Late on Inauguration Day, newly sworn-in President Trump signed an executive order outlining his America First Trade Policy. Although presidential impatience and the occasional tweet are bound to upset the policy’s fine print and timelines, the document is worth a closer look. It provides an intellectual roadmap for the new administration’s trade policy team. For Canada, the policy holds both perils and promises.
Let’s consider the perils first. The document provides plenty of justifications for imposing tariffs on Canada. Renowned trade historian Doug Irwin suggests that tariffs are used for three purposes: raising revenue, achieving reciprocity in trade relations, and restricting trade to boost local manufacturing and investment. All three goals are explicitly mentioned in the America First Trade Policy. Add to that a fourth reason: coercion by using tariffs as leverage for pressuring countries into making domestic policy changes.
Of the four, coercion is the most imminent threat, but potentially also the most transient. The policy document notes concern over “unlawful migration and fentanyl flows from Canada.” Trump’s threat of a 25% across-the-board tariff on Canada and Mexico is explicitly tied to the issue. While it is unclear what more Canada can do to satisfy his demands, given that the promised 1.3 billion dollars to boost border security have seemingly been deemed insufficient, a negotiated solution is likely in the short to medium term.
Achieving reciprocity, the second goal of tariffs, is already more elusive. President Trump has long complained over trade imbalances and has repeatedly complained that Canada exports more to the U.S. than it imports. Unsurprisingly, the America First Trade Policy explicitly calls for “eliminating destructive trade deficits”, including through tariffs. While Canadians can strive to buy more from the U.S. and export more to third countries, bilateral trade deficits are partly driven by outside factors such as domestic saving rates or exchange rates that limit Canada’s ability to successfully balance trade relations to escape tariffs.
Further complicating matters is that President Trump wants to use tariffs to generate revenue. To underscore the point, the new administration is rebranding the Bureau of Customs and Border Protection as the “External Revenue Service.” The America First Trade Policy contemplates enacting a global tariff on all U.S. trading partners to boost revenue. With a 15% share of total U.S. imports, Canada’s exports make for a lucrative target.
Most problematic for Canada, however, is that Trump’s tariffs may ultimately be about the fourth rationale: restricting market access to force Canadian companies that want to supply the U.S. market into setting up manufacturing in the United States. Indeed, boosting domestic production is the thread that runs through the document. In the America First Trade Policy, the name is the game. There is little Canada can do unilaterally to avoid tariffs if the ultimate objective is to divert investment to the U.S.
Fortunately, the document also creates a possible path out of this mess (which does not involve Canada becoming the 51st state).
First, the document ties the America First Trade Policy back to Trump’s achievements during his first term, including the conclusion of the USMCA (United States-Mexico-Canada Agreement). The policy document commits the United States to prepare for the review of the agreements scheduled to take place in 2026. This may indicate a respect for process and a willingness to work with and build on agreements that Trump negotiated during his first presidency.
Second, the document signals the U.S.’ appetite for engaging in new bilateral or sectoral negotiations to obtain market access abroad. That is an encouraging sign. The Biden administration abandoned export-oriented trade policy. Its revival under Trump creates opportunity for trade-offs, although the best Canada can likely hope for is retaining existing market access in exchange for painful new concessions.
The most promising aspect of Trump’s policy for Canada is the America First Trade Policy’s emphasis on economic security and countering unfair Chinese trade practices. The United States is concerned about circumvention of China-specific tariffs as well as loopholes in broader sanctions and export controls. The policy also emphasizes the need to reduce dependence on China and to boost the U.S.’s industrial resilience and technological advantage.
These concerns create opportunities for Canada to propose an economic security partnership with the United States. Such an agreement would help plug holes in the current trade and investment control regime by enhancing cooperation on investment screening, sanctions and export controls. It could also open the door for deepening bilateral collaboration on critical minerals and industrial production. Ontario’s recent Fortress Am-Can plan for expanding cross-border energy cooperation is a step in the right direction and could serve as a blueprint for a pan-Canadian proposal.
In short, the America First Trade Policy includes threats, but also presents opportunity. Now that the U.S. has put its cards on the table, it is time for Canada to play its hand.
