From retaliation to negotiation: How Canada’s U.S. trade strategy is shifting under Carney

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In the opening rounds of the trade war with the United States, each time Donald Trump hit Canada with tariffs he was met with a counterpunch from Ottawa.

That strategy appears to be changing.

When the U.S. President doubled tariffs on steel and aluminum this week, Prime Minister Mark Carney chose not to respond in kind, despite urging from some business and labour groups and Ontario Premier Doug Ford. Meanwhile, a set of carve-outs, announced in April, have taken the edge off some of the levies Canada imposed on U.S. products earlier this year.

Canada’s more measured approach marks a new phase in the trade conflict, where negotiations between Mr. Carney and Mr. Trump have moved behind closed doors after months of public grandstanding.

It may also reflect the thinking of a former central banker, now in the prime minister’s chair. Economists largely agree that imposing tariffs frequently hurts your own businesses and consumers more than your opponent’s – whether you’re the aggressor or simply trying to defend yourself.

Three months after Canada started hitting back – becoming one of only two countries, alongside China, to try going tit-for-tat with the United States – there’s mixed evidence that this is inflicting much pain on U.S. businesses, and few signs that this pressure is having the intended political effect.

At the same time, Ottawa’s decision to place tariffs on around $90-billion worth of U.S. goods, then offer carve-outs for some key industries and inputs used by Canadian manufacturers, is creating confusion and headaches for many Canadian businesses.

“That’s the quandary for a smaller economy. We can’t win the war of attrition, but we’re putting our entire economy on the line,” said Matthew Holmes, chief of public policy at the Canadian Chamber of Commerce.

“So we have to be targeted and selective and smart … Be ready. Be firm. Do it if you say you’re going to do it. But be precision-targeted to exert the most pain on those parts of the economy that won’t kneecap our own sectors.”

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Having inherited an “elbow’s up” countertariff regime, which was fuelled by a surge in Canadian patriotism and belligerent rhetoric during the Liberal leadership race and federal election, Mr. Carney is now having to decide whether to keep ratcheting up the pressure or take an off-ramp.

He told the House of Commons this week he’s focusing on negotiations while “preparing reprisals if those negotiations do not succeed.”

There are risks in both approaches. Even as Mr. Carney and Mr. Trump have reset the relationship between the two countries and begun negotiations, there’s no guarantee the President is acting in good faith. And Ottawa’s softer approach has exposed the government to criticism from political opponents, and could open a rift between Mr. Carney and powerful provincial premiers he needs to keep on his side.

“Negotiating in public is usually a bad idea, and it’s usually a signal that you haven’t established that private relationship that you need to have to really get the deals done,” said Tim Sargent, a former deputy minister of International Trade, who helped oversee Canada’s response to U.S. steel and aluminum tariffs in 2018.

“Prime Minister Carney has clearly been able to get that personal rapport with the President and now by all accounts is being able to use that. Of course, nothing’s been agreed yet.”

When Mr. Trump began threatening a 25-per-cent tariff on all Canadian products shortly after his election last fall, Ottawa reached for a familiar playbook.

Back in 2018, when Mr. Trump imposed tariffs on steel and aluminum, the Trudeau government hit back with a series of countertariffs aimed at sensitive industries in Republican-controlled U.S. states. Harley Davidson motorcycles, orange juice and Kentucky bourbon were high on the list of targets.

The goal was to inflict maximum pain on key American exporters – with the hope that they direct their frustration toward their elected representatives – while trying to minimize the knock-on effect for Canadian importers and consumers.

The approach worked. Mr. Trump’s then-agriculture secretary Sonny Perdue warned him of backlash from farmers concerned about Canadian countermeasures. The U.S. Defence establishment highlighted the folly of pushing up the price of metals needed to make tanks, fighter jets and warships. Mr. Trump relented after a year and lifted the tariffs on his neighbour.

“They can hurt us more than we can hurt them, and whether we use countertariffs, it’s not going to bring their economy to its knees,” said Mr. Sargent, who is now senior fellow at the Macdonald Laurier Institute. “On the other hand it does have an impact, especially if you target them quite carefully. . . . In the American political system, pain reaches the head very quickly.“

This time around, however, the political reaction that made Canada’s retaliation successful in 2018 appears to be much weaker. Republican politicians, in thrall to the MAGA movement, have been reluctant to contradict their tariff-loving President. U.S. companies and business lobby groups have largely held their tongues.

Mr. Trump has backpedalled on his most severe tariff threats, and offered important exemptions to many Canadian and Mexican goods. But this appears to have been in response to bond market turmoil and complaints from big U.S. automakers about U.S. tariffs, not Canadian countertariffs.

The subdued political reaction to Canada’s retaliation has forced Ottawa to shift its thinking around countertariffs, according to a former official in the Trudeau government. The Globe is not naming the source so they could speak freely about current trade policies.

There is also a question of how much Canada’s tariffs are actually biting U.S. exporters.

This week Statistics Canada reported that goods exports to the U.S. fell 15.7 per cent between March and April, but at the same time imports from the U.S. tumbled 10.8 per cent.

A chunk of that decline is the result of businesses rushing to move their products across borders earlier this year before the tariffs hit. That has allowed companies to hold the line on prices for consumers, though those inventory stockpiles are being depleted – a trend the Bank of Canada is watching to determine the inflationary effect of retaliatory tariffs.

But the April trade numbers suggest some U.S. products that are subject to countertariffs are being hit.

Lawnmower imports were cut in half compared with the year before. Carpets from the state of Georgia, which last year shipped nearly US$200-million of rugs to Canada, fell by one-third.

Meanwhile, unfrozen orange juice shipments to Canada plunged to the lowest level in more than two decades. Imports of American booze also tumbled to multiyear lows, though that was expected given provincial governments have pulled U.S. alcohol off the shelves of liquor stores across Canada.

Some companies have addressed the countertariffs head-on.

The Campbell’s Co. is “seeing an impact from the Canada wave-one retaliatory tariffs,” said Carrie Anderson, the company’s chief financial officer, during an earnings call with investors this week.

The question, however, is how much this is owing to countertariffs, or other more grassroots factors beyond Ottawa’s control.

“My sense from speaking to Canadian retailers is that there has been a larger drop in demand for American exports to Canada coming from patriotic decisions by our own consumers, who are avoiding made-in-the-U.S. products whether tariffed or not,” said Avery Shenfeld, chief economist at CIBC Capital Market in an e-mail.

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From the get-go, when former prime minister Justin Trudeau announced the first $30-billion tranche of countertariffs in March, there was the option for companies that were unduly hurt by the tariffs to apply for an exemption – or what the government calls remission.

This reflects the fact that Ottawa’s countertariffs actually hurt many Canadian businesses and consumers. As economists have been screaming into the wind, in the direction of the White House: Tariffs are paid by importers and typically passed on to consumers in the country that implements the tariffs.

“It is complicated because on one hand, it would be in our best interest to not put a countertariff on inputs to manufacturers where they don’t have an alternative. But on the other hand, you don’t want to have a situation where you’re providing remissions on countertariffs where there is a Canadian supply,” said Dennis Darby, president and CEO of Canadian Manufacturers & Exports.

“That’s the knife edge that the government has to balance.”

In mid-April, the relatively restrictive remission regime was expanded significantly. Canada offered temporary tariff exemptions for goods used in key industries, such as health care and emergency services, as well as a much broader six-month exemption for inputs used in Canadian manufacturing.

It also allowed some U.S. auto companies to keep importing a certain quota of vehicles duty-free, so long as they maintain production in Canada. Five carmakers have been granted these quotas, which will be assessed quarterly based on production levels in Canada, a Department of Finance spokesperson said in an e-mail.

The carve-outs have led to widespread confusion over how much of the original countertariffs are still in place.

This confusion was fanned by a widely circulated report last month from Tony Stillo, director of Canada economics at Oxford Economics, that estimated Canada’s tariff rate on U.S. goods was “nearly zero” as a result of tariff exemptions. Mr. Stillo tempered that estimate in a subsequent report which calculated 58 per cent of targeted U.S. goods are likely eligible for an exemption.

Finance Minister François-Philippe Champagne said last month that 70 per cent of tariffs on some $60-billion worth of “end-use goods” remain in force.

Conservative Leader Pierre Poilievre has been quick to accuse Mr. Carney on social media of failing to live up to the “elbows up” rhetoric he used during the federal election.

What we do know is that Canada collected more than $1-billion in import duties in March, a $617-million increase from the same month a year earlier, according to Canada’s Fiscal Monitor report.

March’s tariff haul was 22 per cent higher than the peak month of countertariff revenue during Mr. Trump’s first trade war with Canada in 2018. However, adjusting for how much imports have grown since then, import duties in March were a relatively small 1.5 per cent of imports. (The numbers include duties and imports from all countries, not just the United States, though the U.S. accounts for half of all Canada’s imports.)

It’s not clear the Carney government will reach the $20-billion in tariff revenue the Liberal Party platform said countertariffs would generate over 12 months.

The government has said it plans to hand all tariff revenue over to hard-hit industries, although the mechanics of how this could be done aren’t fully clear. So far, the government has returned to its COVID-19 playbook, but at a much more modest scale, expanding EI eligibility, backstopping wages and promising loans for struggling companies.

Export Development Canada, which announced a $5-billion business support program in March, said the uptake has been limited so far. The Crown corporation has signed just eight transactions totalling around $96-million, EDC spokesperson Tasha Jean Baptiste said in an e-mail.

“Most companies have been taking a wait-and-see approach amidst all the uncertainty,” Ms. Jean Baptiste said. “What we have found is that they are being cautious and not necessarily looking to add additional debt to their balance sheets at this time. They want to better understand the actual impact of the tariffs and evolving trade policies.”

For Jessica Horwitz, a partner at the law firm Bennett Jones who practises trade law, there’s no question that Canada’s countertariffs continue to bite many importers. Indeed a custom’s notice published in May to explain the scope of the tariff exemptions actually tightened the definition of what companies are eligible, she said.

Whatever happens next, as Mr. Carney and his team weigh the pros and cons of fighting back against Mr. Trump or playing nice, Ms. Horwitz said the government needs to get better at communicating.

“I understand that that’s challenging for policymakers as well because they’re reacting to things in real time the same way that businesses are. I’m not sure that there’s a real solution for that. But certainly more guidance, communication, and transparency would be beneficial to businesses overall,” she said.

“The biggest thing that businesses want is certainty and predictability. And this has been a very challenging period because there’s been none of that.