Consider this scenario. A large firm and a small firm, the former ten times the size of the latter, are in similar lines of business. The smaller firm is seeking joint ventures or strategic alliances with the larger one. After the smaller firm rejected a merger, the larger firm is planning a hostile takeover. The smaller firm is looking for win-win options that make both firms better off. The larger firm is willing to suffer in the short term to make the smaller firm significantly worse off, which would make a hostile takeover less expensive. Thus, the smaller firm wants to create value and the larger firm wants to destroy value.

Fortress Am-Can or 51^st State?

I think this scenario is perfectly applicable to the tariff negotiations between the US and Canada. The Canadian Government is talking about joint ventures, integrated supply chains (for example automobiles), or what the Ontario Government calls “Fortress Am-Can.” Since he was elected, Donald Trump has continued to talk about Canada as the 51^st state and the US taking over Canada, with his latest word on the topic being “never say never,” in his Oval Office media availability with Prime Minister Mark Carney.

In the current tariff negotiations, the Canadian Government has lined up US business leaders and politicians, especially Republicans, who share this win-win vision for their firms or their states. They realize that Trump’s tariffs will increase costs to Americans and reduce their exports to Canada. The problem is that the business leaders sometimes and the Republican politicians always seem unable to find their voice when talking to Trump.

Donald Trump’s vision appears to be to do as much damage as possible to the Canadian economy, with the expectation that impoverished Canadians will want to join the US because they will then be financially better off. Put differently, it’s a manifestation of Trump’s theory of dominance: if he kicks people in the face hard enough, they will bend to his will. Canadians’ reduced purchases of US exports and sharply reduced travel to the US, to which Trump has applied his all-purpose insult “nasty,” indicate a resolve to resist.

Trump’s plan to damage the Canadian economy is constructed on a sector-by-sector basis by shutting off access to the US market and enhancing the access of US businesses to the Canadian market. Steel and aluminum tariffs will choke off the major market for Canadian producers. Tariffs on automobile parts and assembly will harm the Canadian auto industry, which is predicated on access to the US market. Opening up Canada’s protected agricultural sector will hurt rural Canada. Trump would like US banks to have access to Canadian retail banking thereby weakening the big six Canadian banks. Putting tariffs on film production in Canada for the US market will kill the Canadian film industry. A rapid increase in Canadian defence spending will force the Canadian Government to take on billions of additional debt and likely to buy billions in US weaponry.

I am not privy to the current trade and security negotiations between the US and Canada, but if I am right that economic pain is Trump’s agenda, then these are the likely US Administration proposals. It is hard to see what is in it for Canada, except the choice between immediate catastrophe or slow decline.

When Trump sees prosperity in any country other than the US, his prima facie conclusion is that country is ripping off the US. Thus, the US Administration objective in the trade negotiations with Japan and the EU is to transfer wealth through US tariffs and agreement of the EU and Japan to lower their tariffs and invest in the US. But these deals are not a prelude to attacks on their sovereignty.

What should the Carney Government do in this situation? The answers are self-evident but worth repeating.

No deal at all is better than a bad deal. Don’t accept the pressure of artificial deadlines. Canada already has a trade deal with the US – CUSMA. The current sectoral tariffs are a violation of CUSMA, and Canada should not accept them or any additional sectoral tariffs.

Second, Prime Minister Carney will have to level with the Canadian people. He may have to revive the campaign line “he wants to break us so he can own us,” if this indeed describes the Trump Administration’s approach to its negotiations with Canada.

Third, we will have to look for alternative ways to keep alive the sectors of the Canadian economy Trump is hell-bent on using tariffs to destroy. Bailouts are a costly and only temporary solution. We will need different markets, both domestic and export, and likely different types of products.

I would like to think that if there is some kind of deal between Canada and the US this week it is along win-win lines. But I’m not betting on it.

Postscript

As I mentioned in my previous post, I spent the last two weeks working on my response to the copyedit of our forthcoming book. One time-consuming aspect was references: checking that all references in the text are in the reference list at the end of the book, eliminating references in the list that are not found in the text, making sure that references in the list and in the text are consistent, and checking that URLs still work. We completed this work last Friday, and we look forward to reading page proofs in the fall.