Canada has leverage in this trade fight, but economists warn it comes with a cost

Canada has leverage in this trade fight, but economists warn it comes with a cost

A volatile and unpredictable U.S. administration makes it difficult to know which levers to pull

With the Trump administration's promise to impose more tariffs on us in January, many Canadians are asking: What leverage should we use to get them to change course?

The question suggests that there are actually real things we can do to change U.S. President Donald Trump's mind — that if Canada hits back hard enough, or demonstrates its willingness to suffer enough, we will get that policy change.

Christopher Ragan, the founding director of McGill University's Max Bell School of Public Policy and former chair of Canada’s Ecofiscal Commission put it this way: "Canada is in a set of negotiations with a party that appears to be unpredictable, volatile, so I don't think anybody really knows what's going to work here."

Don Drummond, former chief economist for TD Bank, said if Canadians are willing to suffer the consequences, there are plenty of ways to punch back at the U.S.

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"You first strike the things they've said are the most important to them," Drummond said. "They made it painfully clear that the only thing they want or need from Canada is oil, and maybe for a while electricity.

"We've had an export tax on oil and natural gas before and we could introduce that. We could also introduce quotas," he said.

Canada's leverage is significant when it comes to energy and fertilizer. In 2025 Canadian comodities accounted for 63 per cent of oil imported into the U.S., 81.3 per cent of imported electricity, almost 100 per cent of imported natural gas and 80 per cent of imported potash.

And while there's still a long way to go before Canada fully develops its critical mineral reserves, Drummond says we could notify the U.S. that they won't get preferential access when those reserves come online.

"We could also restrict American access to Canada," Drummond said. "In the extreme we could require a visa and we could be very stingy with them."

Canada could also refuse to buy the F-35 fighter jets from the U.S. and choose instead to go with the Gripen from Sweden, he said.

Canadian banks, governments, pension funds and others currently hold about $459.6 billion US in U.S. treasury bonds.

"Given that the U.S. is tormented at the moment trying to get their long-term bond yields down, if we said we were going to divest ourselves of those, or at least not buy any more, that would tick them off," Drummond said.

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Drummond also said that Canada's CPP fund could divest itself of all U.S. assets (51 per cent of the $864-billion fund is invested in the U.S., compared to just 12 per cent in Canada), but that would open the door to using Canadians' retirement as a political tool and placing retirees at risk — a step he said the country should avoid taking.

"You could put back the digital services tax, for example. Why the hell did we give it away? We got absolutely nothing for giving it away," Drummond said.

He says we could also eliminate the Canadian Film or Video Production Tax Credit, which he says results in lost tax revenue of about $500 million annually, with little economic benefit for Canada.

"So it could be fairly broad-based, it could be export restrictions or export taxes, it could be any number of things," Drummond said.

Some economists warn that while employing these non-tariff measures might feel good and would certainly harm the U.S. economy, they would hurt Canada's economy more.

"I think emotions are pretty high and there's just a desire to lash out, but cooler heads require us to take a moment to think about what it is we're trying to achieve," said Trevor Tombe, director of fiscal and economic policy at the University of Calgary's School of Public Policy.

Tombe says the 50 per cent tariffs on about $27 billion of Canadian goods represent a hit to Canadian GDP of about 0.4 or 0.5 per cent, and taking retaliatory action that costs Canada more than that doesn't make economic sense unless it changes U.S. behaviour.

"That's a lot easier said than done," Tombe said. "And if we do things that increase costs in the United States, that might very well play into the hands of the U.S. administration by allowing them to blame Canada."

Beyond hurting Canada's economy in the short term, there's another negative side effect: hurting it in the long term.

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"Maybe we have a lot of leverage, a lot of ability to impose pain, but it comes at a huge cost for us because we are both losing revenue and we are potentially severing relationships with our best customer," said Wolfgang Alschner, the Hyman Soloway Chair in Business and Trade Law at the University of Ottawa.

What if, for example, the U.S. replaced all Canadian oil with Venezuelan oil in a decade?

By way of example, Alschner says, China's export controls on critical minerals have prompted the U.S. to try to strike new deals, find new customers and build new critical mineral supply chains. Perhaps the best example of this is Canada's push to diversify in the face of the Trump administration's trade war.

"Even if you do it for a short period of time, you're sending a signal that this can be turned on and off. And so maybe the United States will not have time to mitigate that particular disruption at that moment, but it will then put measures in place to mitigate it in the future," he said.

Alschner also said bringing back concessions such as reimposing the Digital Services Tax or cancelling tax credits would be a direct provocation with an unclear dividend.

Sometimes there is only the fight

Ragan from McGill University says the U.S. would likely react strongly to export controls or taxes that drive up U.S. gas prices. That would risk turning energy scarcity caused by Canada into something that unites Americans against this country.

"That move escalates the trade war a few notches at once," Ragan said. "I say this half jokingly, but I wonder if you restricted electricity sales or oil sales or natural gas sales, whether that would lead Donald Trump to calling the troops. I'm not so sure."

Some economists say that rather than take actions that cost the Canadian economy in the short and long term, Canada should focus on how it can make up the difference with trade expansion and diversification abroad while building at home.

"Another way to think about the U.S. right now that I find kind of helpful is that they are flailing around in increasingly irrational ways and we are getting hit in the face," Tombe said.

"To the extent that their moves are crazy and not grounded in economic rationale, the best option might be to step back, try to weather the storm, and hopefully they work out their own issues domestically."

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Tombe says that aside from the broader move to diversify our exports, sign new trade deals and build at home, Canada still hasn't liberalized internal trade, an opportunity he calls low-hanging fruit.

He says that by simply recognizing credentials across the country, Canada could boost productivity enough to offset a 25 per cent across-the-board tariff.

Alschner says the advantage Canada has right now is that the EU and other global trading partners are locked in similar trade disputes with the United States, which means they may be highly motivated to work with Canada.

"We should really use this as an opportunity to forcibly substitute U.S. imports with strategically selected non-U.S. imports," Alschner said. "We should say to the European Union, 'All right, what are the things that you can sell to us that the United States used to sell to us?'"

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Tombe notes that while there are plenty of economic reasons to avoid employing non-tariff retaliatory measures in this trade fight, Canada's battle with the U.S. isn't entirely economic.

The U.S., as Prime Minister Mark Carney has said, wants to break us so it can own us, and some say a threat to our sovereignty requires an un-economic response.

"I'm getting a little tired, mainly, with fellow economists who point out that it's harmful to Canada to retaliate. I think that's pretty narrow-minded," Drummond said.

"I'd like to give that advice to the kid in the schoolyard who's getting bullied, [because] it's not much more complicated than that: If you want to stop a bully you have to be prepared to get your nose bloodied. It just eggs them on otherwise."

Peter Zimonjic is a senior writer for CBC News who reports for digital, radio and television. He has worked as a reporter and columnist in London, England, for the Telegraph, Times and Daily Mail, and in Canada for the Ottawa Citizen, Torstar and Sun Media. He is the author of Into The Darkness: An Account of 7/7, published by Vintage.