Well, ironically, when those things happen, there is kind of a rally around the flag and Carney himself gets more popular. So, if the administration is trying to force Canada to sign the deal, this is probably the worst possible thing to do because it just makes Carney more popular in the eyes of Canadians and gives Carney more ability to back away from a bad deal.
Welcome to Prof G Markets. I'm Ed Elson. It is September 9th. Let's check in on yesterday's market vitals. The major indices declined on tensions in the Middle East. Brent crude rose above $99 per barrel. The yield on 10-year Treasuries climbed. And finally, SpaceX rose 4% amid reports that its weight in the NASDAQ 100 may increase this month when the index rebalances.
Okay, what else is happening?
Canada is striking back against the US with tariffs of its own. The new levies range from 15 to 50%, covering around $20 billion worth of American goods. Tariffs on US steel, aluminum, and iron products doubled to 50%, and other targeted products include furniture, clothing, appliances, and dairy. The move is payback for the 50% tariffs that Trump levied against Canada last month. Trade talks between the two nations fell apart at the end of August, and now Mark Carney is pledging to, quote, 'hit back against Trump's bullying, quote, dollar for dollar, rate for rate.' Joining us to discuss what this escalation means for the US and for Canada, we're speaking with Mike Moffatt, Canadian economist and founding director of the Missing Middle Initiative. Mike, it's great to see you again. Thanks for joining us. I'd love to just start at the very beginning. We haven't talked about the Canada-US trade war for a while, but it's an ongoing situation. How did this all begin? How did it flare up again over the summer? And how do we arrive at this moment?
Yeah, it's a great question. I think Canadians are asking themselves that question, like, what did we do to deserve this? But this has been happening before Trump was elected the first time, or at least before he was inaugurated the first time in 2017. There have been these flare-ups from time to time. We've seen the US put additional tariffs, particularly under the second Trump administration, on a variety of goods. There were negotiations over the summer, and Canada walked away from those. It's not entirely clear, you know, what the sort of tipping point was. You know, part of it is Canada not wanting to negotiate through the media, but it sounded like there were some last-minute changes that the Trump administration put on a deal between Canada and the US that the Carney administration just couldn't abide by. So, we find ourselves here today.
So, those negotiations break down. Mark Carney walks away from them because something that we're not totally clear on wasn't going correctly, at least in his view. And then Trump's decision is tariffs.
Well, the negotiations were basically to take those tariffs off. So the Trump administration had threatened these $20 billion in tariffs. We had gone, Canada had gone to the administration to try and work out a deal. Then we walked back. Again, it's kind of unclear why. There's stories around what was in the deal in terms of automotive or Canada's ability to sign other trade deals. And, you know, like any other country, Canada wasn't just going to sit there when it had tariffs put on it. So the Carney administration kind of matched dollar for dollar. Some of those tariffs are, you know, basically reciprocal. So you put 50% on us, we'll put 50% on you. But others are a little bit more targeted towards swing states, towards areas where Canada often buys, you know, not 100% of its imports from the US, where we have a little bit of choice to buy from, say, the US or Japan or the EU. So the idea is that we don't want to raise Canadian prices as much, but instead, if Canadians can buy from Japan or the EU instead, that should dampen the effect of these tariffs.
What is the economic impact of these tariffs at this point? How significant is it for the US economy and then also for the Canadian economy?
Well, certainly a bigger hit for Canada. We're proportionately smaller. I've seen Trevor Tombe at the University of Calgary has estimated that if these continue for a year, it would shave about 3 to 4 tenths of a percent off of GDP growth, which isn't fantastic. Now, Carney's the beneficiary of a little bit of luck here, though, in terms of good timing. He's quite popular right now. He's ahead 16 points in the polls. And one of Canada's biggest exports is oil. And the price of Western Canadian Select has gone from about $50 a barrel prior to the actions in Iran to $80 a barrel. So you never want to take a 3/10 of a percentage point hit to GDP, but if you had to do it at some point, now's really not a bad time.
It seems as though there's almost a stalemate here between who's going to back down and who's going to, I guess, put their pride aside. I'm not sure if that's the right way to look at it, but would you expect that this is something that will continue for the foreseeable future?
Well, I certainly hope not. I hope that Canada and the US can come to a deal. I think there is some hope in Canada that the upcoming midterms might get the US to come forward with an agreement that we can live with. But in the meantime, we've got Prime Minister Carney going to the EU next week. We've heard rumblings of a deal between Canada and the EU, which is not quite at the level of EU membership, but a close integration with the two countries. So, I think that's how Canada's playing it now, that we still want a deal with the United States, but we're also exploring Plan B and trying to diversify our trade in the meantime.
One of the most viral videos of the week this week has been a video that Trump posted on social media on Truth Social. And it's like an AI-generated cartoonish video of him beating Mark Carney with a hockey stick on the ice. What is your reaction to that video? It's gone pretty viral. A lot of people very upset about it. How significant is it? And what is Canada's reaction to that video?
Yeah, we're certainly not happy about it, but I think Canadians are trying to take the position that we just shouldn't take the bait, right? That this is an attempt to go at us. So, it's one of those things where we start to get angry and then we go, 'Okay, deep breaths. Let's just calm down. We don't, you know, this is what Trump is trying to get from Canadians, so let's calm a little bit.' But we're certainly not happy about it. And there is, you know, ironically, when those things happen, there is kind of a rally around the flag and Carney himself gets more popular. So if the administration is trying to force Canada to sign the deal, this is probably the worst possible thing to do because it just makes Carney more popular in the eyes of Canadians and gives Carney more ability to back away from a bad deal.
Yeah, that has certainly been my takeaway. It seems as though every time Trump tries to punch basically what looks like down on Mark Carney because Canada is a smaller nation, it seems like he's trying to make this bullying tactic or something. People just like Mark Carney more. They like Canada more. It seems like that is consistently what has been happening. We saw the same thing with changing the name of Lake Ontario to Lake America. It seems as though people are generally more supportive of the quote-unquote enemy that Trump wants to make out of Canada. How popular at this point is Mark Carney, and how much of that popularity is a function of Trump's attempts to bully him?
I think quite a bit. Right now, the latest polling I saw from Nanos has the Liberals, Mark Carney's party, at 47%, the Conservatives at 31%. And, you know, like the UK, we are a multi-party country, so a 16-point lead is massive. And I think a lot of that is, you know, all of the folks who aren't necessarily Conservatives, and many Conservatives are parking their vote with the Liberals right now. And if you look at polling about the response to these counter-tariffs, you know, Canadians who are non-Conservative voters support them in, you know, 90 to 95%. It's overwhelming. You can't get Canadians to agree on 90 to 95% on anything. And even Conservatives are about 50-50. So overall, it, you know, I think Canadians like what the prime minister is doing, and it's showing up in the polling results.
There was also the viral image that Trump posted of a map of the US, but then it includes Canada and Mexico and Greenland, and it's got like a US flag covering all of it. Basically, like all of this is ours. Is there anyone in Canada who likes him at this point? Like, does that even exist?
It does. I would say it's about 15% of the population, and it's about half of those Conservative voters that I mentioned. There is a cohort that, you know, likes Trump. They tend to be quite conservative. They tend to have been just sort of frustrated with Canada. They've always wanted Canada to be more like the United States when it comes to taxation and social issues and so on. So that does exist, but it's, you know, about an 85-15 split. I think most of us are quite upset with the Trump administration, and it has made us unfortunately more kind of anti-American than we were a year or two ago.
Just in terms of consequences and what this will actually mean for the global economy. You mentioned how Canada and the EU are now working on a new all-encompassing deal seemingly as a response to the lack of partnership between the US and Canada, and it seems as though the global order is kind of rerouting itself away from the US. Would you say that that is kind of the direction that we are headed as a global economy?
Yeah, I think so. And here in Canada, like even if we had a deal tomorrow, there's just so much uncertainty. You know, the deal would feel like it was written in pencil. So investors and businesses are looking to diversify. Canada used to, about 80% of Canadian exports used to go to the United States. A couple of years ago it was down to 70. It's now down to about 67%. So oddly, you know, the Trump administration's kind of done us a bit of a favor in a strange way because we've always talked in Canada about the need to diversify our trade. Well, we're actually doing it now. So there is some irony here. As much as, you know, we hate the tariffs, we hate the hockey video memes, you know, it is kind of forcing us to do a bunch of things we probably should have got done decades ago but just never had the motivation to do it.
Yeah. What are some of the other consequences that you think will come out of this? I mean, is it possible that, for example, the relationship could never really be repaired? I mean, what are the other long-term consequences?
I think in the kind of short and medium term, I think we're going to see a shift in defense spending. I think that may come out of this EU deal. So, you know, there's been this debate in Canada for decades about buying the F-35. You know, we might see that go away. I do think the Canadian-US relationship is repairable, but it's going to take a while. It will take, you know, kind of a few administrations of, you know, goodwill. But, you know, I do think our countries have too much in common, you know, to be forever at odds. But it certainly feels that way right now. Like this really does feel like we're going through a messy, angry divorce. And it does feel hard to reconcile. But I'm an optimist. I'm certainly hopeful that we can get through this.
