In a speech at the World Economic Forum in Davos, Switzerland, U.S. President Donald Trump singled out Canadian Prime Minister Mark Carney's speech from the day before.
U.S. President Donald Trump’s weekend threat to impose a 100 per cent tariff on Canadian exports if Canada signs a trade deal with China “would never see the light of day,” Scotiabank economist Derek Holt argues.
In a note sent to clients Monday, he notes that the specifics of the tariff threat are unclear, as is what constitutes a trade deal with China that would trigger the hypothetical levy. But any such manoeuvre is “an empty threat,” Holt says, for various economic and legal reasons.
Trump issued the threat on Saturday in a social media post that referred to Prime Minister Mark Carney as “Governor Carney” — consistent with a recent, more acrimonious turn in the relationship between the two leaders. Carney’s January 20 speech at the World Economic Forum in Davos was widely praised as a call to action against a changing global order under Trump. A day later, in his own speech, Trump singled out Carney, calling him “ungrateful.”
On Sunday, a day after Trump’s tariff threat, there appeared to be efforts to de-escalate the spat. Carney declared that Canada is not pursuing a free trade agreement with China, and that the Canada-U.S.-Mexico Agreement requires prior notification for such deals with non-market economies like China’s. U.S. Treasury Secretary Scott Bessent also downplayed the idea of immediate new tariffs, The Canadian Press reported, connecting the threat to the possibility of China using Canada to “dump goods” in the U.S.
Regardless, Holt argues, the initial threat would never be realized. The impact of a 100 per cent tariff would be “devastating” to many U.S. businesses and industries, he says. He cites an auto parts executive warning that the lower tariffs proposed earlier last year would have resulted in millions of layoffs, mostly in the U.S.
“Apply this reasoning across multiple industries,” Holt wrote. “It could no longer be economical to supply oil and gas, hydro, any resources, or any manufactured product or service. Supply chains could freeze across multiple industries. Millions of American workers could be laid off.”
Instability only adds to the case to diversify away from the U.S. -- Scotia economist Derek Holt
The imposition of tariffs would also result in “enormous pressure to invoke major retaliation and that would include federal and provincial governments and consumers,” Holt says.
Moreover, he adds, the implementation of a massive new tariff could have a similar market effect as the “Liberation Day” tariffs, where indices, the U.S. dollar and U.S. Treasury yields fell.
“Markets may lose faith in the U.S. institutional framework, view it as having much higher country risk, and sell assets across the board towards a new equilibrium that reflects higher risk,” Holt said. “That means dumping the dollar, dumping Treasuries, dumping credit and ditching equities.”
The tariff move, if made sooner than later, could also further weaken the Trump administration’s case with the U.S. Supreme Court, where Trump’s use of an emergency powers act to impose tariffs is being tried.
Even though Trump’s threat is not “remotely credible,” Holt says it still justifies an ongoing effort to adjust Canada’s approach to trade.
“Nevertheless, instability only adds to the case to diversify away from the U.S.,” he concluded. “That has been underway for a while, as the share of total Canadian exports that go to the U.S. has fallen from 85 per cent about a quarter-century ago to 67 per cent today and will likely keep falling over the next decade.”
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