News Analysis
U.S. President Donald Trump has kept Canada on edge with his tariff threat and the unpredictability surrounding it, but there appears to be a detailed plan for its execution if one delves into the economic thinking of a key presidential adviser.
The desire to impose tariffs on Canada, and much of the world for that matter, is inscribed in the Trump’s administrations’ objective to reshape the global trade and security architecture, according to a policy paper by Stephen Miran.
Trump said in December he was nominating Miran, a Harvard-educated economist who served at the Treasury Department during his first term, as the chairman of his Council of Economic Advisers.
In his “User’s Guide to Restructuring the Global Trading System“ published by Hudson Bay Capital on Nov. 12, shortly after Trump’s election victory, Miran wrote about using tariffs as a strategy to rebalance trade with other countries and extract concessions not only economically, but around security and defence as well.
Trump’s threat to impose broad 25 percent tariffs on Canada and Mexico has been linked to border security issues such as illegal immigration and drug smuggling.
Trump initially threatened to impose the tariffs on his first day in office by way of an executive order, but instead issued a memorandum to trade officials on Jan. 20. The memo instructs officials to provide a report to him by April 1 on why the United States faces trade imbalances and how tariffs could solve the issue.
The piece by Miran explores the topic in-depth and says the imbalance derives from the post-World War II and Cold War eras, in which the United States positioned itself to favour the reconstruction of other countries or to keep countries outside the Soviet Union’s orbit.
The tariff rates defining the international trading system are, “broadly speaking, locked into a configuration designed for a different economic age,” Miran wrote.
Lowest Tariffs
It can be hard to fathom that the world’s top superpower would be the victim of unfair trade practices, as Trump has often commented, but Miran cites World Trade Organization (WTO) data on the sometimes significant discrepancies in trade barriers.
The WTO says the United States applies an average of 3.4 percent tariffs on imports, which is the lowest across the world. By comparison Canada is at 6.6 percent, the European Union 4.9 percent, and China 10 percent. A large developing economy like Brazil imposes an average of 31.4 percent in tariffs.
These “asymmetric trade conditions,” coupled with the “persistent overvaluation of the dollar,” are the root of a “deep unhappiness with the prevailing economic order,” Miran said. He attributes the overvaluation of the U.S. dollar to countries purchasing massive amounts of treasuries, even during recession as the reserve asset is considered “safe.”
“Such overvaluation makes U.S. exports less competitive, U.S. imports cheaper, and handicaps American manufacturing,” he wrote, adding this has led to the decay of the United States.
“Manufacturing employment declines as factories close. Those local economies subside, many working families are unable to support themselves and become addicted to government handouts or opioids.”
Part of the tariff strategy entails imposing duties which lead to the devaluation of the other country’s currency and, by consequence, prevents U.S. customers from bearing the brunt of a rise in prices, all while the U.S. government collects revenue.
Miran says the strategy, which was applied against China during Trump’s first term, works effectively.
“Those tariffs passed with little discernible macroeconomic consequence—inflation remained stable or even declined, and GDP growth continued to perform quite well despite the Fed’s hiking cycle. It is therefore reasonable to expect tariffs once again to be a primary tool,” he wrote.
This reasoning could influence the Trump administration on the perspective that imposing tariffs on Canada can hurt U.S. residents, a point that has been made repeatedly by Canadian premiers.
Miran goes even further by adding that, combined with Trump’s economic agenda of tax reform, deregulation, and unleashing energy production, “it is quite possible that even with substantial tariffs, Trump Administration policy is overall disinflationary.”
‘Negotiating Tool’
If the tariffs are a tool to rebalance trade and boost domestic manufacturing, Miran says they’re also very much a negotiating tactic.
“Because tariffs are a negotiating tool, the President was mercurial in their implementation,” he says about Trump’s first term which was marked by a trade war with China.
Trump also imposed tariffs on Canadian steel and aluminum during NAFTA renegotiations in 2018, though he lifted them in 2019 after Canada brought in its own tariffs. Trump has already indicated he plans to renegotiate the three-country free trade agreement.
“The uncertainty over whether, when, and how big adds to leverage in a negotiation, by creating fear and doubt,” Miran wrote, which accurately summarizes the state of uncertainty and apprehension in Canada right now.
Trump’s latest tariff threat has effectively mobilized Ottawa and some provinces, which have come up with detailed plans to strengthen the border with the United States.
The federal and provincial governments have also been planning how to retaliate if the tariffs are imposed. Prime Minister Justin Trudeau said last week he agrees with the “principle of dollar-for-dollar matching tariffs.”
“This administration in the U.S. is very unpredictable, so we have to be ready and working on both fronts, preventing tariffs, and at the same time working on our response,” Foreign Affairs Minister Mélanie Joly told reporters in Ottawa on Jan. 27.
Retaliation
While addressing the topic of potential retaliation in his paper, Miran said there could be consequences beyond the economic front if the Trump administration merges national security and trade policy.
“It may provide some incentives against retaliation” if Trump declares that “joint defense obligations and the American defense umbrella [are] less binding or reliable for nations which implement retaliatory tariffs.”
The new Trump administration hasn’t mentioned resorting to this approach, but the president has previously stated that NATO countries who do not spend adequately on their own defence should not be protected by the United States.
Miran said an outcome where a country retaliates with tariffs should not necessarily be viewed as a failure if it leads to increased defence spending.
“If Europe retaliates but dramatically boosts its own defense expenditures and capabilities, alleviating the United States’ burden for global security and threatening less overextension of our capabilities, it will have accomplished several goals,” he wrote.
“Europe taking a greater role in its own defense allows the U.S. to concentrate more on China, which is a far greater economic and national security threat to America than Russia is, while generating revenue.”
Others in the new administration also hold this view. Trump’s pick for Treasury Secretary, Scott Bessent, said last year that tariffs are a negotiating tool and that countries should be placed in different tariff categories in relation to their relationship with the United States.
Countries that align closer with the United States would receive preferential tariff treatment, he said during a talk at the Manhattan Institute.
“In terms of tariffs, I think in terms of currencies, I think in terms of bilateral trade agreements, I think in terms of security agreements, I think in terms of values,” he said.
“I think we should make it very clear that there is a green, a yellow, and a red bucket, and we let everyone know where they are … you can choose which bucket you want to be in and here’s what you get for being in the bucket.”
Elaborating on Bessent’s “buckets” concept in his paper, Miran said the U.S. could discriminate against a country if its leaders “grandstand against the United States in the international theater,” if it doesn’t meet NATO’s defence spending commitments, or harbours “enemies of the United States.”
“Does the nation side with China, Russia, and Iran in key international disputes, for instance at the United Nations?” he wrote.
Canada views itself as an indispensable partner to the United States, but there’s at least one top Trump adviser who could have a few bones to pick with that assertion.