BREAKINGVIEWS-Canada’s trade war reset will be a gentle one

By Pranav Kiran

TORONTO, Jan 20 (Reuters Breakingviews) - Canadians’ famed tact will increasingly be put to the test. As the United States ramps up a multi-front trade war with new territorial claims, its northern neighbor is responding by mending ties with China and boosting exports elsewhere. The simple facts of geography and politics mean that the U.S. will remain Canada's dominant trade partner. That might be fine for now, though.

Prime Minister Mark Carney, the country-hopping former central banker who seems to embody a fading era of globalization, must now navigate the fracturing of the world trade order. On the one hand, his government is set to begin talks to review the USMCA trade agreement – which President Donald Trump derided as “irrelevant” – in July. On the other, he is working to repair damaged ties with Beijing.

He's making some progress. Carney’s visit to China last week – the first by a Canadian premier since 2017 – concluded with a deal to allow 49,000 electric vehicle imports this year. In exchange, the People’s Republic is lowering tariffs on more than $2.6 billion worth of canola seed and other farm goods.

It’s a promising start for Carney’s mission to hedge against an increasingly belligerent neighbor by doubling non-U.S. exports over a decade. Yet even that degree of success would only change so much. The U.S. absorbs about three-quarters of Canada’s exports. Hitting the government’s goal would reduce that figure to about 60%, assuming the total grows at a nominal rate of 2%.

The Trump administration has weaponized this reliance, raising levies on key industries including steel, aluminum, auto parts and softwood lumber, which have already taken production and employment hits, according to RBC Economics.

Further escalation could endanger remaining tariff-free trade under the USMCA agreement. Still, it would be painful for both sides. While 100,000 Canadian auto jobs hang in the balance, for instance, Detroit’s carmakers depend on intricately integrated cross-border supply chains that would be costly to relocate. It’s an even tougher ask after General Motors GM.N and Ford Motor F.N both took multi-billion-dollar write-downs on their last big investment push, in electric vehicles.

Some $150 billion in oil trade between the countries is also paramount. About 60% of Canadian oil exported to the U.S. ends up in Midwestern refineries, according to investment bank ATB Financial. Keeping those facilities humming is crucial, and Venezuelan crude would be a tough substitute. For Canada, selling oil to Europe or Asia requires building new pipelines that face fierce political opposition.

In the meantime, Carney is coaxing infrastructure investments out of China and Qatar. Cozying up to the global leader in EVs could help Canada’s auto industry retool for the future. For now, this gentle reset might just suffice.

CONTEXT NEWS

Canada and China struck an initial trade deal on January 16 that will slash tariffs on either side on electric vehicles and canola, respectively. Both nations promised to reduce trade barriers while forging new strategic ties during Prime Minister Mark Carney's visit to Beijing.

Carney is the first Canadian prime minister to visit China since 2017 and is seeking to rebuild ties with his country's second-largest trading partner. Canada will initially allow the import of up to 49,000 Chinese electric vehicles at a tariff of 6.1% on most-favored-nation terms, Carney said after talks with Chinese leaders including President Xi Jinping.

Under the new deal, Carney said, Canada expects China will lower tariffs on its canola seed by March 1, to a combined rate of about 15% from the current 84%.

Canada also expects its canola meal, lobsters, crabs and peas to have anti-discrimination tariffs removed from March 1 until at least year-end, he added.