BURST
WASHINGTON, D.C. — Prime Minister Mark Carney’s team arrived in Washington this week with high hopes for a trade breakthrough, but even with Dominic LeBlanc, the minister responsible for Canada-U.S. Trade still in talks late into the week before heading home on Friday, Canada’s bid for tariff relief appears to remain out of reach. So why is Washington insistent on a tariff-laden trade framework?
For answers, National Post turned to Mark DiPlacido, the policy advisor to American Compass, a D.C.-based think tank that promotes a labour-friendly conservative agenda.
This interview has been edited for clarity and length.
Q: Most economists believe that President Donald Trump’s tariffs will hurt American consumers through higher prices while alienating trade partners and failing to strengthen the U.S. industrial base. Please explain why you believe they’re wrong and why Trump’s tariffs will benefit the U.S. economy.
A: First, I think the way that any national leader and really any economist should look at the economy is at its long-term stability. American Compass and I believe the Trump administration looks at the trade deficit as a significant negative indicator for the economy in the long term. The U.S. has about a trillion-dollar trade deficit every year. That essentially means we’re consuming a trillion dollars more than we’re producing. In that scenario, those goods have to be paid for somehow, and to purchase them, the United States has to either take on more debt or sell off its existing assets. This erodes U.S. wealth in the long term, and it also hollows out our industrial base. It eliminates opportunities for future innovation that spring from that industrial base, creating a lot of national security concerns. It also erodes a lot of quality middle-class jobs, especially for people without a college degree, which still represents two-thirds of the U.S. population.
On the specific concern about American consumers, I think we need to start looking at Americans not just as consumers, but as producers as well. I think we have to make sure we’re producing enough to consume what we are consuming, especially if we’re going to get a handle on both the trade deficit and the national debt, which is getting bigger and bigger and is very much a related economic problem.
We’re now spending more on interest payments on the national debt than we are on any other line item in the entire federal budget, including the military and Medicare. So that’s going to continue to be a problem, and it’s a problem that will be structurally easy to solve if we start producing again, if we start getting benefits to the overall level of productivity in our economy that will come from producing again, because manufacturing drives a lot of those productivity increases. And productivity, of course, is, next to output, one of the major drivers of GDP growth.
Lastly, the speed of the changes, I think, is the least compelling argument that any free trade advocates make. The fact that we have a problem right now and it can’t be solved immediately isn’t a reason not to try to address the problem in the first place. I mean we’ve been rowing in the wrong direction on economic policy for over 30 years when it comes to trade. It’s not going to change overnight. I don’t think anybody’s arguing that it would change overnight. But we have serious structural issues with the economy. We have national security vulnerabilities due to reliance on supply chains, especially with nations like China, and we have a lot of issues in in our job market that are going to create political blowback as well.
Q: Your colleague Oren Cass has argued that phasing tariffs in slowly is the best approach as it gives businesses time to adapt, while buying time to build more factories domestically. As we know, Trump has taken a more abrupt approach. Do you think that will impact the outcome or the ability to strengthen the U.S. industrial base within a reasonable time?
A: I don’t. I think one of the advantages of maybe signalling higher tariffs than we eventually landed on — if you compare the rates between the April announcement and the August announcement — is sort of setting a higher mental benchmark than otherwise would’ve been set.
If we came in at a lower number immediately, that would’ve given less leverage for us to get to the reciprocal rates where we find them now. I think you always have an ideal scenario in mind for how policy should look and be implemented, but in a democracy with three branches of government, the opportunity to implement policies in that ideal way is limited.
I think what we’ve also seen is a change in the mentality. Even in Congress, if you look at where things were back in Trump’s first term, there were still a lot of holdouts even on the question of trade with China. I think now almost everybody recognizes we have serious problems in the United States if we’re going to continue to rely on Chinese supply chains. I think most people are very aware of the ways in which China distorts its economy to capture market share and strategic industries. People are coming around to understanding that the trade deficit isn’t sustainable and that something like a 10 per cent baseline tariff is not unreasonable at this point in American economic history. It’s certainly not without precedent.
The president has been able to move the needle on that by being aggressive out of the gate.
Lastly, I would just note that we have arrived at pretty stable and predictable rates. The U.S. Trade Representative, Ambassador (Jamieson) Greer, spoke to the Economic Club of New York last week and implied that the rates as they’re set now are largely expected to stay. I think those are all at pretty reasonable baselines for where the U.S. trade balance is with our trading partners.
Q: What are the key economic and strategic goals the U.S. should be seeking by imposing tariffs on Canada? And also how do the tariffs on Canada specifically fit your broader vision for revitalizing the U.S. industrial base and securing supply chains?
A: Canada and Mexico together represent almost 30 per cent of traded goods with the United States. So there was an immediate need to set things right in our own backyard first. Tracking the timeline of trade events and the way trade policy was rolled out this year, you saw Canada and Mexico addressed first, and the president has moved out from there.
I think the reason for that is not because, you know, Canada is the largest abuser or that the U.S. has a specific issue with Canada? It’s been more about the priority of arriving at the best destination possible with our closest allies and our closest trade partners first.
One of the keys to understanding that relationship going forward is the exemption for USMCA-compliant goods. Starting out this year, about 50 per cent of goods imported in the U.S. from Canada already qualified for those exemptions. I think around another 30 per cent were eligible, but people didn’t bother filling out the paperwork because the difference between a 0 per cent tariff and (the average before this term) something like 3 per cent is too small to go through all the trouble.
Increasing the tariff above that 3 per cent actually strengthens the significance of the agreement by really even further incentivizing and coalescing around North American supply chains.
The last final piece that’s really important to understand — not just for Canada but the larger framework — that the second (Trump) administration has embraced (compared to the first) is that the conversation does really need to expand beyond China.
China is the biggest perpetrator of trade abuse — it’s definitely the central problem. But what we saw after the first term was that when the U.S. only tried to target tariffs on China, Chinese goods were still able to get into the U.S. market through third countries. They’ve done that either illicitly, through trans-shipments, where they ship through a third country and just put a different label on it. They’ve moved production facilities to third countries to do it legally. That was a big trend in Mexico, especially over the last six years or so.
We’ve seen the U.S. trade deficit nearly triple with Mexico since 2016. So the United States, when it’s looking particularly at its closest trading partners, the partners that it has the most volume with, we want to make sure that the goods coming from those countries are actually from that country and are not transshipped from China and other countries that engage in abusive trade behaviours and juice their industries essentially.
So I think looking at negotiations with Canada, I think the biggest priority is stopping those trans-shipments from third countries and making sure the content that’s being exchanged between the U.S. and Canada is actually generated, produced, and manufactured in those two countries.
Q: OK, so do you think the justifications for the tariffs on Canadian goods — border security, drug interdiction/esp. fentanyl, and economic patriotism — have legitimacy, or do they distract from underlying trade priorities?
A: The president and prime minister discussed fentanyl yesterday, and both acknowledged it as something that the countries are working on. If you look at the broader arguments that the administration has been making, every country is being looked at for its specific trade abuses and for specific imbalances. So, I think there are a lot of different issues that the U.S. and Canada are talking through. I certainly wouldn’t say that fentanyl is the only issue, but there have been enough conversations administration-wide from all of its officials to give people an idea of what the new trade framework and trade negotiations are aiming toward at this point.
Q: What impact do you foresee the trade tensions having on Canada’s strategy to diversify its energy exports, including projects through the Arctic and the East Coast?
A: The United States certainly wants its largest trading partner to have a strong, robust, and diversified economy as well. I think the end result we’re looking for when all of the trade agreements are arrived at and the new framework is in place, has the potential to be very beneficial for Canada and for the North American economy as a whole.
Q: How do you envision the long-term trade relationship between the U.S. and Canada evolving under the new tariff framework? What standards or conditions should Canada meet to qualify for any tariff exemptions, if possible?
A: I think remaining committed to the thresholds established for content in the USMCA is going to be key. I think the fact that almost 80 per cent of Canadian goods already qualify for tariff-free treatment based on the USMCA agreement is a positive sign and something that I think is going to give them a leg up on trade with the United States over basically almost any of our other trading partners. I wouldn’t be surprised if, at the end of it, the baseline comes down closer to 10 per cent — like the U.S. established with the United Kingdom.
I think Canada will definitely continue to be a top trading partner for the United States. When all is said and done, we could even be, you know, more integrated in certain respects than before this year. At the end of the day, that will be contingent on, first, keeping Chinese goods out and secondly, probably meeting its defence commitments under NATO and working with the United States to secure our mutual border and commit to a broader framework of working together as well.
Q: On Tuesday, during his press conference with the Canadian team, Trump seemed less committed to CUSMA. What changes do you expect the administration to the trilateral agreement when the renegotiation begins, and why?
A: The comments I saw basically indicated there may be some interest in having more bilateral conversations with Mexico and Canada because of the differences in issues that the United States has with those countries. I don’t know that I took it as an indication that the U.S. is going to walk away from the agreement or anything like that at this point. What I would expect for the USMCA talks is probably a lot of the same discussions over a lot of the same issues that have been raised over and over again.
Softwood lumber, for example, is a persistent issue — as is the dairy industry. But I think overall that focus on transshipments and keeping Chinese goods out of North America would probably take precedence over even those smaller issues — industry-specific issues.
Q: On Tuesday, Carney and Trump instructed their negotiation teams to hammer out deals on steel, aluminum, and energy, according to Dominic LeBlanc. That suggests they’re mainly talking about Section 232 tariffs. Do you expect any sort of breakthrough on those this week? Also, Trump hinted that formulas are being worked on. What did that likely mean?
A: I don’t think I can shed too much light on that. Overall, the United States has really gotten to a point where it’s down to just one or two companies, one or two facilities even, that are manufacturing steel and aluminum products. So, as there’s a lot of industries and a lot of goods that are being targeted for protection with 232 tariffs,
I think things like steel and aluminum have some of the strongest justification, given the precarity of the U.S. market share. And especially with China, steel and aluminum are probably two of the goods that China dumps most substantially on the rest of the world.
Keeping non-North American steel and aluminum out of the country will continue to be a priority. What that means for quotas between the United States and Canada, I can’t speak too much to.
Q: How should Ottawa respond to the tariffs to minimize economic harm?
A: I think that the main thing Canada should probably keep an eye on is the 232 tariffs because those are probably the most likely to not receive the USMCA exemptions. But in general, I think the rates are likely to remain pretty consistent and broad-based across tariff levels.
Q: If the Supreme Court rejects President Trump’s use of the International Emergency Economic Powers Act (IEEPA) for his retaliatory global tariffs — the 35 per cent tariffs on non-CUSMA-compliant goods in Canada’s case – what happens then? Will there be reimbursements? Do you think that the Section 232 tariffs would be leveraged even further?
A: I think the administration feels pretty confident about the case. News reports have indicated that there would have to be some amount of repayment, but I think the administration is prepared to pursue other avenues to enact those tariffs if need be. Section 301 has a pretty expansive precedent at this point, especially after the first Trump administration. There’s another authority called, I believe, Section 338, that gives some more expansive authority, and there’s some limited authority under Section 122. That specifically applies to trade deficits as well.
Of course, the 232s have plenty of historical precedent, so I think the administration will have the authority it needs to pursue these tariffs. I think there’s a decent case to be made under IEEPA and the president’s emergency authority there. But even beyond that, if they do get struck down, I think the administration will be ready to use a different authority to basically get to the same place.
Q: Do you have any expectations around the Supreme Court’s decision?
A: I’m remaining optimistic. It’s my understanding that the Supreme Court is pretty deferential to the president’s emergency authorities broadly, and with tariffs, in particular, there’s precedent for considering tariffs a regulation of commerce, not just a revenue tool. That’s sort of the sub-issue under emergency authorities. I think the specific language gives the president the authority to regulate commerce under emergencies. The question is whether tariffs can be considered a regulatory tool, not just a revenue tool. And I think there’s plenty of precedent in American history for that.
Q: If the Supreme Court decides that the IEEPA tariffs are constitutional, what Trump might do with the other tools — the other sections you mentioned — in addition to the IEEPA tariffs?
A: I don’t think the Supreme Court’s ruling on the IEEPA tariffs would have much bearing on his use of the other tools. I think he’ll continue to use them — probably at the same pace.
Q: Yesterday, President Trump said that the U.S. and Canada have a natural conflict when it comes to trade due to proximity and similar industries. Do you agree?
A: There’s competition between any two countries, and with some goods that may be regional, like timber, maybe you have even more room for competition just because there’s an overlap in the terrain that makes that industry thrive and specific regions and climates. But overall, I think the U.S. and Canada have always had a strong basis for cooperation and amity, and I think, like I said earlier, I could see the baseline rates ending up closer to the 10 per cent mark that other countries in the Anglosphere, like the U.K. and Australia, already have as a baseline. And then, unless things really took a negative turn, which I don’t really foresee at the moment, I think those exemptions under USMCA actually put Canada in the best position worldwide to trade with the United States and will look very, very positive for the U.S.-Canada relationship going forward.
Again, the only caveat I see to that is if Canada isn’t ready to keep Chinese goods out.
One other way I would frame it is that the U.S. runs a deficit with most of its trading partners. Some of those trading partners also run sort of overall deficits, trade deficits. So the overall U.S. trade deficit is around a trillion dollars. Our deficit with Canada is $55 billion. Canada runs a surplus with the United States, but I believe overall also runs trade deficit.
If Canada continues to run deficits with countries like China, the U.S. can’t absorb goods through China that make our deficit bigger. It’s okay to have some fluctuations in trade balances among trading partners, but those trading partners, at the end of the day, have to agree to keep non-fair trade goods out of our mutual economies, and that involves commitments by both trading partners. It can’t just be the United States acting alone to confront China.
Q: That will take quite a lot to undo these trade deficits, so is a prolonged trade conflict of some sort between the U.S. and Canada inevitable?
A: I don’t think so. I think they just have to agree on this new framework of a trade bloc that operates on a fair footing. I think they could be really the first two central pieces of a new trade bloc that is more committed to balancing some of these trade deficits.
Q: In the U.S., are you starting to see progress in the strengthening of the country’s industrial base this year as a result of tariffs?
A: I think the biggest indicator of progress is the investments that have been pledged by American companies, foreign companies, and foreign governments to expand production in the United States. Back in the spring, I think people were already projecting the number at US$7 or $9 trillion, and the numbers have really only grown from there. I think that’s the first sign of progress.
Obviously, those (building projects) are going to take some time to get off the ground.
But an investment is the first indicator, and I think we’ve seen a lot of positive momentum on that front.
I also think we’ve seen a lot more resilience than a lot of people predicted in the U.S. economy and U.S. markets back in the spring. People were pretty panicked and really assumed there would be a bigger crisis in the economy as we adjusted to some of the tariffs. Growth was just revised up to 3.8 per cent in the second quarter, employment is still pretty solid, inflation has been pretty moderate. I think that speaks to the strength of the U.S. economy. And it also speaks to the opportunities there are here to make more investments in physical production and in expanding our capital base. I think it’ll be good for long-term growth.
National Post
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