The U.S., Trump and the Future of Canadian Business in the Global Economy

Ever since U.S. President Donald Trump began dropping tariff bombs and hurling threats of annexation, Canadians have understandably been dazed, confused and angry. While some of the American belligerence Canada is experiencing can be traced to the president’s unique psychological profile, there is a larger story playing out – one that didn’t start just after his inauguration.

Those Canadians who had been paying attention have no doubt picked up on the many signals that the long, uninterrupted era of global economic integration was coming to an end.

To understand this, we need to go back to the end of the Second World War. There was little left of the battle-weary economies in both Asia and Europe, but the U.S. emerged as an industrial juggernaut with a military larger than the rest of the world combined. 

As they took stock of the smouldering wreckage, the Americans (with the British at their side) became convinced that their system of liberal, market-based democracy provided the best protection against future wars. Economies would grow and societies flourish as countries focused on productive uses of their time, energy and resources.

This philosophy was formalized in the form of the Bretton Woods Agreement of 1944, which became the blueprint for the new global economic order; it defined an international monetary system that was to ensure exchange rate stability, prevent competitive devaluations and promote economic growth.

Bretton Woods was backed by the spirit of American exceptionalism. The Americans spun an inspiring and benevolent narrative: We have created a republic with a constitution of the people, by the people, and for the people. We are special. Should you, the citizens of the free world, choose to emulate us, we will take care of your security concerns. The U.S. Navy will protect global shipping lanes. The boundless U.S. economy will purchase your many products and services. From now on, when you need something, don’t reach for your guns; get out your wallet instead. 

In the post-war years, the emphasis was on reducing tariffs and other trade barriers and allowing the competitive advantage of nations to drive commerce and, in turn, international relations. If a country had natural strengths in a certain domain, they were to focus on exporting that which they were good at, and importing products and services in their areas of relative weakness from nations with strengths in those domains.

Is good for the world bad for the U.S.?

The result of this new order was nothing less than spectacular. The global economy exploded; countries that began in rubble, like Germany and Japan, re-tooled and became high-quality exporters. Many other nations not only rose out of poverty but became formidable competitors to the U.S. China may be the most dramatic example of a country that took advantage of the new rules of the global economy, as more than 500 million Chinese people were lifted out of poverty.

Through the eyes of some Americans, though, this does not look like success. Today, the U.S. has large trade imbalances with almost all countries, Canada included. Many of its manufacturing-based industries were wiped out after moving to lower cost regions. As for the future, the U.S. is in a dogfight to maintain leadership in some the most coveted technologies and high-value businesses of the emerging digital economy — computer chips and artificial intelligence.

Most of us can agree that Trump is an erratic, aggrieved character. Yet, to focus on that is to miss the larger point. Increasingly, Americans are driven by the belief that the system of global trade ushered in by Bretton Woods no longer works for the benefit of the U.S. To their way of thinking, countries have gamed the system with unfair trade practices (that include weak labour and environmental laws) and state-run enterprises that enjoy special protection, and have run roughshod over U.S. intellectual property. To add insult to injury, they say, allies have been free riders under the vast American security umbrella.

Successive U.S. presidents have grumbled about all this but the rest of the world, including Canada, has paid little mind to these concerns. So Trump, the disruptor who doesn’t care who he harms or offends, wants change, and he wants it now. What he is doing is essentially opening a door, throwing in a grenade and then figuring out what can be rebuilt in the rubble. 

Canada’s global business agenda

Now that the reworking of the global economy is underway, what is Canada to do?

From the political perspective, the new U.S. attitude towards Canada is a significant challenge. Canada can get into the boxing ring with the U.S. and probably land some blows, but they are 10 times bigger than us. For every punch we land, they may be able to land 10. Nonetheless, for reasons of both national pride and negotiation strategy, Canada needs to prepare itself for a painful fight.

As many have noted, we must begin to build on earlier efforts to remove most, if not all, of the remaining barriers that hinder the free movement of goods and services between provinces. Provinces may want to protect favoured businesses or industries, but the new dynamics of the global economy will require scale and fitness to succeed. The principle of competitive advantage of nations has proven to be very successful in raising the standard of living around the world. Clearly, we now need to think of the competitive advantage of provinces.

Canadian political leaders should also clearly identify the areas of the economy that are strategically important. The food supply is surely one. Energy is another. This is not only a matter of economics; the Covid experience taught us that we are not immune to global pandemics or other calamities of the future brought on by external shocks. This may require Canadians to pay more for certain items that are produced in Canada rather than abroad, but this could be seen as a type of insurance for a rainy day.

Individual business aren’t defenceless either. While Canadian consumers may be able to boycott many American products and services, businesses often are not in the same position. Nor should they even try. For all the talk about diversifying export markets beyond the U.S., Canadian firms should realize that proximity to the biggest, richest consumer market in the world is an invaluable location-based asset that virtually the rest of the world would relish. Yes, doing business with the U.S. will be more difficult. The effort is worth it.

Strengthening the supply chain

Now is not the time to waste a good crisis. Canadian executives can take the opportunity to make the changes that seemed impossible to act upon in the past. Companies with strong management and healthy financial statements can decide to reposition their businesses, to rearticulate their business plans and invest in future-focused areas. Exporters can consolidate their list of suppliers or shorten their supply chain via friendshoring or nearshoring. These all require heavy lifting.

While they’re at it, all businesses would be wise to re-visit what they consider to be their own competitive advantage in the new global economy, and double down on it. They need to show their foreign buyers, Americans in particular, why they are needed. Instead of competing at an entry level, can they elevate their game on innovation, skills and capabilities, perhaps by upgrading their physical and human resources to offer something unique? Are there partnerships with suppliers or complementary firms that can help buffer the negative impacts of uncertainty?

Further, there are many new global supply chain regulations that have come into force (and more on the way) relating to environmental sustainability, labour practices and supply chain transparency. All firms, including those in the U.S., are required to report to their own regulators on how they perform in these areas. Canadian businesses will need to show prospective U.S. buyers that they can manage these regulations better than competitors from other countries. This is another significant pain point but one that can be turned into a competitive edge.

An often-overlooked advantage for Canadian firms is their ability to operate successfully in a highly multicultural country. We know how to create and sustain workplaces in which people with different ethnic backgrounds can collaborate with less friction, and we know how to sell across cultures. Many countries seem unable to achieve inclusion and cultural understanding. We are in an excellent position to attract and welcome high quality talent from around the world to create the products and services that the world needs. And the largest single market for those products is right beside us.

I believe Canadian businesses are up to the challenge. We have shown that we can compete — and not only in hockey. There will be a time when Trump is no longer in power, though the issues he has raised will certainly outlast him. If we can resist the urge to respond emotionally to the childish provocations coming out of the current White House, Canadian enterprises can embrace the challenge, identity their necessary next steps, and begin the heavy lifting of positioning themselves for the new global economy.