USA, Canada Trade Punches

President Trump followed through on his February 1 Executive Order by allowing the 30-day reprieve to expire on March 4 at 12:01 AM.

Canadians are rightfully incensed at the 25% tariff on almost all Canadian goods and the 10% tariff on energy and energy products.

Federal and provincial leaders were quick to respond with swift retaliatory measures.

As the “what” of the tariffs has become clear, there is still ambiguity around the “why.”

Debating the “Why”

The Trump administration is noisy. This makes it more difficult to tease out the signal of why these tariffs are being applied against Canada:

• Illicit fentanyl trade is the official rationale. However, Canadian politicians, the media, and the public do not accept this as the true reason. Canada is the source of less than 1% of the fentanyl spilling into the U.S. and has implemented a further $1.3B in measures to keep the border safe.
• Trojan Horse theories have popped up to speculate on other ulterior motives. Perhaps Trump’s goal is to create uncertainty and drive investment out of Canada and into the U.S. Control of the Canadian Arctic, increased defence spending, and the use of economic force to annex the country are also on this list. Statements (or more accurately, social media posts and responses to reporters) by Trump and his team have fueled these hypotheses.
• China emerged as a new argument in the days leading up to the imposition of tariffs. It was reported that Mexico (which has become a major hub for Chinese assembly lines and transshipment in the wake of ongoing U.S.-China trade tensions) proposed to U.S. officials that it would implement new tariffs against China. U.S. Treasury Secretary Bessent publicly gave credence to this idea.

Reconciliation Scenarios

Each of these motivations implies there might be a path to resolve this crisis.  It depends on whether a person thinks that anyone can negotiate with President Trump as a rational actor.  For Trump, however, any scenario that steps away from the official rationale, illicit fentanyl trade, further demolishes his and his administration’s credibility.

So how does he walk back from the brink?

Looking for an Exit Ramp

The most likely scenario is the U.S. will stick to the nominal rationale and use that as an exit ramp. Despite the administration sending mixed signals, the official documents have remain tightly linked to fentanyl supply and the border.

It is plausible that Canada has offered up more concessions related to joint-law enforcement activities. Secretary Lutnick alluded to this during a March 4 television appearance and indicated that Canadian officials “were on the phone with [him]” trying to persuade him that Canada will do better on this issue. He also suggested that there will be an outcome “somewhere in the middle.”

Whether this is a trade war, a drug war, or an economic war over sovereignty is open for debate.  But what underlies all dealings with Donald Trump is a narrative war.  Using facts and figures to win against Trump will not work.

Secretary Lutnick’s comments signal that there may be a bargain in the works to limit the extreme 25% tariffs.  However, lower tariffs that continue to undermine Canadian competitiveness could also leave a lasting economic impact that help build a bridge between the fentanyl and other ulterior economic and political goals.