What economic levers could Trump actually pull to annex Canada?

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U.S. president-elect Donald Trump suggested he would use “economic force” to annex Canada at a press conference this week, marking an escalation in the string of threats and jibes he has made against the country since his election.

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“You get rid of that artificially drawn line, and you take a look at what that looks like, and it would also be much better for national security,” Trump said at his Mar-a Lago home in Florida on Tuesday. “Canada and the United States, that would really be something.”

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Trump ruled out the use of military force against Canada — something he seemingly left on the table when it comes to Greenland and the Panama Canal, two of his other recent targets — saying that instead he would stick to economic means to intimidate America’s northern neighbour into becoming the 51st state.

But just how far he might be willing to go on the economic front remained unclear. Most of the focus since his re-election has been on Trump’s threat to impose 25 per cent tariffs on Canadian goods, but the U.S. has numerous other tools at its disposal when in comes to inflicting economic pain — many usually reserved for its worst enemies.

“There’s no limit to what he can do,” said trade lawyer Mark Warner, a principal at MAAW Law, noting that an important constraint on Trump would be the impact of any measure on American consumers.

Fen Osler Hampson, professor of international affairs at Carleton University and co-chair of the Expert Group on Canada-U.S. Relations, said that outside of tariffs, the U.S. could attempt to cap the price it pays for energy or other resources coming from Canada.

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For example, G7 countries put a cap on Russian oil, which reduced foreign currency flows into Russia and lowered the value of the ruble, he said.

Trump could go even further by placing a trade embargo or restrictions on specific exports and imports.

At this week’s press conference, Trump seemed to raise such a possibility, saying the U.S. could get by without buying Canadian lumber, dairy or automobiles at all.

“Normally, you only do that with a country that you’re at war or in a major conflict with,” Hampson added. “But again, it’s a potential tool, and there is presidential authority to do it now.”

Still, placing an embargo on certain items would be inflationary for the U.S. and have an impact on American consumers as well.

“The reason we trade goods is the laws of comparative advantage,” Hampson said. “You get it from the cheapest source, and that lowers the price to consumers.”

Other potential, if extreme, measures could include restrictions on Canadian-owned companies doing business in the U.S., asset seizures or even sanctions, although Canada could in turn retaliate with the opposite measures to create penalties for both sides.

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Could the U.S. halt all economic relations with Canada altogether? It is possible, Hampson said, but would be costly to the U.S. and Trump might face legal challenges in American courts.

“The two-way flow of trade is almost a trillion dollars, and that is one of the most important trading relationships in the world.”

While the damage from such tactics would be extreme, the 25 per cent tariffs Trump has already threatened could cause “enormous damage” on their own, meaning Trump may not need to escalate further to get what he wants, Hampson said.

“By the time the damage of that particular brush fire has burned out, there may be less to burn.”

He also questioned whether Trump seriously desires annexation, which could result in 40 million Canadians who are less likely to vote Republican.

Trump’s threats may really be a message to other countries and their political leaders, Warner said.

“It’s basically almost like a boxing match in the first round, where the opponent is feeling the person out,” he said. “And I think some of it also is simply Donald Trump, in his second term, is settling scores.”

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Avery Shenfeld, managing director and chief economist at the Canadian Imperial Bank of Commerce, also downplayed the “annex Canada” threat.

“The actual risk is simply that the Trump administration will hit our economy, and others, with tariffs as a means of protecting American industry, or as a way of raising government revenues, largely on the back of American consumers, to cover some of the fiscal cost of other tax cuts,” Shenfeld wrote in an email.

This could mean cutting into Canadian export volumes and slashing capital spending in export industries, Shenfeld said. He pointed to Trump’s first stint in the White House, in which Canada saw a significant drop in its exports of steel products due to tariffs (which were later removed) and a two-year decline in manufacturing capital spending during the period in which the North American Free Trade Agreement was seen to be at risk.

“Canada will try to use both the carrot (pledges for tighter border controls, increased defense spending, and addressing selected trade irritants), and the stick (tariffs on U.S. exports to Canada and becoming less cooperative in other policy areas) to convince the Trump administration to stand down on its trade threat,” he said.

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Hampton said a potential trade war could force Canada to diversify its trading relationships with other countries — something he and many experts feel Canada should have already been doing, instead of relying on its southern partner.

“If you want to erase the border through the use of economic instruments, the dumbest way to do it is through economic coercion,” said Hampton.

“Yes, we’ll take a hit. But there are other places in the world we can sell what we have.”

At the end of the day, Hampton said if the U.S. really wanted to fold Canada into its borders, it should be “offering carrots, not sticks,” by deepening their economic relationship.

Walid Hejazi, a professor of international business at the Rotman School of Management at the University of Toronto said that he thinks Trump doesn’t understand how trade can be mutually beneficial.

Trump believes the U.S. is doing a favour to countries that trade with it, he said. “It’s (aimed) to his base as part of this idea about American exceptionalism.”

Hejazi said two of the three sectors Trump mentioned specifically on Tuesday, dairy and automobiles, are “real threats” since they’re “movable assets,” while Canadian lumber would be much harder for the U.S. to replace.

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In the event of a trade war, Hejazi said Canada could make it harder for large American companies to do business in Canada, creating more economic costs for the U.S.

The federal government is already reportedly considering retaliatory tariffs on U.S. steel products and ceramics, including toilets and sinks, and Florida orange juice, while Canada could also consider blocking exports such as oil, electricity and critical minerals.

Hampton further proposed the creation of a consumption tax on American companies that provide discretionary services, such as Uber Technologies Inc. and eBay Inc., or even Tesla Inc., “because it’s the digital tech guys who’ve got Trump’s ear.”

Most importantly, Hampton said, Canada needs to first wait and see what Trump actually does once he takes office.

“Let Americans feel the pain first, and let American consumers and producers do the heavy lobbying for you,” he said. “The last thing you want to do is escalate.”

• Email: slouis@postmedia.com

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