Should Canada Switch Sides?

Jeff Rubin is the former chief economist for CIBC World Markets and is the bestselling author of a number of popular economics books that have tried to explain how the world is changing and departing from the norms of the 20th century to a more unsettled era of scarcity, inequality, natural disasters and war.

His previous books have warned about the end of cheap oil and explained how the middle class “got screwed” by globalization.

Rubin’s latest book is called The Map of the New Normal: How Inflation, War, and Sanctions Will Change Your World Forever, and it tackles the rapid inflation that hit economies across the globe in the wake of pandemic measures. The author is unapologetically realpolitik in his world view. At a book event last summer, he described his outlook as “more Game of Thrones than biblical good and evil.”

We decided to call Rubin up to ask him for his take on Donald Trump’s bellicose tariff threats against Canada and the American president’s repeated urging for Canada to join the United States. To recap: shortly after his re-election, Trump threatened to impose 25 per cent tariffs on Canadian exports — a move that would heavily damage the Canadian economy. While Trump originally threatened to start the tariffs on Feb. 1, Canadian government officials were able to get a 30-day delay after making several promises on border security. But Trump has continued to threaten Canadian sovereignty, making repeated comments that Canada needs to join the United States in order to avoid the tariffs.

Rubin, it turned out, had a lot to say about the situation — even before we’d asked our first question. This interview has been edited and condensed.

The Tyee: This interview will focus on what’s happening now with the tariff threat. We thought it would be interesting to get your take on it because of the book you recently wrote...

Jeff Rubin: Let me start off by saying that my take is probably a little bit different than other people’s take. If you were to watch the CBC or read the Globe and Mail or whatever, you’d hear, “This is a shock. This is an aberration. This is a radical departure from the norm. This is a black swan event.”

Whereas I think that this is a continuum of policies that the White House has engendered for over a decade, not only dating back to the first Trump administration, but during the entire Biden administration and now into Trump’s second administration.

And the key to this policy is to turn the economy into a weapon to wage economic warfare to further America’s interests. And whereas Trump has relied on tariffs both in his first administration and his second, [former President Joe] Biden has relied on sanctions.

That being said — despite the fact that President Biden and the Democrats were hugely critical of the tariffs that Trump imposed on China in his first administration, not one tariff that Trump had imposed had been rescinded by Biden. Biden kept all of those Trump tariffs intact, and they were the largest tariff hike since the Smoot-Hawley tariff of the early 1930s. And in addition, Biden loaded on sanctions.

So I think this is the new norm. I think that weaponizing the economy and waging economic warfare is the norm that is accepted by both Democratic and Republican White Houses.

What’s changed is the target. The target initially was America’s adversaries, principally Russia and China. And now the target has been refocused or recalibrated to America’s neighbours and allies: Mexico and Canada.

American protectionism has been around for a long time. Before the first Trump administration, it was pretty common for American politicians to do things like want to protect American steel. Is that different from what you’re talking about?

First of all, political polarity has spun around. Protectionism historically was the preserve of left-wing Democrats, and of course, the unions supported them. Republicans were for free trade, but that all changed when Donald Trump seized the leadership of the Republican party, because the policies that Donald Trump actually articulated really weren’t that different than the policies that Bernie Sanders of the left wing of the Democratic party articulated, which was to protect the American worker.

For Bernie Sanders to champion the rights of the American worker was par for the course, given where he was on the political spectrum.

For a Manhattan real estate billionaire to take up the cause of the American worker, well, that was a little out of the norm.

Let’s get back to this idea that the U.S. is switching targets to countries that have historically been their friends and allies. What does that mean for Canada?

What it means for us is that our presumed greatest asset, which was our access to the huge, rich, dynamic American market, may now become our greatest liability — if in fact the 25 per cent tariff is imposed.

And while I totally understand the instinctive response for reciprocity to apply a 25 per cent tariff on American imports [in response]... let me just say that in any protracted tariff war, we are going to lose, and we are going to lose for one very simple reason: exports are three times as important to the Canadian economy as they are to the U.S. economy.

And 75 per cent of our exports — and in the case of oil, which is our major leading export, 97 per cent — go to the U.S. That is not a strategy for success.

So dare I say that perhaps there are lessons that Canada could learn from our supposed adversaries, Russia and China? Because both Russia and China have very successfully warded off economic warfare from the United States imposed by both Trump and Biden.

Let’s take Russia and oil and gas. Like Canada, oil and gas is Russia’s primary export. And the western European markets were almost, not quite, but almost, as critical to Russian oil and gas exports as the U.S. market is to Canadian oil and gas exports.

So when all of a sudden those markets were denied because of sanctions and because of the sabotage of the Nord Stream pipelines, the thinking was that if Russia can’t generate oil and gas exports, that’s the lifeblood of the Russian economy and, by implication or extension, the lifeblood of the Russian war machine.

But instead of bringing the Russian oil and gas industry to its knees, Russian energy export earnings actually soared and reached all-time highs in each of the last two years. Why? Because Russia was very successfully able to pivot to its BRICS partners, and China and India welcomed sanctioned Russian goods, particularly energy, with open arms.

[Editor’s note: BRICS is an acronym that stands for Brazil, Russia, India, China and South Africa and refers to a loose coalition of non-western governments. According to the Council on Foreign Relations, “BRICS countries seek to build an alternative to what they see as the dominance of the Western viewpoint in major multilateral groupings, such as the World Bank, the Group of Seven (G7), and the UN Security Council.”]

What lesson can we learn from China? Well, China got slapped with this 25 per cent tariff on almost $300 billion of exports to the United States during the first Trump administration, and now Trump has added another 10 per cent tariff on it.

But tariffs aren’t the only thing that affects the competitiveness of your exports. So is currency. And so China depreciated the yuan against the U.S. dollar, which took a huge bite out of the impact of Trump’s tariffs.

The Bank of Canada has been allowing the Canadian dollar to fall — just recently, we were almost as low as 68 cents. But understand that if we were to offset a 25 per cent tariff, that would mean the Canadian dollar would have to go into uncharted territory — probably somewhere around 50 cents [to the U.S. dollar].

Trump has repeatedly combined the threats of tariffs with threats to Canadian sovereignty...

Not threats to Canadian sovereignty. An invitation to join the union, which, incidentally, he has not extended to Mexico.

You don’t see that as a threat to Canadian sovereignty?

“Threat” is pejorative. Some people would see it as a threat. Fox News doesn’t see it as a threat. Fox News wonders, you know, why are Canadians worried? Doesn’t everybody want to join the U.S.?

Now Trump has said he’s ruled out the use of military force to annex Canada, but he has said that he would use economic coercion and certainly imposing a 25 per cent tariff would qualify as economic coercion.

Right now I’m guessing that maybe 20 per cent — tops — of Canadians would want to become part of the United States.

I guess what Trump’s betting on is if we have a tariff war and the Canadian dollar goes down to 50 cents against the U.S. dollar, would it be a much, much higher percentage [who aren’t opposed to joining the U.S.]?

I don’t know the answer to that, but I do know this — that after a year of fighting a tariff war with the United States, more than 20 per cent of Canadians would say yes. Particularly if Trump was willing to negotiate five states [for Canada] and you can convert your dollars at par when you join.

In Canada, the Liberals have promised to help people and businesses affected by possible tariffs. But the Conservatives are saying that’s going to be horrible, it’ll just make inflation go crazy again.

When Chrystia Freeland was the finance minister and the deputy prime minister, she was not averse to running up huge deficits. At one point, the federal deficit was about $328 billion during the pandemic. So I’m not surprised that the same party that ran up a $328-billion deficit would want to use deficit spending to compensate economic losers. But that’s not a solution, and that would contribute to higher inflation.

I’m not saying that there aren’t cases in the Canadian economy that would be so severely damaged that some kind of fiscal support would be warranted.

But I’m just saying that’s not a solution. The solution is we have to diversify our trade. In today’s world, trade is divided by geopolitical blocs, and maybe we’re in the wrong geopolitical bloc.

It’s noteworthy that Mexico has expressed an interest in joining BRICS as a hedge against its troubled trading relationship with the United States. We may find that in order to diversify our trade, our geopolitical positioning may have to change as well.

You seem to be suggesting that we do need to look at moving closer to China and Russia, but I think there’s always been concern about that because they’re not democratic countries and we are. How would you respond to that concern?

Economic necessity will prevail. I’m not suggesting that Russia or China, by any means, holds the higher moral ground, although I would argue no one today holds the higher moral ground.

But I am pointing out that the world is now polarized in trading blocs that are formed around geopolitical alliances. And unfortunately, our trade is with the U.S. and we could be subject to economic warfare from our major trading partner. We’re going to have to find new markets. Guess who the four fastest-growing economies have been in the last 20 years? China, Russia, India, Brazil, all founding members of BRICS, and the fifth fastest is Saudi Arabia, a recent entry.

Maybe we don’t approve of their political systems, but those are the markets we’re going to have to access if we are successful in diversifying our trade and withstanding economic warfare from the U.S.

What would be the problem with aligning ourselves with European Union countries or the U.K.?

The problem with that is that the [EU] are as protectionist, if not more protectionist, than Trump. Try selling an agricultural product into France or Italy and see what happens.

Moreover, that’s not a dynamic market: the European Union is a huge economic casualty of sanctions from the Ukraine-Russian war. Germany was the third-largest exporter in the world, but thanks to the destruction of the Nord Stream pipelines, it has some of the highest energy costs in the world. That’s not where new car plants are going to be located.

So I would say EU is not an attractive alternative to the U.S. market. Brazil, South Africa, Russia, China, India? Very attractive.