The Trump tariffs – Scenarios, implications and possible strategies

Guest blog by Peter Padbury. Foresight and vision-building for transformative change -Foresight Lab for Public Policy

We have entered a new era. Trump’s plan could dramatically remake the US and the world order. If fully implemented the tariffs and the larger plan could be catastrophic for Canada. But they are not the only disruptions on our doorstep. We need to see the big picture. 

Much of the public dialogue is focused on surviving Trump’s tariffs. We need to broaden the dialogue and build on our own long-term vision and strategy for the next economy. 

This discussion paper explores: Trump’s vision and the logic for tariffs; outlines three tariff scenarios; suggests possible consequences; identifies several other disruptions that also require attention; and offers possible actions to consider when developing a robust strategy.  

Trump’s agenda

• Trump has stated several broad international objectives that could impact Canada: 
• secure the northern and southern US borders from immigrants and drugs,
• create an America First trade policy that uses a combination of tariffs and taxes to attract foreign investment and encourage factories to relocate to the US,
• use tariffs to raise revenue,
• make international trade and taxation “fairer” for American companies,
• use economic threats to take over Canada as the 51st state, 
• force NATO countries to invest 5% of their GPD in defence, 
• and withdraw from key parts of the multilateral system. 

This plan will remake the global trading system. Through his speeches Trump is telegraphing a vision of the US. The US will be the most powerful military force in the world (to intimidate if needed). It will be a technology and manufacturing powerhouse. It will have economic and industrial resilience (bordering on autarkic self-sufficiency) in key areas to reduce dependence on others (and increase bargaining leverage). Government will be smaller, with minimal regulations and oversight. Tariffs and massive growth driven by foreign investment will reduce taxes. He assumes foreigners will continue to buy US goods and services despite poor terms of trade.

Stephen Miran, Trump’s key economic advisor, has offered the tools that drive Trump’s agenda. According to his paper, “A Users Guide to Restructuring the Global Trading System”, tariffs on imports will drive up prices for Americans, but they will also drive down the value of the Canadian dollar so the net impact is a small price increase for Americans but a big hit for Canadians. His proof is the impact of the tariffs on China. The tariffs will force producers to relocate to the US.

Tariff Scenarios

At this point, Trump seems to have three strategies in play at the same time.

1. High tariffs are imposed to disrupt cross- boarder trade for a short period to extract a more favourable trade deal from Canada and Mexico. A new trade agreement may require significant concessions just to maintain the status quo, unless Canada can use oil and resource exports as leverage.

2. High permanent tariffs are imposed. Canada and Mexico are prime targets because of the high volume of trade. According to the US Trade Representative, US imports from Canada were $481.2 billion in 2022. A 25% tariff on Canadian goods and services trade would add $US120.3 billion a year to US tax revenues. Factories and investments move to the US, further hollowing out the Canadian economy. Many countries may attempt to diversify away from the US. With half of the global middle class, China, India and Asia are the big winners. The US is more isolated, less trusted, and less influential.

3. High tariffs are intended to destabilize Canada, so we beg to join the US as the 51st state (or perhaps, each province enters as a state and the Republicans never get a majority in Congress).  

Possible consequences

The economy is a dynamic adaptive system with a complex interplay between trade, exchange rates, consumer confidence and investments. So, high tariffs may have unintended consequences. As Trump’s grand vision and plan becomes clearer, we are likely to see an increasingly competitive global environment. There may be a rush to create new bilateral and expand regional trade agreements as countries look to diversify trade. 

The massive Asian middle class may become a new focus for investment and trade with high growth potential. Some countries may work together to counter US tariffs or even invent a new global trading regime that isolates members who don’t respect rules and agreements. Advanced economies may push for greater self-sufficiency and resilience in key sectors to insulate themselves in a chaotic trade environment. We may see a rapid uptake of new technologies and competition for investment, resources and skilled labour. 

Commitment to climate initiatives may be put on hold. Some of the unintended consequences of Trump’s agenda are starting to hit Americans. Trump may make adjustments that generate further unintended consequences for the US and the world.

Some plausible planning assumptions to consider:

Given the above, we need to update and clarify our core planning assumptions. Here are some suggestions to keep in mind: 

1. Trump’s style is to threat, flood the field and twist the truth to put opponents off-balance. 
2. Trump’s plans for system change could create both chaos and opportunities.
3. As pressures increase, there will be calls for rapid, simplistic responses. 
4. Trump is serious about testing tariffs as a tool to raise income.
5. The current US administration could dominant for several election cycles. 
6. Our economy is going to evolve – for better or worse. The status quo is not an option.

Strategies to Consider

In the short term:

1. Counter Trump’s narrative that the US is subsidizing Canada: Some polls suggest that Trump has now convinced a significant number of Americans that Canada is taking advantage of the US. We should use humour in an extensive social media campaign to help Americans understand the complex relationship and the ways our below-market oil prices subsidize them. (See this TD analysis to get a balanced story).
2. If we do get into a tariff war: Be sure to take Miran’s analysis into account and consider the exchange rate in setting a tax on our exports (to counter a low exchange rate) so Trump tariffs have an impact on US consumers.
3. Prepare a comprehensive assessment of our relationship with the US: In his executive order on trade, Trump has asked for an assessment of many aspects of the Canada-US relationship. We should prepare our own fact-based comprehensive assessment of Canada-US relations for delivery on 1 April to make sure we are talking about the same things.
4. Experiment with new income support models: It appears Canada will use the Covid income support program as a model. We should use this “crisis” as an opportunity to experiments with new models for long-term income support for people in non-standard work; for people who have been displaced from work but need upskilling; and for people who may never work in the market economy again. It seems incredible but recall that some tech barons are saying there are many workers that are surplus to requirements. Cautiously explore variations on MMT as a source of funds.
5. Elect forward-looking leaders and political parties: Hopefully, political parties will use the election to launch vision-building dialogues with voters about the challenges ahead. Ideally, the debate will focus on these visions rather than just the personalities and bring innovative proposals and credible visions into public awareness. A broad understanding of the challenges, visions and real possibility for an equitable, prosperous and environmentally sustainable future will give direction and legitimacy to our next leaders.

Looking beyond tariffs - More disruptions ahead

Trump has a big vision and capacity to implement it.  But that is only the start of our problems. There are several disruptions on our doorstep that Canadians need to consider. If we ignore them, we will be stuck in the old economy. Addressing following disruptions / opportunities will give us a robust strategy that is more likely to succeed in a less friendly environment.

• Disruptive technologies / New opportunities: We need to prepare for the next economy - not try to prolong yesterday’s economy. Several technologies, artificial intelligence, robotics, sensors and data analytics, synthetic biology, additive manufacturing, etc., have been in the lab for a decade are now in factories. Over the next decade they are going to rapidly disrupt where and how goods and services are produced. The net effect is they enable the localization of production, rapid product innovation and customization. But, for Canada to realize their potential requires an entrepreneurial mind, global business intelligence, sophisticated investment ecosystem, integration in new supply chains and appropriately skilled labour. We do have some of the pieces in place, but we need to support risk-taking, experimentation and uptake of these new technologies. They will be the major driver of change.
• Skills shortage / Retooling education: As we enter this new era, Canada’s comparative and competitive advantage will change. Some jobs will disappear, and new opportunities will emerge. We need to update our education institutions and policies to help Canadians adapt. Increasingly profits and jobs will go to people who understand and have the skills to integrate the new technologies in revamping of old and inventing new products and services. Given adults cannot spend 4 years and $50,000 at university, our universities and colleges need to rapidly re-invent themselves and their offerings to help upskill Canada. It must be excellent, convenient, flexible and affordable.
• Inequity / Reinventing the social safety net: Canada has highly targeted social welfare policies designed for a time when most people had a traditional job or for people with special needs. These policies need to be updated to reflect changing circumstances. If implemented, the tariffs could destroy several hundred thousand jobs overnight with many cascading impacts on people, families and the economy. Given Trump’s four-year mandate, this situation could last years. And more compelling, about half of the work force is in non-standard, short-term contract and gig work NOW. Unemployment and under-employment are likely to grow. Many young people are NOW suffering as a result. Recall that the tech barons are warning that there will be more people than jobs. 
• Simplistic political solutions / credible integrated visions: Three dilemmas put Canada at a disadvantage: loss of trust in leaders, loss of trust in the current strategies and loss of vision about the way forward. This is true for many countries. In part, it explains the rise of Trump with a big vision. The role of the politician is to lead, especially in time of disruption. We need ethical politicians that have a fact-based, non-ideological analysis of the challenges ahead and that work to create credible, integrated visions of the way forward. We need politicians who, when elected, commit to collaborative problem solving and vision-building. There is no room for opposition parties constantly in “gotcha” election mode.
• Climate catastrophe / adaptation: The biggest threat coming at us is the changing climate: drought, food insecurity, floods, wildfires, ocean acidification, rising seas, extreme weather (hot and cold), new diseases and pests, civil disruption, mass migration, war, etc. These problems travel. For instance, drought in other countries could cascade and cause food shortages here. Innovation and adaptation across all sectors are needed and can create many jobs. For example, as we build five million houses, there is an opportunity to re-imagine cities, infrastructure and all the related systems to be more resilient, affordable and environmentally sustainable. 
• Reactive / proactive mission-driven government: System level change is almost impossible unless you have all the necessary people and resources in alignment to make the change. System level change is needed, and governments are the only actors with the power and credibility and mandate to convene system-level changes. A mission-oriented approach identifies societal problems and assembles the people, analysis and resources to innovate, coordinate and sequence changes across all necessary sub-systems to promote system transformation. It could help Canada make the big changes that are needed. One of the big challenges in government is how to fund significant change projects. The use of the Bank of Canada to fund the Covid response shows what is possible. Modern Monetary Theory (MMT) suggests we can do this again. The main problem with this approach is it creates inflation. We can avoid inflation by creating mission-driven projects that train workers, create new supply chains and don’t compete with the private sector for resources.  

Some longer-term strategies

If the economy is seriously threatened by Trump, consider the following:

• Launch mission driven projects where transformation is needed: Canada suffers from low productivity and high costs. From health care to mobile services, we have many public and private systems that we can no longer afford. A mission driven approach would build a consensus on key problems in need of transformation. It would convene the stakeholders, develop a plan, change regulations, and mobilize opinion, expertise and resources to make transformation happen. 
• Use new technologies to build the next economy: The new technologies create huge opportunities for innovation and transformation in areas like manufacturing, agriculture, energy, heath care, government services, etc. We should support mission-driven projects using these technologies to demonstrate and drive change. We should look for funding opportunities to multiply the impact of public expenditures. For instance, if we are forced to put more that 2% of GNP into defence. Let’s use it to create an innovation-led defence industry. Let’s re-assess buying tanks and billion-dollar fighter jets and create next generation low-cost drones, lasers, etc., with civilian R&D spin-offs and uses. Canada has experimented with some mission-driven R&D. Let’s do more.
• Re-imagine the education system: Education is the key to ending inequality and promoting prosperity. The system needs to move into the 21st century and help millions of adults upskill in a personalized, fast, convenient, flexible and affordable way.
• Reinvent the social safety net: There is a need to rethink support programs to cover all possible futures including people who need upskilling between jobs, people in irregular, non-standard work as well as for people who never have paid work. We must profoundly question our assumptions about the future of traditional work and prepare for post-work futures for some part of the population.
• Re-invent multilateralism: As a middle power, Canada needs a working multilateral system to collectively manage global problems in climate, health, etc., as well as collectively confront the excesses of the great powers. The UN functional agencies are reasonably effective but drastically underfunded. As the US withdraws this may get worse. The deliberative bodies in New York are in frequent stalemate. As a starting point, Canada could explore the possibility of working with partners to build a new global trade regime that does not involve members that frequently use national security as a reason to break the rules.

A debate on the big picture is needed. Ideas like these would make Canada less dependent on the US and would provide a credible, motivating, vision. We need to prepare for change and build a more equitable, prosperous, resilient, and environmentally sustainable society.

The scenarios for Canada-US Relations 2025-2030

I am trying to make sense of the potential impacts of the Trump tariffs and his larger agenda.

Attached is a set of scenarios exploring five different strategies Canada could adopt:

1. Appeasement
2. Resistance
3. War – by other means
4. Diversify and build alliances
5. Resilience and transformation

Your thoughts on this powerpoint and especially on other possible scenarios are most welcome. 

Join the discussion on my LinkedIn here.

Peter Padbury