By Michael O’Neill

Canadians are getting their knickers in a knot after incoming U.S. President, Donald Trump, argued that Canada should become the 51st state of the U.S.

Mr. Trump argued passionately for a U.S. economic (rather than military) takeover of Canada. He claimed that if he got rid of the border (he called it “that artificial line”), it would be better for National Security.  He emphatically claimed that by protecting Canada, the U.S. loses $200 billion or more every year, and asked, “So why are we protecting them?

He wasn’t done. “We don’t need their cars. They make 20% of our cars. I’d rather make them in Detroit. We don’t need their lumber. We have massive fields of lumber. We don’t need their dairy products; we have more than they have. We don’t need anything, so why are we losing $200 billion dollars a year and more to protect Canada?”

Mr. Trump has a point about Canada defense spending, which peaked in WWII. It has been below the NATO-mandated 2.0% of GDP threshold since Pierre Elliott Trudeau (Governor Trudeau’s daddy) began transferring defense dollars to social programs.

The rest of his arguments are hogwash.

Canada doesn’t have a $200 billion trade deficit with the U.S.—not even close. It is $53.5 billion and reflects a mutually beneficial relationship, with Canada providing essential energy and resources. Despite facing freezing temperatures due to a polar vortex, Americans in states including Montana, Minnesota, and Wisconsin are able to stay warm thanks to the steady flow of over 4.3 million barrels of crude oil shipped daily from Alberta which supplies roughly 60% of the United States’ crude oil needs.

Trump’s assertion that the U.S. doesn’t need anything Canada has is hyperbole. Aside from energy, Canada supplies critical minerals, metals, steel, aluminum, and uranium, which are vital for various U.S. industries, including defense.

While Trump’s comments reflect a political stance or perhaps a negotiation tactic, they are not supported by the economic data or the nuanced nature of the defense relationship between the US and Canada. (NORAD for example). His portrayal of the situation simplifies complex bilateral relations to serve a narrative rather than presenting a factually accurate picture.

Hit by a Bus

Donald Trump’s approach to diplomacy is not any different from his “The Apprentice” reality TV show. The show saw candidates divided into teams and tasked with completing projects. A person from the losing team got to hear Trump’s catchphrase, “You’re fired.” His approach to global diplomacy isn’t much different. His threat to level 25% tariffs on Canada and Mexico due to lax border security led to Canadian officials tossing Mexico, its U.S.-Mexico-Canada (USMCA) trade partner, under a bus. The Canadians argued that drug smuggling and illegal border crossings were a Mexican issue, adding that Mexico was a back door to Chinese investment. Justin Trudeau and some provincial premiers openly discussed cutting out Mexico from future talks.

Trump Wins in Clash of Egos

It is no secret that President-elect Donald Trump does not hold the Prime Minister in high regard. At various times, Mr. Trump has called Justin “dishonest and weak,” “two-faced,” and most recently, he mocked him as the “Governor of Canada.” He is not alone—over 80% of Canadian voters feel the same. Trump’s disdain for Trudeau may have been behind the 25% tariff threat and his way of facilitating a “regime change.” If so, he got his wish. Justin Trudeau announced his resignation on January 6.

FOMC Fumbles Forward Guidance

Trump’s tariff threats claimed another victim—the Federal Open Market Committee (FOMC). The minutes of the December 19 meeting reveal a very confused central bank. They cut rates by 25 bps to 4.50% but the future outlook is unclear. The forward guidance says that the committee will continue to take a cautious and data-dependent approach while signaling a slower pace to future rate cuts as they close in on neutral rates.

However, a cautious approach to rate cuts is not something Trump wants to hear about. He campaigned on lowering interest rates, which puts him at odds with the Jerome Powell and his colleagues.

Tariffs are Not a Loonie’s Best Friend

If Trump’s threat to slap tariffs on Canadian exports was not a ploy to get rid of Trudeau, it will certainly get rid of any Canadian dollar bulls. Donny promised to implement his tariff plan on day one of his presidency, but Canadian parliament has been prorogued. The polls say that the vast majority of Canadian voters want to be rid of Liberal rule, and what’s left of the Trudeau government does not have a mandate to negotiate a trade deal. If tariffs come into effect on January 20, USDCAD will soar to about 1.5000.

Trump may want a 51st state, but Canadians say: “No tanks, no thanks.”