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President Donald Trump makes a special address remotely during the 55th annual World Economic Forum meeting in Davos, Switzerland, on Jan. 23, 2025.
The Big Tar-iffs: Will he or won’t he start a trade war?
The big Trump tar-“iff” now has a when: Feb. 1.
That’s when the busy new US president has promised to slap 25% tariffs on both Canada and Mexico. In his virtual address to the folks attending the World Economic Forum in Davos, Switzerland, on Thursday, President Donald Trump again singled out Canada for harsh treatment. “We have a tremendous deficit with Canada,” he said, reiterating his usual inaccurate tariff mantra. Trump claims the trade deficit is between US$200 and US$250 billion a year when it is significantly less than half of that, mainly due to energy exports.
Trump then followed up with his favorite new expansionist taunt. “You can always become a state,” he said to Canadians. “If you’re a state, we won’t have a deficit. We won’t have to tariff you.”
But what he said next was more dire because it was aimed directly at the industries that are core to the Canadian economy. “We don’t need them to make our cars,” President Trump said. “We don’t need their lumber, because we have our own forests. We don’t need their oil and gas. We have more than anybody.” In other words, we don’t need Canada at all.
Cue the economic peril clutching.
Let’s slow-walk through all this.
Will President Donald Trump really follow through with tariffs, or is it a negotiating tactic?
Yes, tariffs are coming the way cold comes in winter. Why so certain? Our general rule is to take the president of the United States both seriously and literally. As Trump said in his inaugural address, tariffs are now his primary source of government revenue, not just a tool for negotiation.
“Instead of taxing our citizens to enrich other countries, we will tariff and tax foreign countries to enrich our citizens,” he announced. “It will be massive amounts of money pouring into our treasury coming from foreign sources.” He even floated the idea of an “External Revenue Service,” so tariffs are the flywheel in the engine that Trump promises will drive a golden age.
In his Davos speech on Thursday, the president emphasized the warning. “If you don’t make your product in America,” he said to a large group of CEOs, “then, very simply, you will have to pay a tariff, differing amounts, but a tariff which will direct hundreds of billions of dollars, even trillions of dollars, into our treasury to strengthen our economy and pay down debt.”
Is he right that high tariffs will really work for the US?
Not as promised. This is where the Trump math breaks down and politics and economics collide. Trump’s tariff threats will drive some businesses to keep factories in the US instead of, say, Canada. For example, this week Stellantis announced it was going to build the new Dodge Durango in Detroit and not move it to Canada as initially thought. It will also reopen a previously closed plant in Illinois to build another vehicle. So, expect some short-term “wins” from the America-first, protectionist agenda.
After all, in his first term, Trump used tariffs on goods like steel, aluminum, and products from China to more than double the amount the government collected from duties to about $111 billion.
Sounds like a lot, but it’s not. In 2023, the US government took in over $4.2 trillion in income and payroll tax. Even with 10% tariffs on all goods from China and 25% tariffs on Canadian and Mexican goods, the US government would take in only another $140 billion in 2025, according to the Committee for a Responsible Budget.
That’s not nearly enough to finance new tax cuts. For example, Trump has promised to extend his 2017 tax cuts in 2026. The Congressional Budget Office estimates doing so will cost about $4.7 trillion in lost revenue between now and 2035. That leaves a Grand Canyon-size hole that revenue from tariffs and savings from government cuts can never fill. Deficits will explode.
So will tariffs really be 25% across the board on Canada and Mexico, or will President Trump come down to a more manageable level on a few select goods?
That remains very unclear. The president didn’t slap these tariffs on week one, revealing they may have dropped as a symbolic priority for him. That opens up some room to maneuver to negotiate until the Feb. 1 deadline, and now there is even further hope for exceptions. The president has also asked for a report on trade and unfair practices to be delivered to him by April 1, which offers yet another potential delay in the tariff war. There will be lobbying, networking, and a full-bore strategy to give Canada some kind of carveout.
Still, neither date removes the possibility of the promised tariffs happening at some level. The president needs revenue, and tariffs are his preferred tool, despite the math.
Will Canada retaliate dollar for dollar?
Yes. The same strategy Canada deployed in Trump 1.0 during the steel and aluminum tariffs will be deployed again, and the list amounting to CA$37 billion worth of goods — including things like Florida Orange juice — is already made and ready to be deployed. After all, if Trump goes through with the tariffs, Canada could get pushed into a recession, with up to 5% of its GDP hit. While goods and services in both countries will get more expensive for citizens, it will hurt Canada much more for one reason: Canada sends almost three-quarters of its exports to the US, compared to just a little more than 17% of US exports crossing the other way.
If there are 25% tariffs across the board, will Canada use the nuclear option and try to cut off energy exports to the US, risking a full national unity crisis?
Very unclear. All the premiers and territory leaders met this week with Justin Trudeau to align their retaliation strategy, which includes energy … except for Alberta Premier Danielle Smith, for whom any inclusion of fossil fuel exports in a trade war is strictly off-limits. This is the lifeblood of the Alberta economy, after all, and she is protective of her province. However, her position deeply hampers a united Canadian response and allows the new US administration to deploy a divide-and-conquer strategy, knowing they can absorb any trade shocks better than Canada, especially if they do not include energy.
Is Trump still serious about taking over Canada by economic force?
Unclear. That view has certainly created a surge of patriotism in Canada and escalated tough trade talk as politicians jockey to wear the “Captain Canada” label. But if there is a desire to have an integrated North American economy — newsflash! — we already have one.
Energy alone is the best example. The US imports 24% of its crude oil from Canada, and that is very hard to replace because US refineries are retooled to process Canadian heavy crude oil, not the kind of oil the US extracts from fracking. Not only that, when looking at all energy products that flow across the border, like natural gas, there is a combined network of pipelines in North America that is over 281,000 miles long! With the free trade agreement, integrated fossil fuel pipelines, and hydroelectric systems in the East supplying electricity to the Northeastern states, it would be hard to find two more interconnected economies anywhere in the world.
In other words, on Feb. 1, the US and Canada are headed for a trade war they don’t need over a prize they both already have.
Carney looks like he will win a chance to lose
Unless some strange things happen, the next prime minister of Canada is likely to be an ambitious, high-achieving Albertan who made a mark on the world stage after excelling at Harvard and Oxford.
We don’t know yet whether that Albertan will be Mark Carney or Chrystia Freeland. But whoever becomes the Liberal Party leader on March 9 is unlikely to ever live in the official residence, because Justin Trudeau will probably still be packing boxes by the time his successor faces a different Albertan in an election.
Conservative Leader Pierre Poilievre has an enormous lead in the national polls, which have not moved despite Trudeau announcing his long-pined-for resignation. The polls may move when the Liberals pick a new leader, but not enough to stop a Conservative landslide this spring.
It is impressive in a way that both Carney and Freeland — both extraordinarily accomplished people — have decided the race is worth the trouble because it looks like all the winner will get is a chance to lose. (House Leader Karina Gould is also running, but she is unlikely to find a way to be competitive in such a short race.)
A lot to give up
It is particularly striking that Carney — the former governor of the central banks in both Canada and England — is willing to give up a lucrative life in lush boardrooms for a difficult and uncertain political career. He has resigned as chair of both Brookfield Asset Management and Bloomberg LP and disentangled himself from a variety of other desirable gigs, giving up goodness knows how much money.
He must think he can win the leadership — and believe he has some chance of beating Poilievre — or he wouldn’t be doing all that.
Carney looks like he will win the first race. He kicked off his campaign by cracking jokes during a successful interview with Jon Stewart last week on “The Daily Show,” which drew approving reviews from Canadian Liberals who previously had found him staid, even for a banker.
But, without Stewart to loosen him up, he appeared wooden during his official launch in Edmonton, a sign of his inexperience as a politician.
Emotional and divisive
Freeland doesn’t have that problem. A former journalist who impressed Canadians with her toughness during trade negotiations with Donald Trump during his first term, she will be a formidable opponent. In her launch video, she presented herself as the candidate best suited to stand up to Trump, who is threatening to impose economy-killing tariffs on Canada.
But Freeland’s launch was interrupted by Gaza protesters and overshadowed by news that Foreign Affairs Minister Mélanie Joly — a crucial organizer in Quebec — would support Carney. Former Minister Navdeep Bains — a crucial organizer in the rest of the country — is also said to be on Team Carney, as are a growing number of prominent ministers. On Sunday, François-Philippe Champagne, the influential industry minister, is expected to endorse Carney, adding a note of finality.
Canada’s Middle East policy has not emerged as a point of debate — there have not yet been any debates — but it appears to be a dividing line in the race ahead, judging from how supporters are sorting themselves. Joly has often been criticized by Israel’s supporters, and they were quick to see her Carney endorsement as a bad sign.
Freeland has spoken up for Israel in the past, while Carney has no public record on the issue but appears to be attracting supporters who are more critical.
They will likely both be challenged to take a position as the race continues, which may damage whoever wins. An emotional and divisive dispute over Middle East policy is exactly what the Liberal Party doesn’t need as it gets ready to face Poilievre, who is strongly pro-Israel — but it may be what the party gets.
An outsider? Really?
Whether that so-far sublimated division emerges into the open or not, Carney is likely to win. He has the advantage because of “the short timeline, the high buy-in, and just the sheer number of early caucus support he’s gotten,” says pollster Quito Maggi, of Mainstreet Research.
“In a long leadership, caucus matters very little. In a short leadership like this, where each caucus member is going to bring to the table a couple hundred supporters from their riding to be able to sign up for this, it matters a lot.”
And Freeland faces challenges. She will find it hard to distance herself from unpopular Trudeau policies since she was his deputy prime minister.
Carney was on the sidelines, giving him more of a credible claim to being, as he called himself on “The Daily Show,” an “outsider.” The Conservatives will ridicule that, pointing to his public support of carbon pricing, for example, but they might have to work up a sweat to make it stick. It is already stuck on Freeland.
“He’s got a lot to prove,” said a senior Liberal who prefers to remain anonymous. “Freeland has a lot to disprove, which means, I think that he has the easier go of it.”
And the manner in which Freeland left the Trudeau government — resigning on the day she was to deliver a fall economic update and throwing the government into chaos — may not sit well even with those Liberals who were relieved to see Trudeau pushed out.
There’s an old adage in politics: She who wields the knife never wears the crown.
It would be hard for her to win, but Carney — who is entering a demanding new profession at age 59 — might find a way to lose.
Whoever comes out on top will almost immediately face the fearsome Poilievre, giving them a good chance of beating the record set by Charles Tupper, who had the shortest tenure as Canadian prime minister when he served for just 68 days in 1896.
Graphic Truth: Which major economy has the lowest tariffs?
The Biden administration scaled back the EU tariffs but built on the China tariffs with additional measures. The tariffed share of US imports is now the highest it has been in decades, and Trump has threatened to boost tariffs even more.
But he’s starting from what is still, despite all that, a low base. The US has the second-lowest tariff barriers among the G20, the group of the world’s largest economies.In 2023, the trade-weighted average US tariff rate – a measure that takes into account the mix of goods a country actually imports – was just 2.2%. Only Japan’s was lower. Canada’s, by comparison, was 3.4%. The EU’s was 2.7%. And India’s was a whopping 12%. Here’s a look at how all 20 economies stack up when it comes to levies at the border.Can Liberals get a boost?
Before Trump makes a serious move on tariffs, Canadian Liberals are to choose a new leader, who will face Conservative leader Pierre Poilievre in an election soon after. At that point, Canadians will decide who should manage the country – and its difficult new relationship with its southern neighbor.
All the polls show Poilievre with a decisive lead, but issue polling is giving the Liberals faint hope that they might turn things around.
Prime Minister Justin Trudeausaid Tuesday that Canada would respond with a “very strong” dollar-for-dollar retaliatory package. A poll from Ipsos for Global News finds that 82% of Canadians agree that Canada should retaliate. Conservative leader Pierre Poilievrehas said Canada should do so, but his position is more delicate, since about half of Canadian Conservatives like Trump.
He is demanding that Trudeau recall Parliament so that MPs can debate tariffs and other elements of the response. Trudeau won’t do that because Poilievre would move a non-confidence vote, which could send Canadians to the polls in the middle of a Liberal leadership race.
The same poll that showed support for retaliatory tariffs found that three-quarters of Canadians want an immediate election, but they will have to wait. Voters in Ontario will likely get the chance to express their views sooner as Premier Doug Ford is expected to call an election there as early as next week. He hopes to capitalize on his Captain Canada image and lock down votes before the federal election scrambles electoral preferences.President Donald Trump signs executive orders in the White House.
Trump uses uncertainty on tariffs for leverage
In November, Trump said he would impose those tariffs on Day One, which was Jan. 20, but the document he was signing when he made his remarks calls for a comprehensive report on trade to be delivered to him by April 1, setting out his options.
That process will allow American trade and national security officials to have input “in a formal way, rather than the kind of monarchical court that was going on at Mar-a-Lago,” says Eurasia Group analyst Graeme Thompson.
That means that Canada and Mexico will likely have the opportunity to make their case for continued trade before Trump acts, but he is going to be pushing hard for concessions.
The fresh tariff threats should be thought of as “a negotiating tactic,” says Thompson, but that doesn’t mean there won’t be tariffs. “The bottom line is, whether they come today, tomorrow, next week, or next month, Canada is going to have to live with the specter of US tariffs hanging over its head on any issue at any time for the next four years.”
Trump will reportedly use the threats to force Canada and Mexico to renegotiate the USMCA in an attempt to shift auto manufacturing from those countries to the United States.
Canada and Mexico can both be expected to push back hard to protect jobs in their countries but may be forced to make difficult tradeoffs to avoid broader tariff pain.
An Amazon warehouse in the Lachine neighborhood of Montreal, Quebec, Canada, on Jan. 22, 2025.
Hard Numbers: Amazon to close unionized Canadian facility, Pentagon sends troops to border, Quebec’s new AI infrastructure fund, Freeland abandons capital gains tax
1,700: On Wednesday, Amazon announced it will close all Quebec facilities in the next two months, cutting over 1,700 jobs and outsourcing deliveries to smaller contractors. The company claims the decision is for cost savings, not related to the recent unionization at its Laval warehouse — Quebec's only unionized Amazon workforce in Canada. The CSN union federation denounced the closure as nonsensical. Workers at the Laval facility, who were seeking a $26 per hour wage, received news of the closure through an email to their union lawyer.
1,500: The Pentagon is sending 1,500 troops to secure the southern US border. The move comes two days after Donald Trump signed a series of executive orders – including one declaring a national emergency – to increase military presence at the border.
1 billion: Quebec-based Novacap Investments has successfully closed a $1 billion digital infrastructure fund, predicting that the rapid growth in AI will keep the demand for digital infrastructure high. To put this sum in perspective: Canada only raised $1.56 billion in private equity funds in the first 11 months of last year. The fund exceeded its initial $750 million target despite challenging market conditions, and it aims to invest around $100 million each in 10 regional companies providing connectivity and data services.
19 billion: Despite previously championing the tax increase as finance minister, Chrystia Freeland plans to abandon the Canadian government's capital gains tax hike policy if she wins the Liberal Party leadership race to replace Justin Trudeau. Freeland's shift against the tax hike – the policy would have generated CA$19 billion over five years – comes in response to Donald Trump’s policies and the risk of investment flowing to the US.
An aerial view of the Pasadena Refining System, Inc., in Pasadena, Texas, from 2017.
Why does the US Import oil despite producing enough for its needs?
The United States is one of the world’s largest oil producers, producing enough crude oil for domestic consumption and exporting millions of barrels daily. In 2023, it exported just over 10 million barrels per day, or b/d, of petroleum to 173 countries and three US territories.
Yet, the US also imports roughly 8 million b/d, mostly heavy crude,60% of which comes from Canada, up from 33% in 2013. US oil refining capacity stood at 18.4 million barrels per day (b/d) as of Jan. 1, 2024. This may seem counterintuitive, but there are several reasons why the US still relies on imports.
Oil quality differences. Crude oil comes in different grades, generally categorized by density (light vs. heavy) and sulfur content (sweet vs. sour). The US primarily produces light, sweet crude, ideal for gasoline. But many US refineries, especially those along the Gulf Coast, are geared up to process sour, heavy crude – the kind produced in countries like Canada and Venezuela. Heavy crude oil is cheaper, and its chemical composition allows it to be used in a greater variety of products, such as diesel, jet fuel, and petrochemicals.
Geographic logistics and costs. US oil fields are concentrated in Texas and North Dakota, making it cost-effective for other regions to import oil from Canada, whose pipeline infrastructure can directly supply US refineries in the Midwest and Gulf Coast. Canada also supplies oil by rail, as its supply exceeds pipeline capacity. Its oil is also sold at a discount, as high as $20 a barrel in the last two years, due to its limited pipeline infrastructure to coastal ports that makes the US its chief customer, as well as competition from increased production of Mexican crude that has saturated the market.
Economics and trade. US producers sell their light crude to international markets, where they can fetch higher prices than domestically. From 1975 to 2015, it was illegal for the US to export crude oil. President Barack Obama lifted the ban as other sources of oil including hydraulic fracking became available, increasing domestic supply. The US Energy Information Administration forecasts that US crude oil production will continue to rise, reaching an average of 13.5 million b/d in 2025, up from a record 13.2 million b/d in 2024.
Energy security strategy. The US has long maintained a policy of diversifying oil sources to ensure energy security, particularly since the 1973 oil embargo by OPEC countries during the Arab-Israeli war, preferring imports from more stable trading partners like Canada. President Donald Trump’s declaration of a national energy emergency on Monday, however, is designed to boost US oil and gas production by expediting drilling permits and removing restrictions on exploration, including offshore and in Alaska. This might make it less necessary to import Canadian oil – an issue of concern to Alberta, whose economy relies heavily on exports to the US. Tariffs on Canadian oil would also make the product more expensive and encourage greater production of US oil, which could also reduce reliance on Canada in the long term.
Container ships in front of the port of Bremerhaven.
How scared should the world be of Trump’s economic threats?
On Wednesday, President Donald Trump used his social media platform to threatenVladimir Putin with “high levels of Taxes, Tariffs, and Sanctions on anything being sold by Russia to the United States” unless he struck a bargain over Ukraine.
There’s just one problem: Russia has very little trade with the US. Americans imported just $2.8 billion in goods from Russia from Jan. to Nov. 2024, less than a tenth of the pre-war figure and less than 1% of all US imports over the same time period. The extensive sanctions already in place have hardly brought Moscow to its knees, and arguably benefited US rivals like China, Iran, and North Korea. It’s tough talk, but it’s not likely to push Putin to the table.
China is a different story. Trade with the US added up to an average of $54 billion per month in 2024, and the 60% tariffs Trump threatened to put on China on the campaign trail would cause severe damage to both economies. That may be why Trump is backing off the high sticker number and said Tuesday he is considering imposing at 10% tariffs on Chinese goods as soon as Feb. 1.
Now, 10% is a number that Beijing feels is much more manageable. China is experiencing price deflation — a really damaging phenomenon with one silver lining in that it could mean US consumers wind up paying about the same prices even if Trump hikes tariffs. The central government is also promising funds to stabilize the stock market in the face of potential tariffs and prevent investors from seeking safer shelter for their cash.
The fears are more real in Europe, where Trump threatened to impose tariffs without specifying a rate on Tuesday. Growth in the region’s most important economies is already stagnating, and even small barriers to trade with their most important partner will have serious consequences. Further economic troubles could empower far-right movements across the continent, which may suit Trump just fine. We have our eye on Germany, which will hold elections in precisely one month.
And don’t forget Canada and Mexico, which are staring down the barrel of 25% tariffs that Trump threatened on Tuesday as well. It’s creating a decidedly tense atmosphere in North America, with Canadian Prime Minister (for now) Justin Trudeau promising retaliation, which Mexican President Claudia Sheinbaum has hinted at as well.
The bottom line? You’re probably in for rising prices in the near future … unless everyone can come up with a reason for Trump to let them slide. We’re watching what Trump says when he speaks at the World Economic Forum in Davos on Thursday.