Canada’s crisis

Canada is right to be fearful that when Trump repeatedly talks about making his northern neighbour the “51st state”, he means it. His behaviour at home and abroad since 20th January has been so bullying, belligerent and contemptuous of legal and democratic norms, that he might escalate his current trade war to extreme heights in order to make his conquest.

It seems incredible to say so, but this is a view clearly shared by Canada’s outgoing and incoming prime ministers, who have spoken in alarming language of the existential threat facing their country. “It is a real thing,” Justin Trudeau said of Trump’s annexation threat. “We will never, ever, in any way, shape or form be part of the United States," Mark Carney said at his inauguration, “America is not Canada.”

The good news is that Canada has been in something like this position before, and came through. Republican president William McKinley’s tariffs of 1890, which Trump praises as the last attempt to “Make America Great Again”, were partly intended to force Canada to join the US. They failed.

Instead, there was an immediate and massive political reaction in Canada. Prime minister John Macdonald turned the 1891 Canadian election into a referendum on national sovereignty. He won and proceeded to levy retaliatory tariffs on the US, while dramatically reorienting Canadian trade towards Britain. Within two years of the McKinley tariff, Canadian agricultural exports to Britain had jumped from $3.5m to $15m. Canada granted preferential market access to British imports, while US manufacturers moved production to Canada, to bypass its tariff walls.

Meanwhile, as domestic US inflation rocketed in response to McKinley’s wholesale import tariffs averaging nearly 50 per cent, the opposition Democrats won both Congress and the presidency in 1894. US tariff rates were sharply reduced and no more was heard of Canadian annexation—until Donald Trump.

Carney is using the same Macdonaldian language of national salvation, and so too his Conservative opponent in the upcoming Canadian election, Pierre Poilievre.

So far, so good. But what happens next? Britain today is not, relatively, the imperial economic giant it was in the 1890s. But Britain plus the European Union could partially replace US trade in a range of agricultural, manufactured and energy products.

The imperative is for a rapid expansion of trade under the Comprehensive Economic and Trade Agreement (CETA), the 2017 free trade agreement between Canada and the EU (which was rolled over with the UK after Brexit).

However, the gap to be filled is enormous. Canada does about 10 times as much trade with the US as it does with the EU and UK combined. Much of it is in advanced manufacturing, including cars, where US-Canada supply lines can’t conceivably be substituted in the way that Britain replaced the US as the market for basic agricultural exports in the 1890s. Ditto much of Canada’s energy exports to neighbouring US states.

Besides that, the EU might not be keen on a surge of Canadian steel and agricultural imports undercutting domestic producers who are also facing high US tariffs and diminished exports opportunities themselves. Unless Canada joins the EU, which would be the work of years not months, it will still face appreciable trade barriers with the EU. And even EU membership can’t shorten the distance between Europe and North America.

The hope therefore has to be that the inflationary and recessionary effects of tariffs force Trump to reduce them in fairly short order, as with the McKinley tariffs of 1890. If this doesn’t happen, given its greater reliance on external trade, Canada could go into a deeper recession than the US—with Carney or a successor unable to engineer the fundamental change in trade and manufacturing patterns needed to counteract Trump.

And what if Trump starts threatening Canadian security? Either directly, or maybe as part of a Greenland escapade? Back in the 19th century, Canada had Britain to fall back on, militarily as well as economically. And Britain stepped up—famously burning down the White House in the war of 1812.

A real US security threat to Canada still seems far-fetched. But with Trump, you never know.

This crisis may have a long way to run. And it looks extremely dangerous for Canada.