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Canada-India relations strained by murder allegation
Ian Bremmer shares his insights on global politics this week on World In :60.
What's the future for Canada-India relations amidst the accusation of Sikh leader murder?
Also Canadian citizen, by the way, this is the equivalent of Jamal Khashoggi if he had been assassinated in the United States as opposed to Turkey. It's a big deal. The Canadians have hard intel. They've shared it with all of their top allies. The Americans certainly see it's very credible. This is, frankly, since the Russians invaded Ukraine, US relations with all of their top security partners and allies have only gotten closer and stronger over the last 19 months. This is the single big exception to that. India and Canada, two increasingly strong security partners of the United States with a very major flap. Trudeau called them out directly. There's been, you know, already some diplomats that have been tossed out of each other's countries. Doesn't really matter from an economic perspective. There's very little trade relations between the two countries, but it matters a lot in terms of domestic politics.Indian population in Canada is pretty big, and they have fair political autonomy because they're dominant in a couple of key districts politically. The Indian government views this guy as terrorist that was killed. They also deny it, so they had nothing to do with it. And there's a lot of nationalism. So it's very hard for me to see this getting fixed any time soon. Watch how the Americans respond, because they are between a rock and a hard place in this flap.
Another missing Chinese minister. That's the defense minister. Is this a coincidence or something bigger happening?
Well, we know when we don't hear from ministers for a couple of weeks, we're not going to hear from them going forward. They have been purged. And in this case, it does look like a significant corruption issue, something that the Chinese and the Ukrainians have in common right now, except Ukrainians you still hear from. The Chinese, house arrest or a lot worse. I guess the one positive thing you can say is that with corruption still being a big problem and the Chinese clearing house domestically inside the military, they're not going to be looking to invade Taiwan any time soon. Of course, I didn't think that was going to happen anyway. But there is also the possibility that we could see a breakthrough on US-China defense relations, because this defense minister, one of the reasons the Americans didn't and couldn't see him is because he was sanctioned by the US. That will not likely be true of his successor.
Is Azerbaijan and Armenia on the precipice of full-scale war?
Hard to know whether the Armenians in Armenia will be getting involved, but the autonomous Republic of Karabakh, mountainous Karabakh, 120,000 Armenians inside Azerbaijan. They're in very serious trouble. For years, the Armenians had the upper hand. The Russians were their primary security and defense partner. They had control of their region, also took over Azeri territories, buffer territories, kicked the Azeris out of it. They didn't want to negotiate. Why? They didn't have to. Well, now they do. Now the Russians are in trouble. They're distracted. No one else is going to support them. They're in big trouble. So as a consequence, the Azeris first cut off all the humanitarian aid, cut off the ability to get any food in, any medicine in. And now they've actually invaded. They are in very seriously dire straits. It's a tragedy playing out. And I am hard-pressed to imagine anyone intervening on their behalf. Hate to see it.
Talk to you all real soon.
- What the G20 summit revealed about the Modi Trudeau relationship ›
- Canada accuses India of assassination ›
- Where is China's foreign minister? ›
- China's missing foreign minister is out (of a job) ›
- The Graphic Truth: How do Azerbaijan and Armenia stack up? ›
- Armenia, Azerbaijan & the Nagorno-Karabakh crisis that needs attention ›
Canada's Prime Minister Justin Trudeau rises to make a statement in the House of Commons on Parliament Hill in Ottawa, Ontario, Canada, Sept. 18, 2023.
India and Canada expel diplomats, US treads carefully
Following Canadian Prime Minister Justin Trudeau’s allegation on Monday that the Indian government assassinated Sikh independence activist Hardeep Singh Nijjar on Canadian soil, the two countries each expelled one of the other’s diplomats.
Ottawa booted an official that it said was heading India’s intelligence operations in Canada, while New Delhi announced it would send home a senior Canadian envoy as well.
India denies any role in the killing of Nijjar, who was gunned down in June, and the foreign ministry objected to what it said was the “interference of Canadian diplomats in our internal matters and their involvement in anti-India activities.” New Delhi believes Nijjar was involved in terrorist attacks carried out by Sikh separatists in India.
Meanwhile, the White House has been circumspect. The Biden Administration said it was “deeply concerned” and that it is “critical” that Nijjar’s killers be brought to justice — but refrained from directly commenting on India’s alleged involvement.
Trudeau’s allegations, of course, put Washington in an awkward position – caught between supporting an extremely close and longstanding ally, or potentially embarrassing India amid major US efforts to make inroads with New Delhi.
(For a deeper dive into the geopolitics behind the Nijjar assassination, read the forthcoming edition of GZERO North)
Modi and Trudeau back to back
What the G20 summit revealed about the Modi Trudeau relationship
But it wasn’t a great few days for Canadian Prime Minister Justin Trudeau, who ended up literally stuck in the country because his plane had broken down.
The broken plane begs to be called a metaphor. That’s a bit on the nose, but it isn’t wildly off the mark. What’s more, Canada didn’t get what it wanted and its G20 grab bag seems light compared to the Biden administration’s haul, and Modi’s, too.
Ottawa, for its part, wanted a tougher rebuke of Russia for its war in Ukraine, but wasn’t able to secure it. It also wanted to advance its Indo-Pacific strategy, which includes making further inroads with India, the world’s most populous country and its fast-growing economy.
Trudeau also, no doubt, wanted to avoid any embarrassing snubs. There’s a sense among observers that India and Modi, while certainly not inclined to dismiss Canada all together, don’t value the country as a top-tier partner, even as Canada increasingly recognizes the importance of its relationship with New Delhi. This dynamic isn’t new. Canada has been snubbed by India before.
India-Canada relations aren’t thriving
Canada wants – and needs – a robust trade and migration relationship with India. In 2022, trade between the two states amounted to roughly CAD$20 billion ($14 billion) in goods and services. India is the number one source of immigration to Canada. Nearly 120,000 newcomers from India became permanent residents in 2022. That’s more than a quarter of Canada’s entire permanent resident count for the year.
Ahead of the summit, the Modi government was cagey about the prospects of a bilateral meeting between the two leaders, which wasn’t a great sign for bilateral ties. That’s no surprise, since it’s evident the two leaders don’t particularly care for one another.
Indian High Commissioner Sanjay Kumar Verman told the Canadian Press he expected some sort of meeting, but cautioned that the format was “difficult to say.” The two ended up talking on the sidelines in New Delhi, but did not hold a bilateral meeting.
Biden and Modi, on the other hand, did hold a bilateral meeting, their second in just a few months after the Indian leader’s state visit to Washington in June. Both meetings pointed to warming relations between the US and India, particularly concerning trade, energy, and technology. India is keen to place itself as a partner and alternative to China in the Indo-Pacific and beyond, which the US is happy to oblige.
Canadian officials often compare foreign – and, for that matter, domestic – policy outcomes with those of its southern neighbour. Canadian governments are routinely compared to US administrations, and benchmarked against them. Plus, Canada can’t stray too far from the US, its top ally, trade and security partner, and global guarantor.
And yet Canada appears to look out of step with the US on relations with one the world’s most important emerging powers – India. Many analysts say this is reminiscent of Canada’s complicated relationship with China. The Trudeau government is trying to manage its affairs with the world’s second-largest economy – trade between the two hit an all–time high in 2022 – against a backdrop of the US hedging its China bets, and Beijing allegedly interfering in Canadian domestic politics.
In a sign of just how bad ties between India and Canada have become, ahead of the G20, the two countries announced an indefinite pause on trade talks, which have been ongoing for more than a decade. Canada asked for a break in 2017 order to “take stock” of its position, and India accepted. Trudeau kept mum on why.
Accusations of domestic interference
At the same time, Canada has launched an inquiry into foreign interference in its democracy, which may include a look at India, particularly its reach into the Indian diaspora in the country.
Canadian officials are concerned about India’s influence on these communities and the political agenda New Delhi may be trying to set, including suppressing dissent and critique of the Indian government, and efforts to support the Khalistani separatist movement, which seeks to establish an independent Sikh state within India. Trudeau talked about foreign interference with Modi, and it can’t have been a warm chat.
If Canada is sensitive to Indian diaspora politics in the country, so is India. Modi reportedly brought up Sikh protests in Canada with Trudeau. He chastised Sikh separatists while an Indian government statement claimed the activists were promoting violence and separatism – essentially accusing Trudeau of letting dangerous secessionists run wild in Canada. After India, Canada has the largest population of Sikhs in the world at roughly 770,000.
“The Khalistani issue, and now claims that India is interfering in Canada's domestic affairs, are real obstacles,” says Sanjay Ruparelia, associate professor in the Department of Politics and Public Administration at Toronto Metropolitan University.”
In a not-so-subtle jab at Modi’s rebuke, Trudeau told a press conference that Canada will always respect and protect “freedom of expression, freedom of conscience and peaceful protest.” Modi is routinely accused of suppressing protest at home, particularly from Sikhs and Muslims in the country.
Canada outside looking in
If the American relationship with India looks to be more constructive than Canada’s, that’s because it is. Ruparelia points out that several US presidents, including Bill Clinton and George W. Bush, “ramped up efforts to forge a multidimensional strategic partnership with India to counter China.”
While Washington and Delhi have disagreed on plenty throughout the years, Ruparelia says, “the Biden administration has clearly taken a realist stance”, adding that while theoretically that could help Canada’s relationship with India, given its closeness to the US, there’s no guarantee it will.
The human rights angle
Trudeau has been critical of Modi’s human rights record in the past. Human rights and faith groups have urged Trudueau to snub Modi given his record of discrimination towards minorities in India. These groups want Canada to make trade talks with India contingent on the country improving its human rights record.
In the United States, however, Biden now faces his own criticism for putting strategic interests ahead of human rights as the White House presses for more integration with India. During a visit to India back in March, Secretary of State Anthony Blinken avoided criticizing human rights abuses in India, despite facing pressure to do so. Blinken claims he discusses these issues in private. Indeed, the Biden administration has been softer on India than the Trudeau government, and it seems to be showing in the respective foreign policy outcomes of the two.
For Ruparelia, while “the underlying structural and political issues are longstanding … the trip [G20 summit] seems only to have worsened official relations.”
What does a US-China reset mean for Canada?
A breakthrough in US-China relations is signaling a possible detente. Earlier this week, US Commerce Secretary Gina Raimondo visited her counterpart Wang Wentao in Beijing to discuss smoothing trade relations. While the Biden administration is still committed to trade and security restrictions on China, it’s hoping to open space for more trade on consumer goods while “de-risking” the relationship between the countries – meaning reducing the chances of an accident or misunderstanding escalating into a full-blown crisis. For its part, Canada, as always, is following in the wake of the big powers.
Why now?
China’s economy is slowing of late, putting pressure on Xi Jinping. Chinese exports were down 14.5% year on year in July, while imports were down 12.4%, and economic growth between April and June was down to 0.8%. Trade with the US, meanwhile, is down 34%.
Between China’s economic slowdown and the Biden administration’s desire to de-risk and stabilize relations, there’s now an opportunity for the two to build a little trust in a relationship long marked by distrust – but that doesn’t mean sunshine and rainbows. As Anna Ashton, a China expert at Eurasia Group, warns, this reset is not a return to US-China relations pre-Trump. “It’s not a detente that is aimed at ending the competition between the two countries or resolving ideological differences, or rectifying concerns about national security. It’s something else.”
That “something else” may be a smoother and more responsible sort of competition. “It’s like we’re in this chapter of both sides recognizing each other as rivals and potential adversaries,” says Ashton. But they’re also acknowledging the mutual need to have clear channels of communication and engage in crisis prevention. “I find that unexpected,” she says, describing the relationship as “rivalrous and constructive at the same time.”
And what about Canada?
Canada-China relations are currently rocky, at best, and some say they’ve reached “an all-time low.” Prime Minister Justin Trudeau is facing pressure to call an inquiry into alleged Chinese electoral interference – despite special rapporteur, former Governor General David Johnston, recommending against one. Johnston warned of subversive threats to Canadian democracy from foreign interference but said little to no evidence was found to support allegations that China had directly funded candidates in the 2019 Canadian election or targeted candidates for defeat. He also found no evidence that former Liberal MP Han Dong had interfered in the process to secure the release of two Canadians, Michael Kovrig and Michael Spavor, arrested by China. Dong left the party’s caucus over the allegations but is now seeking to return, having been vindicated by the report.
So, given these tensions, where does the US reset with China leave its northern neighbor? Canada is one of America’s top three trading partners, alongside Mexico and China, with nearly $8oo billion in trade between the two countries in 2022. Trudeau will be watching Biden’s China policy closely and keeping tabs on how the 2024 election takes shape. Canada struggled to deal with the Trump administration during its tenure, cursed with managing both the mercurial president and traditional trade challenges such as softwood lumber disputes.
As president, Trump forced a long, difficult renegotiation of the North American Free Trade Agreement – now the US-Mexico-Canada Agreement. Last month, former US trade representative Robert Lighthizer revealed in his memoir “No Trade Is Free,” that during that time, the relationship between the two countries sunk to its lowest since the War of 1812. History buffs may remember that war as the one where the British, who claimed and governed Canada as its territory at the time, set the White House on fire – so it’s a high bar for low relations.
The magical powers of supply chain security
If Canadians are worried about what Biden’s rapprochement with China means for them, they may be buoyed by the administration’s desire to secure its critical supply chains. Graeme Thompson, senior analyst of global macro-geopolitics at Eurasia Group, says that while the president is making space for more trade with China on consumer goods, Canada remains a trusted ally – especially when it comes to sensitive trade goods.
“Canada is already treated as, essentially, a domestic source for US military procurement, and it benefits from measures in the US Inflation Reduction Act that incentivize electric vehicle manufacturing and cross-border supply chains within North America,” he says. The two countries are particularly close on critical mineral trade and trade related to technologies with national security implications, such as microprocessors. Still, Canada is left to shape its policy to conform to American imperatives – and that includes not being too far out of step in its relationship with China as the Biden White House seeks a more stable relationship with Beijing.
Ottawa in the middle
Canada is caught between the US and China and left responding to events rather than shaping them – and that's not a new problem. This conundrum was exemplified by the Meng Wanzhou affair, in which Canada arrested the Huawei executive (and daughter of the company’s founder) at Washington’s request, which prompted China to arrest the two Michaels (mentioned above) and charge them with espionage. The men were freed the day Meng was released with a deferred prosecution agreement negotiated by US prosecutors.
Once again, Canada has plenty of work to do now to warm up its own relationship with China and to follow the American lead on trade policy. As Thompson puts it, when it comes to choosing sides and trade relations, “There isn’t really much choice for Canadian policymakers – the option is to stay closely aligned to the US, and the alternatives aren’t readily apparent.”
As concerns over supply chain security and reliability persist, it makes sense that the US and Canada, long-term trusted allies and neighbors, would keep close, even while Biden attempts to de-risk relations with China. That’s good news for Canada. But at the same time, the White House is seeking to break with past Democratic presidents – Obama and Clinton – to focus more on protecting American workers, which further puts pressure on Canada as it struggles to get its share of the American manufacturing and trade pie.
The break with past trade and industrial policy means more goods manufactured in the US and a more closed economy. It also means putting a bit of a brake on globalization. Policies and laws such as the IRA, The Build America, Buy America Act, and the CHIPS and Science Act include protectionist provisions and reflect the president’s home-first focus. But the securing of supply chains may still be a boon for Canada despite a more isolationist American bent.
Canada should still have a significant role to play in the US economy – and not just for consumer goods. “There’s a lot of talk of re-shoring, but also near-shoring and friend-shoring,” says Thompson. “While American policymakers want to bring jobs and production home to the US, having strategic supply chains run through close security partners and allies is an acceptable second best. And because of geographic proximity, an intimate security and defense relationship, and what Canada sells into the market, all of those things put Canada in a very strong position to capitalize on US concerns about supply chains.”
Between navigating a response to the US-China detente and America-first policies, Canadian trade and foreign policy folks have their work cut out for them – but with both countries facing elections, it’s unclear how long they have to maneuver.
The electoral factor
National votes are pending in the US in 2024 and Canada in 2025, and campaign politics have a way of changing the diplomatic mood. In recent weeks, Canadian Environment Minister Steven Guilbeault, for example, caught heat from opposition Conservatives for heading to China to discuss climate change.
In the US, there are calls from both sides of the aisle to toughen relations with China. “There’s far more political incentive to be hawkish than anything but hawkish,” Ashton says.
So while both Biden and Trudeau are currently pushing for better relationships with China and cooperation on critical shared problems such as climate change, things could change quickly as elections loom. As always, politics comes first.
Broken housing markets could shape US and Canadian elections
The United States and Canada share hundreds of billions in annual trade, a deep defense relationship, the world’s longest undefended land border, and an affordability crisis that threatens to upend political fortunes. At the heart of that problem is housing. As both countries grapple with inflation and rising interest rates, the cost of shelter and the risk of foreclosures are rising.
The causes of unaffordable housing include a complex mix of under-supply (itself caused by several things), urbanization, marketization and speculation, immigration, population growth, temporary foreign workers, international students, and natural barriers. But whatever the cause, the US and Canada are both millions short on needed housing stock.
For President Joe Biden and Prime Minister Justin Trudeau, unaffordable shelter presents both a policy challenge and a political liability, especially as each faces looming elections. Biden is up for reelection in late-2024, and Trudeau must face voters by the fall of 2025.
Rising interest rates – and foreclosures
On Tuesday, Canada’s consumer price index revealed an inflation jump, moving from a two-year-plus low of 2.8% in June to 3.3% in July. The uptick makes a Bank of Canada rate hike in September more likely. The bank raised rates 25 basis points last month, sending the target rate to 5%. This summer, mortgage costs have been the primary cause of inflation – a vicious cycle of rate hikes driving mortgage costs, which drive rate hikes.
In late July, the Federal Reserve raised US interest rates to 5.25% – the highest in 22 years. That same month, the inflation rate moved 0.2% to hit 3.2%, driven, like Canada, by high housing costs.
As rates rise, so do US foreclosures. According to property data firm ATTOM, foreclosure starts rose 15% in the first half of 2023 – and a whopping 185% over the rate two years ago. Over 185,000 properties faced foreclosures in the first half of 2023 as the numbers trend back toward pre-pandemic rates. In 2017, more than 428,000 homes were foreclosed, while in 2018 it was more than 362,000, and 2019 saw over 296,500. The number of foreclosures had been in decline after the 2010 high of 1.65 million in the aftermath of the 2008 financial crisis. But last year was the first year that saw a rise in foreclosures since those dark days. Pandemic measures protected homeowners in recent years, but those are now in abatement.
Anecdotal data in Canada suggests an upward trend in foreclosures there too. A Calgary lawyer, for example, says the numbers are surging in Alberta’s largest city – the worst he’s seen since 2008. According to the Canadian Bankers Association, 0.15% of mortgages, just over 7,600, were in arrears in June 2023. That rate is low, but underlying conditions suggest trouble ahead, with the government offering new lending guidelines to support distressed borrowers in a bid to keep them in their homes. As the Globe and Mail reported in July, significant numbers of mortgage holders are falling behind on bills and borrowing to cover daily expenses. Meanwhile, household debt in Canada is the highest in the G7.
Moreover, many Canadians have variable-rate mortgages, where the interest rate paid is tied to a fluctuating prime rate. As interest rates have risen, more homeowners have shifted to fixed-rate mortgages. As the Financial Post reported in June, variable-rate mortgage share fell last April to under 8% – down from a January 2022 recent high of 56%.
Mike Moffat, founding director of the PLACE Centre at the Smart Prosperity Institute, says the foreclosure rates aren’t showing up at scale in data yet – but pressure is mounting. “Most of the cases that are starting to face pressures are the variable-rate mortgages,” he says. Lenders are using “creative solutions” such as extreme long-term amortization periods to manage cases, he notes. But there may be greater trouble on the horizon.
“Where we might start to see cracks forming is on fixed-rate mortgages,” he says, “particularly anybody who took a three-, four-, or five-year mortgage back in late-2020 or early 2021 ... When more of those fixed-rate ones start to come up for renewal, that’s when you’re going to see those pressures.” Folks who had locked in cheap rates will face much higher borrowing costs – and tough choices.
Broken markets home to sky-high housing prices
Unaffordable housing for owners and renters alike is a problem in both countries, but the problem is more pronounced in Canada. As Moffat notes, “Both Canada and the United States have some markets that are essentially just broken. You have maybe a half dozen big cities in the US where the housing market is out of control, and it’s the same thing in Canada where a half dozen housing markets are completely out of control, but the difference is in Canada, that half-dozen is 75% of the country.”
In April, the average price of a home in Canada rose to CA$716,000, up $100,000 in four months. While that’s the national average, some local markets are much worse. In Toronto, the average is over $1.1 million. In Vancouver, it’s over $1.2 million. This is also bad news for renters. According to Rentals.ca, in August, the average rental price for a one-bedroom apartment was $1,860 a month, up nearly 11% year-over-year. The average is $3,013 in Vancouver and $2,592 in Toronto.
Prices in the US are better overall, but some parts of the country are, as Moffat says, “broken.” According to Zillow, the average home cost in America is now over $348,000. But in the top markets, prices are much higher. New York averages over $618,500, while Seattle is above $701,000. Los Angeles is nearly $890,000, San Diego is almost $882,000, and San Francisco comes in at a whopping $1.12 million (that’s after a 4.98% year-over-year price decline).
Governments are waking up to the problem
The federal government in Canada is now ramping up its housing rhetoric – and perhaps its action. Newly appointed Housing Minister Sean Fraser says the feds should have never left the affordable housing game (which it has done over the last five decades). He is advocating more building, and there’s now talk of the governing Liberals leveraging their power and money to induce cities to build more supply. Fraser also says the government plans to make housing affordablewithout tanking the value of homes for existing owners. The government also recently launched a tax-free First Home Savings Account designed to help first-time buyers save for a downpayment.
Fraser’s comments come as Conservative opposition leader Pierre Poilievre is making affordability, including housing, a core part of his campaign message, and promising that, if elected, his government would withhold federal money from municipalities that don’t meet housing goals. It also comes in the wake of a Trudeau gaffe: The PM recently said housing isn’t primarily a federal responsibility, which is both true and the last thing Canadians want to hear.
The Biden administration has also caught on to the importance of affordable housing and is aiming to boost supply and bring ownership within reach for more Americans. The new strategy, announced in July, includes measures to ease land use and zoning restrictions, expand financing, and convert commercial spaces into residential spaces.
Housing could shape elections
With the Liberal government lagging in the polls, it seems to have caught on that it needs to go all-in on housing ahead of the next election. For months, Canadians have felt the federal government wasn’t paying enough attention to housing.
While events matter and can shift what the next election will be about, Moffat points out that housing is poised to be a major issue. “Barring any large crisis in the next 18 to 24 months, I do believe housing is going to be a top issue, either on its own or in a larger basket of affordability issues.”
In the US, housing policy proposals may end up in broader packages. Clayton Allen, US director at the Eurasia Group, says “presidential candidates are focused more on the question of how to address cost increases and inflation in general, and housing costs would fall under that broad umbrella.” So while there aren’t many specifically targeting housing, there’s a “laundry list of ideas to increase wages, improve the US economy, and tamp down inflation.” And since housing is bound up with affordability, it’s likely to be on the campaign agenda one way or another.
Will things get better?
Foreclosures could drive down housing prices. A recession – which would also induce foreclosures – could do the same. But nobody with an ounce of empathy wants that, and political incumbents certainly don’t. Doubts remain about the future of inflation, interest rates, government willingness to adopt effective housing policy, and the market’s response to government action. On top of that, both the US and Canada face major housing deficits that will take years to remedy.
There is some hope that things will improve as people demand housing action and punish politicians who fail to deliver. But relief, if it is to come, may be years away – perhaps too late to save today’s leaders, who will soon meet angry and anxious voters.
Ottawa, Washington at odds over digital tax plan
The Canadian government has outlined its plans for a digital services tax, which will hit online retailers and social media platforms with a 3% tax on Canadian revenue.
Trouble is, the Liberals’ tax battle with tech titans poses a threat to the carefully laid international plans of their political allies in Washington, according to a Politico report.
The Biden administration is worried that this could change the dynamics in OECD negotiations on a global digital service tax. The OECD is leading talks with more than 130 nations that want a portion of the profits made by US tech companies in their countries to stay within their borders. The US managed to postpone the taxes until at least 2025 but worries that other countries may follow Canada’s lead and move forward unilaterally.
Business groups in Canada and the United States have loudly objected to Canada’s plan, and Washington has threatened to seek redress if Canada proceeds, although it is not clear that the measure would be captured under USMCA, a trade deal between the US, Canada, and Mexico, rules since large Canadian companies would likely also be required to pay.
Treasury Secretary Janet Yellen is reportedly lobbying Canadian Deputy Prime Minister Chrystia Freeland to drop her plans, but Freeland – who played a key role in negotiating the USMCA and has deep connections in Washington – has insisted Canada must proceed. The tax is expected to come into force by January of next year.
Subsidy game could hurt Canada-US relations
Jon Lieber, head of Eurasia Group's coverage of political and policy developments in Washington, DC shares his perspective on US politics.
What is happening with US/Canada relations?
Well, I'm headed up to Toronto, Canada, just about a week after President Biden made his first trip to America's neighbor to the north, which is also the US' second largest trading partner. A very important, deeply ingrained relationship between these two North American economies. And a major source of tension right now between the US and Canada is over industrial policy. The US over the last several years has started to deeply subsidize infrastructure development, semiconductor manufacturing, and in the Inflation Reduction Act, green energy production, electric vehicles, and the components that go into this.
Now, the automobile industry is obviously a very major component of US/Canada trade and has been that way since the mid '90s when NAFTA was signed. The renegotiated USMCA has created a new set of playing rules for governing US/Canada trade, and there have been several long-standing disputes between the two countries that have not yet been worked out. And now with the introduction of the US' new subsidies, the Inflation Reduction Act is causing major concerns in Canada who are worried about losing green energy investments to the United States where there are tax preferences, loan programs, and other direct form of subsidies in order to get that manufacturing into the US.
Canada last week responded with its own budget, laying out billions of dollars in new subsidies to help compete with the United States and hoping that it can attract some of that investment over the northern border. Canada has several very attractive elements that the US does not have, including lower costs of construction, more flexible immigration policy, allowing them to take in higher skilled labor from around the globe, that is set specifically around set of criteria having to do with how qualified and educated immigrants are. This exists in the US but to a much lesser extent, and now Canada's getting into the subsidy game.
So this could be an ongoing source of tension between the two countries. It means that if you're looking to build a manufacturing plant for green energy or EV, electric vehicles, or for batteries, there's going to be this race to the top that the US is trying to push. Where Canada, the US, the EU, are all looking at different ways they can get these manufacturers into their markets. And going forward, these types of tensions could be an important part of the US/Canada relationship.
Both leaders are incentivized to keep things friendly between the two countries. Canada has a lot to lose if they could cut out of the US market. And from the US perspective, Canada is sort of like a very large state where English is the primary language, there's very little trade barriers, a highly educated workforce that's competitive across many of the same areas that the US economy is, and the US is also deeply incentivized to get along well here with Canada.
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Ukraine's President Volodymyr Zelenskiy awards a Ukrainian service member at a position near a frontline, in Donetsk region, Ukraine March 22, 2023.
What We’re Watching: Zelensky’s Bakhmut message, Rishi’s post-Brexit win, Trudeau’s take on Haiti, Ethiopia’s peace progress
Russia and Ukraine score points where they can
Volodymyr Zelensky visited frontline troops in war-ravaged Bakhmut, located in Ukraine’s eastern province of Donetsk, on Wednesday as Russian drones struck across the country. While planning for the trip was surely well underway before Vladimir Putin’s surprise stop in Russian-occupied Mariupol last weekend, the contrast underlined Zelenksy’s signal of defiance.
By appearing in Bakhmut very near the fighting, Zelensky reminded the world that, six months after Putin mobilized 300,000 new Russian soldiers for a deeper advance into Ukraine, even the small city of Bakhmut remains beyond their grasp.
In other war news, Russia has warned it will respond harshly to shipments from the UK to Ukraine of anti-tank munitions made from depleted uranium. Moscow claims this step adds an escalatory nuclear element to the conflict. In response, the UK insists the Russian position is propaganda, that the use of depleted uranium is common in anti-tank weapons, and that it contains nothing that can be used to make nuclear or radiological weapons. Finally, Russia has announced a plan to raise an additional $8 billion in revenue by changing the way oil profits are taxed.
All these stories underscore the reality that, while little has changed on the battlefield, Russians and Ukrainians are still looking for every small advantage they can gain in what looks increasingly like a war of attrition.
Has Brexit got “done” yet?
In a win for PM Rishi Sunak, the British House of Commons on Wednesday passed a reworked post-Brexit deal for Northern Ireland, which was agreed to last month with the European Commission.
Essentially, the proposal known as the Windsor Framework creates two lanes for trade: a faster-flowing green lane for goods transiting only between Britain and Northern Ireland and a red lane with more rigorous customs checks for goods bound for Ireland and elsewhere in the EU. It is unlikely to come into effect for several months as details are ironed out, officials say.
Still, despite the big margin of victory, more than 20 Tories – including Sunak’s two predecessors Liz Truss and Boris Johnson – voted against the measure, with Johnson saying it would mean that the UK won't be able to fully embrace the benefits of Brexit (what benefits, he didn’t say). It also signals that in the run-up to next year’s general election, Sunak will continue to deal with a vocal Euroskeptic wing within his party.
Meanwhile, six representatives from Northern Ireland’s Democratic Unionist Party also rejected the vote, suggesting that the DUP would not lift its boycott on the Northern Ireland legislature, which began almost a year ago. The lack of resolution on this front will make for awkward optics as President Joe Biden heads to Belfast next month to mark the 25th anniversary of the Good Friday Agreement that ended the Troubles.
Trudeau’s take on Haiti
President Joe Biden heads north on Thursday for his first presidential visit to Canada, where he and PM Justin Trudeau are expected to discuss a variety of issues, from defense and immigration to trade and Ukraine (see our look at likely agenda items here). But Biden is also expected to make some demands about … Haiti.
The situation in the Caribbean nation has deteriorated in recent months. Police have lost control to local gangs, and more than 200 Haitians were killed in the first half of March alone.
The Biden administration is reluctant to get more involved itself but wants Canada to take the lead in addressing the chaos in Haiti. Why Canada? The country has a long track record as a peacekeeper and has had prior involvement (for better or worse) in Haiti, making it an obvious choice from Washington’s perspective. An uptick in Haitian migrants seeking entry to the US and Canada raises that urgency further.
But Trudeau says that “outside intervention” can’t bring long-term stability to the country, and it’s hard to argue with the historical record on that. Meanwhile, many in Haiti worry that outsiders would merely prop up unelected acting PM Ariel Henry. And it didn’t help that Haiti’s largest newspaper ridiculed the recent deployment of two Canadian ships to patrol the coast.
All of this puts Trudeau in a tough spot: Biden wants him to be a reliable security partner beyond Ukraine, but the political fallout from a failed entanglement in Haiti could be disastrous for him. While the Canadian leader will likely make a commitment of some sort for Haiti, will it be enough to satisfy Biden or change the dynamics in Haiti itself?
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Ethiopia, TPLF take steps in tenuous peace
The Ethiopian government is removing the Tigray People’s Liberation Front from its list of terrorist organizations, part of a peace deal with the rebel group signed last November. The decision moves the country closer to what observers hope is an enduring peace after a brutal two-year civil war that has claimed an estimated 600,000 lives.
The situation is very delicate. The agreements don’t include all of the various combatants and are vague about who controls certain disputed territories. And while all sides reportedly committed war crimes, many Tigrayans believe the deal doesn’t hold the Ethiopian federal government accountable. PM Abiy Ahmed’s resistance to a UN investigation inspires little hope.
Still, the momentum is towards peace, for now. Economic interests are part of the reason why. Ethiopia is in bad shape, as the country is wracked by famine, drought, and an estimated reconstruction price tag of $20 billion. A lasting peace would enable Ethiopia to reopen two-year-old talks with the IMF on a $26 billion loan restructuring plan, which was interrupted by the war. Still, with so much bad blood – will these incentives be enough to bind the former combatants to a durable peace? All parties must still tread very carefully …