Nine hundred days make a difference! It’s 2018, not 2015 – neither the best nor worst of times. Sunny ways and the middle class still matter. But federal Liberal politics and economic and trade policies need a huge reboot.
Everything for everyone now depends on the United States, but it’s a tale of two Americas: the isolationist America of a century and a half after the War of Independence, and the global-leader America that emerged between 1932 (FDR) and 2016 (Obama). Was the latter an aberration or one more step forward for an increasingly great America able to make its next big forward pivot? Is Donald Trump’s America a temporary setback or a revived American isolationism? Canada must now assume the mostly safe – for Canada – United States of the past 85 years may be gone for many years.
Canada must move quickly – before the U.S. midterm elections in the fall – on trade, debt and competitiveness. For 18 months, Canada has tried to negotiate with an intractable Mr. Trump, for whom facts do not matter. NAFTA is still alive and may, or may not, largely survive. Tariffs on steel and aluminum are not a response to any unfair Canadian imbalance.
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Mr. Trump may yet put recession-causing tariffs on automobiles, which Canada would have to counter. One possibility might be a per-diem tax on Canadians for every day beyond two or three spent in the United States. Such a penalty would hurt in at least two Trump states – Florida and Arizona.
Trade wars are not the way. In an intertwined world, no country can win. Canada – despite the solid balance in the overall economic relationship – is still the most vulnerable to a trade war with the United States. (China, with its big U.S. current-account surplus, is a close second.) It must start to explore, first with Europe but also China, what kind of ‘“second-best” trading order may be possible. It would not have to exclude the United States. It’s the best alternative to a trade war and a go-it-alone United States (the kind of world Mr. Trump has long believed in).
While the United States is free to go it alone, there is no place for a United States of bilateral deals free to undo multilateral ones. The numbers are irrefutable that Canada is a net U.S. economic plus. Canada must make that case as it works for a different collective global response. The United States can hurt Canada greatly, but has never successfully bullied Canada. Before November, Canadians must talk directly to ordinary Americans – quietly, positively, as friends – about how fair and balanced our economic relations are with them. This people-to-people relationship is still beyond the reach of governments, but that could change. If the United States cannot get along with Canada, with whom can it?
On the trade front, the United States is about to make the geopolitical mistake the Soviet Union made when it took over Eastern Europe. American Ambassador to Moscow George Kennan foresaw that overreach would weaken the Soviet Union at home. In the end, it resulted in its actual collapse. Now, the postwar order could also collapse if Mr. Trump underestimates the damage to the United States of losing long-time friends and family.
Canada must move quickly to get a “second-best” trading order on the table. This might help drive the Republicans to finally end their Munich-like appeasement of Mr. Trump – either containing trade wars or providing a second-best alternative.
At home, Canada must reverse the weakening of economic disciplines prevalent since 2006. Prime Minister Justin Trudeau’s current weak fiscal discipline and Bank of Canada Governor Stephen Poloz’s weak monetary discipline see the country headed for an estimated $71-billion current account deficit in 2018 – crazy at a time of the strongest and most synchronized U.S. and global economic expansion in decades (repeating the Stephen Harper mistake of 2009 of borrowing from abroad, not to build Canada’s economic strength, but to spend on current consumption).
Canada needs a new macro policy to strengthen private-sector global competitiveness and address Canada’s now $2.1-trillion of consumer-sector debt, some $560-billion from borrowing abroad. Despite a weakening dollar, Canada is becoming less competitive. One real and symbolic policy for investment and entrepreneurship would be a capital-pool lifetime approach to taxing capital gains. This would make Canada entrepreneurially more competitive, and the reinvestment of capital gains would help reverse its savings shortage ($71-billion this year).
Mr. Trump is a zero-sum guy. Trade is not zero sum. The global trading order is a system. Mr. Trump does not understand the fundamental system’s nature of things. China and Germany have unjustifiably big current-account surpluses. The United States has moderate current-account and steel surpluses with Canada. Canada helps global growth with huge (unsustainable) current-account deficits. There is a basis for fair-trade U.S. compromises from China, but not from Canada. Over all, Canada-U.S. trade is already fair. Any changes need to be two-way. The best global trade compromise would be substantially reduced Chinese and German current-account surpluses.
Private-sector market behaviour may be the only way forward in today’s dysfunctional U.S. political scene. For example, the biggest long-term challenge the United States faces is the technology battle with China, but its politics are hurting its chances of attracting the best people from everywhere. A far-sighted Amazon private-sector decision to have its second headquarters in Toronto would mean Amazon, the United States and Canada together could all have unbeatable best-people access.
The shared Trump-Putin goal is to destroy the Western order. But Mr. Trump may be dangerously cornering himself. He finds it easier to break than make deals. Canada was at the centre of the U.S.-led postwar effort to build a safer and more prosperous postwar world. If there is to be a new “second-best” trading order, Canada again needs to be at the centre. Mr. Trump’s America of trade wars with friends and broken alliances has become too dangerous not to respond to.
Vladimir Putin understands one thing Mr. Trump does not. Weakening America’s alliances helps him and hurts America. This is a bigger moment than ending the postwar global order. A new Dark Ages could be the result.