Carney won Canada. Saving the country from Trump won't be so easy

Yahoo

01-05-2025

Mark Carney has engineered one of the most unlikely victories in political history, saving Canada's Liberal Party from near oblivion and going from the outskirts of politics to prime minister in a matter of months.
But the former Bank of England governor's biggest challenge still lies ahead: protecting Canada's economy from Donald Trump.
Mr Trump has repeatedly claimed Canada will become the 'cherished 51st state' and levied heavy tariffs on the US's northern neighbour. In his victory speech Carney said Trump 'is trying to break us so America can own us. That will never happen'.
Credit: Reuters
As it stands, the US has placed a blanket 10pc tariff on Canadian goods. There is also a 25pc levy on all aluminium and steel imports from Canada, though the Trump administration exempts products covered by the USMCA trade deal that covers the US, Canada and Mexico.
In response, Canada has imposed tariffs of around £32bn on US goods.
Carney and Trump have spoken since this week's Canadian election and agreed 'on the importance of Canada and the US working together – as independent, sovereign nations – for their mutual betterment', the prime minister's office said.
But Carney said on the campaign trail that the return of Trump meant Canada's economy must fundamentally change.
'What is clear is that our trade and our security relations are too reliant on the United States. We must diversify,' the prime minister told reporters in London.
In February, Mary Ng, the then trade minister, visited Australia with a delegation of over 140 businesses as the government sought to build closer ties with the country.
Prior to calling the snap election, Carney travelled to the UK and France in March to meet with both Sir Keir Starmer and Emmanuel Macron as he emphasised his country's bond with Europe.
But with around 75pc of Canada's exports heading to the US – compared to Britain's 16pc – diversifying will prove easier said than done.
'It's like separating London from Oxford,' says Daniel Trefler, a professor at the University of Toronto. 'We're so integrated in so many dimensions.'
Many of Canada's key sectors, such as steel production and the automotive industry, are closely tied to American businesses – with supply chains that criss-cross the border. Dozens of companies have factories in Canada that ship directly to the US.
While Trump wants to end that practice and force jobs into the US, Prof Trefler is sceptical.
'Toyota is not going to suddenly close its plants in Ontario and move them to Ohio because of a 25pc tariff. They're going to have to be sure that a tariff is going to be staying for like a decade before they're going to make a decision like that.'
In the meantime, Canada's economy will suffer.
The OECD has warned that the trade war will hit growth in Canada and slashed its forecasts for the country. It expects the Canadian economy to grow by just 0.7pc in 2025 and 2026, compared with its previous forecast of 2pc for both years.
A lot is at stake for Canadian households. Modelling by Deloitte Canada has estimated that the impact of tariffs from the US is set to cost the average Canadian $2,000 (£1,500) annually.
'There's no doubt that tariffs are already having a significant cost to the economy, just in the uncertainty that they've injected into investment decisions around the continent,' says Lars Osberg, a professor of economics at Dalhousie University, Halifax.
Carney is not the first Canadian prime minister to attempt to shift the country's trade away from its reliance on the US.
'That's been a strategy which Canadian governments have tried to follow for maybe 70 years,' Osberg says.
'Back in the 1950s, under the Conservatives of [former prime minister John] Diefenbaker, there was a big push to try and resurrect some of the trade with the UK – that had been so prominent during the 1930s. But it didn't really amount to much.'
Britain is likely to be central to Carney's diversification efforts this time around too.
The UK is already Canada's third-largest trading partner. Canada exported £10.3bn in goods and services to the UK in the 12 months to the end of September 2024, with crude oil, inorganic chemicals and aircraft among its biggest exports.
Trefler says: 'It seems like there is room for Carney to lead a massive trade delegation to the UK to try and promote trade between the two countries … There is plenty of room for something like that without having to write new agreements.
'I'm not sure that there's any other country like the UK which has a kind of social stability that we would be looking for in a trading partner.'
QEA Tech, based in Markham, Ontario, is an example of a Canadian business targeting the UK for growth.
The environmental software business has begun working on projects in Britain and Germany as part of efforts to find new markets outside of the US.
Peyvand Melati, the company's chief executive, says: 'Recent events obviously bring the thought that we need to expand internationally.
'Traditionally we have relied on the largest trade partner which is the US, as it is the nearest large market that is accessible for us. But the recent uncertainty brings to mind that we need to look outside of North America.'
Reshaping Canada's trading relationships will be a difficult, years-long task.
For now, perhaps the easiest route to boost Canada's economy would be to smooth things over with Trump.
Frédérique Carrier, the head of investment strategy at Royal Bank of Canada Wealth Management, says: 'A stable government will be a relief for financial markets and should put Canada in a stronger position to negotiate trade issues with the US. We expect the new government to start to engage with the US administration to diffuse trade tensions.'
She added that the new government was likely to focus on stimulus efforts in a bid to help the Canadian economy manage the impact of the recently imposed tariffs, with the county's fiscal deficit expected to rise as a result.
De-escalation may be the easiest route but Carney is still using fighting talk.
At a rally in Windsor, Ontario, on Saturday, he deployed a ice hokey metaphor that he used repeatedly on the campaign trail: 'We didn't ask for this fight, but Canadians are always ready when someone else drops their gloves.'
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