By Kevin Lynch and Paul Deegan

With his tariffs now a reality, U.S. President Donald Trump is weaponizing uncertainty to coerce businesses to move their operations to the United States. While we are now subject to 25 per cent across-the-board tariffs (10 per cent on energy), it’s unlikely all his tariffs on Canadian and Mexican imports will remain in place. The cost to Americans, both producers and consumers, would be too high, which is one reason the Wall Street Journal labelled Trump’s tariff attack: “The Dumbest Trade War in History.”

But, over time, we should expect a mix of some tariffs, some deferrals tied to new demands and some studies digging up offending Canadian trade practices and tax policies for later threats. Unpredictability is the art of Trump’s tariff deal.

What does this mean for Canada? Economic pain, yes. But we are far from defenceless — provided we make some tough choices and stick with them.

First, we need to realize that the trade deals we’ve had with the U.S. since the original FTA in 1988 are essentially dead. Trade agreements depend on rules and trust, which the president has broken. We should therefore not “over-pay” for the 2026 renegotiation. It won’t have the value of certainty. Short-term reality is that much trade will continue because it is in American corporate and consumer interests. But for the medium term we need to find alternative markets for Canadian goods, both at home by dismantling internal trade barriers and abroad with like-minded countries that see Trump tariff walls in their future, too.

Second, we have to retaliate, forcefully and cleverly, not only to show our political resolve to a bully, but also to cause difficulty for Trump with his MAGA constituencies. The focus should be on export taxes where, at least in the short term, Americans have few substitute sources of supply and demand is price-inelastic, as well as on import tariffs on key U.S. products from MAGA constituencies. Export taxes would be more difficult, but they need to be on the table. We should also target service sectors where the U.S. has large surpluses in its trade with Canada.

Third, we have to treat the Trump crisis as a permanent structural shock to the economy, which means the playbook for pandemic-type supports does not apply. Monetary policy cannot offset real supply shocks such as this one. Trying would only drive up inflation, ultimately making things worse. To a certain extent, a lower dollar will offset the hit to exports, but it also makes us poorer as a nation. So, it falls to fiscal and competitiveness policies to do the heavy lifting —but with structural reforms, not income supports. These reforms need to include: eliminating internal trade barriers, cutting through the regulatory jungle, which impedes our ability to build anything, and adjusting our corporate tax structure to encourage new investment and market development.

Fourth, with global capital markets increasingly concerned about Trump’s economic attacks, we need to get our fiscal house in order, both to reassure lenders and investors and to be able to make needed structural changes, which will be costly. With this year’s deficit likely above $50 billion, that will be no small task. Realistically, it will require significant cuts in program spending, industrial subsidies and the public service, which have all grown rapidly in recent years. We also have to be aware, as markets certainly are, that the federal government’s planned borrowing for this fiscal year is over $100 billion. The forecast deficit is “only” $40 billion, but extensive loans, investments and advances have to be financed, as well as the cash costs of accrual accounting.

Finally, and this will exacerbate the fiscal challenge, we must rebuild and upgrade our military, not because the U.S. says so, but to do our part in helping counter the rising threats from China and Russia, especially in the Arctic, where our sovereignty is under challenge. If we ramp-up rapidly and well, and Europeans muster the courage for a new collective defence without the U.S. backstop, we should offer to join in it and also seek new trading arrangements with them.

In our dealings with Trump, we should avoid rhetorical battles, which are his superpower with his MAGA base, and offer reciprocity if he comes around to accept (though he will never admit!) that this truly is a dumb trade war and rescinds his tariffs.

None of this will be easy, but the status quo is gone, and we must act, not acquiesce. We must be firm, clear and convincing that Canada can and will stand up for itself and prosper. Let’s hope the initial silence of our friends in Europe and elsewhere will give way to mutual support and cooperation as Trump inevitably turns his sights on them.

Kevin Lynch was Clerk of the Privy Council and vice-chair of BMO Financial Group. Paul Deegan, CEO of Deegan Public Strategies, was an executive at BMO and CN. 

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