Too close for comfort: On America’s tariff and U.S.-Canada ties.
Canada is looking for new friends after the Trump-induced uncertainty.
On July 10, U.S. President Donald Trump announced a 35% tariff on Canadian imports, despite Ottawa rescinding a 3% digital services tax (DST) that was to go into effect on June 30; Mr. Trump had dubbed this as an ‘attack on American firms’. Canada expected that it would generate about $5 billion from DST on revenues from Canadian-source digital services over five years dating it back to January 1, 2022. The 35% tax was imposed despite ongoing trade talks, which Canada was hoping would result in a trade deal by July 21 — as agreed upon between Canadian Prime Minister Mark Carney and Mr. Trump on the sidelines of the G-7 summit in mid-June. The new 35% tax, that was conveyed to Mr. Carney through a letter, which Mr. Trump sent to more than 20 U.S. trading partners, is likely to exempt items compliant under the 2018 United States-Mexico-Canada Agreement. Canada and the U.S. are each other’s largest trading partners. In fact, despite Mr. Trump’s constant refrain about the flow of fentanyl, the opioid coming through America’s northern borders (less than 0.1% of what lands in the U.S.), what has rankled the American President is the trade surplus of about $63 billion in Canada’s favour. This on-again-off again approach to tariffs as a stick against America’s trading partners has forced even steadfast allies such as Canada to scramble to diversify. Hours before receiving Mr. Trump’s letter, Mr. Carney posted a picture of himself with British Prime Minister Keir Starmer on X, saying, “... the world is turning to reliable economic partners like Canada.”
America’s action against Canada brings to mind a similar episode about a decade ago between close neighbours, India and Nepal. India closed land ports following the enactment of Nepal’s new Constitution citing fears about the treatment of the minority Madhesi community that has had close ties to India. This action crippled Nepal’s land-locked economy that was entirely reliant on Indian ports such as Kolkata and Visakhapatnam for its trade. Acute fuel and medicine shortages followed. Nepal’s GDP collapsed from 3.3% in FY15 to 0.2% in FY16, and Nepalis began harbouring a deep resentment toward India. New Delhi’s move forced Nepal to recalibrate its foreign and economic policy, eventually leading it to join China’s Belt and Road Initiative in 2017 and accepting massive infrastructure funds from Beijing, much to New Delhi’s dismay. This episode, between two vastly different nations, would serve Washington well to realise that mending a trade imbalance must not come at the expense of losing one of its closest allies with deep running cultural and linguistic ties, as Canada, with an economy that is one-eleventh that of the U.S. albeit with a trade surplus, now attempts to redraw its foreign and economic strategies.