Canada says no thank you

0:08Rob Armstrong: Everybody needs good neighbours, but the US and Canada, which share a border stretching five and a half thousand miles, have fallen out big time. Donald Trump has been needling Canada throughout his second term in office, making constant references to the country as a bolt-on US state and complaining that Canada is ripping America off. In retaliation, Canadians, supposedly quite hard to annoy, have been backing away from buying US stuff, conspicuously booze. But it's all got really messy now with the total breakdown of trade talks between the two countries. Canadian Prime Minister Mark Carney told his team to pack their bags and walk away from negotiations altogether, saying the US asked too much and they offered too little.

0:57Rob Armstrong: It's not a pause in talks. It's not a negotiating tactic. It is over. We're in full-on tit-for-tat tariffs. Team Canada is elbows up. So today on the show, trade wars. What are they good for? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist at FT Towers in London. Joining me down the line from New York City representing Team America is Mr. Robert Armstrong. Rob, say hello.

1:28Katie Martin: Hello.

1:28Rob Armstrong: But also joining me from leafy Cheshire is FT trade nerd Alan Beatty. Trade nerd, say hello.

1:36Alan Beattie: Hello.

1:38Rob Armstrong: Alan, tell me please, what on earth is going on here? I thought the US, Mexico and Canada already had a trade agreement forged by some fella called Donald Trump. So like, why were they in trade talks in the first place?

1:53Alan Beattie: So obviously, it would be far too simple just to have a trade deal and leave it where you are, because this is Donald Trump. So they do have a trade deal. And it's a long standing trade deal called the North American Free Trade Agreement, which Trump then changed into the US, Mexico, Canada deal. But since he cannot leave well alone, he keeps layering sort of new types of tariff on top of that. So he layered a kind that was supposed to do with national security. He layered a kind which are supposed to do with unfair trade. And this latest set he's layered on top is a whole new, brand new for him, tariff authority, which goes all the way back to the Smoot-Hawley tariff as immortalized in Ferris Bueller's Day Off.

2:34Alan Beattie: And so essentially, because he can't stop messing about and he can't stop picking fights, every time he does, And he adds new twists, new wrinkles, punches new loopholes on top of the architecture that's already there.

2:49Rob Armstrong: So they went into a whole new set of negotiations and eventually, I mean, you've written about this, obviously, but it just reached a point where there was no way Canada could sign this stuff, right? They were asking for them not to use French in documents, which is like a big no-no for Canada. There was just no way that Canada could agree to this stuff, right?

3:11Alan Beattie: Yeah, I mean, if you thought Donald Trump and his administration were rational, which obviously we don't, you would conclude that they meant for this to break down. Because if we believe the Canadian side, the US disputes some of this. They were asking, as you say, for French labelling to be reduced or taken away, for French language content, and for other things like trucks to be exempted from tariff cuts, all sorts of stuff. and also to stop Canada signing trade deals with other countries, to make sure Canada gave all their critical minerals to the US. And, you know, Carney having until then faced a difficult situation because these are difficult situations negotiating with the US.

3:51Alan Beattie: It's not straightforward. In a sense, at that point, his task became really easy because there's no way he could have accepted this. And everyone in Canada accepts this. Even if you get hit by these tariffs, everyone in Canada accepts you cannot mess with Quebec. You cannot just start, you know, riding across French language. So at that point, you know, he said no. And the country united behind him. I mean, it is almost like wartime. You know, if you feel yourself threatened and the country unites and that's what's happened.

4:18Katie Martin: Let me ask you this, Alan. You've described it as simple personal inability to leave well enough alone. But do you have or does anyone have a working theory of what Trump and his trade negotiators, the Jameson Greers of the world, are up to here? Is there more to be said than, you know, these people are just irrational on this topic?

4:49Alan Beattie: so it's hard to tell because you know this is sort of maelstrom and who knows how it comes out to it but you know my take just looking at it from here is that someone like jameson greer the u.s trade representative you might not like what he does but it has a certain logic to it you know he was trying to put canada into a difficult position where they had to either choose the unpalatable thing of keeping some tariffs in place in order to get rid of others or they had to go to trade war. And now one theory that people talked about is that Commerce Secretary Howard Lutnik then comes in late on and adds all of these things that are, you know, just impossible for it to sign.

5:23Alan Beattie: But I think it's very difficult to look at the palace politics. And I've said right from the beginning of Trump, looking at palace politics is basically a bit of a losing game, because it's so complicated, it's so irrational. If you look at what comes out of it, you know, the thing that the president, of course, ultimately has to take responsibility for us, the whole thing is basically like a mafia family, a mafia mob, except they're a really bad one. They're no good at what they do. Because instead of an offer you can't refuse, they give you an offer you cannot accept.

5:58Katie Martin: Right.

5:59Alan Beattie: You can only refuse. And it's not the first time they've done this. What was it, a year ago? Trump threatened to stick a 50 % tariff on Brazil if Lula, the president, didn't do something to help his friend Bolsonaro, who is in jail for a long time for initiating a coup. I mean, it's just completely legally, constitutionally, politically impossible to do. How are you supposed to respond to that? So, you know, I don't know the machinations and they seem very chaotic, but what comes out just doesn't make logical sense at all.

6:28Rob Armstrong: Alan, I want to know, how does this fit into the kind of big history of trade talks? Like, how common is it for talks to completely break down like this? Because like I say, it's not like Mark Carney, the prime minister said, you know, let's all take a pause and we'll come back to it later. He's like, right, screw this for a game of soldiers. We're out. There's no point talking to these people. That strikes me as quite unusual. And what does that mean for any future trade talks that the US tries to get into? Because why would anyone else want to bother with this process? It sounds kind of like a waste of time to me.

7:03Alan Beattie: Well, to be honest, I'm not convinced it will be it forever. I suspect what the Canadians are doing are waiting for the Americans to calm down a bit, and then they'll come back and have some more negotiations, maybe sometime in the fall. I mean, one thing is that Trump, on top of what he announced last week, and we can talk about this, by the way, it's not actually that huge. It's not that cataclysmic. He did threaten something truly cataclysmic, which was a 50 % tariff on autos, which is supposed to come in in January next year, right, hopefully after the midterms. Now, I don't think it will, but you have to assume that there will be some negotiations between now and then.

7:37Alan Beattie: And of course, Trump is always saying this is broken down, we'll never speak to so and so again. So I don't think it will be the last of these. When you say Trump, the talks haven't broken down in the past. I mean, they have. But generally when talks break down, it's because both sides are trying to create something new, right? So there were global trade talks that were known as the Doha round, they were trying to create something new. The default was what we had already, which was like, fine, right? They're trying to create something new. It didn't work, bang, they all broke down. So we just went back to what we were before.

8:03Alan Beattie: But the problem here is what we are going to actually use before is already chaotic, because it's Trump and there's tariff layered upon tariff. So these talks were actually supposed to undo some of the damage that had been done before.

8:15Katie Martin: Alan, I'd love to widen the frame a little bit here. Part of the challenge presented by the Trump administration is the flood the zone thing. There's so much noise, so much sound and fury that it's sometimes hard to just distinguish what has happened. So taking a step back, where are we on their tariff strategy? Have they changed the world in terms of, you know, duties on trade or has it all been rhetoric?

8:48Alan Beattie: I mean, I think they've tried, but I think they failed. And I think the reason they failed is they just literally did not understand what tariffs can and can't do. You know, you can go back well before the election and find some video of Scott Bessent, who then, of course, became Treasury Secretary, with all these incredible grandiloquent plans where you can put countries into three buckets, red, amber and green. And if they annoy you in some geopolitical way, then you start tariffing them until they do this, da, da, da. And none of it's really worked. It hasn't worked in the first term. even with extraordinary tariffs over the last year and a half haven't worked one they've been faced down specifically by china who it turns out has much more leverage than trump does not least through its control of rare earths and second trade has just it's like throwing rocks into a stream if you're going to throw rocks into a stream and hope to stop the flow of water you need to show be clear your rocks are big enough you know and they fit together snugly enough because all that's happened is the water has flowed over round under even the stones a few weeks ago that the administration put out this paper on what they call transshipment um i think was written by peter navarro you know who's the chief sort of china hawk it's worth reading if only for the tone it's completely full of rage and essentially what it says is china has cheated and everyone's cheated and everyone has gone around the terrace by exporting from somewhere else to which everyone in the trade world gave a resounding, duh, because you can entirely see, you know, but one from a totally legitimate point of view, and two from cheating, mislabelling, misvaluing, and so on, that that's what's going to happen.

10:23Alan Beattie: So they're left flailing around with this tool, they thought they could change the world with and they just hasn't.

10:27Rob Armstrong: One of the things I like about all this is that like trade talks are incredibly kind of technical and complicated and specific. But what you've got layered on top of all this is like proper schoolyard kind of insults flowing back and forth, which, you know, is very much my jam. So, you know, you've got the White House tweeting out pictures of an American eagle slaying a Canadian goose. And you've got the Ontario Premier Doug Ford saying that Trump can, and I quote, kiss my ass. Like, you know, Rob, from where you're sitting in the States, are you all burning effigies of Canadians now? Like what is the mood towards Canada?

11:11Katie Martin: Katie, I hate it when you try to make me the representative American. Let me just be clear for the record. For the record, I am a card carrying member of the Northeastern bubble. I'm a feat. I live in Brooklyn. It is hopeless to vox pop me on the topic of what Americans are feeling. But no, I think from the bubble, it just feels like more noise, right, which is part of the general narrative arc of the Trump administration, as it travels further and further into lame duck territory. It feels increasingly like futile attempts to keep people's attention that amount to nothing.

11:53Alan Beattie: It's also worth just looking at that, you know, even it's not that Canada is implacably hostile. I mean, you mentioned Doug Ford there, Katie. I'm sorry to say, I think you broke what's international law now in that you have to refer to him as the pugnacious Doug Ford. That's his official title. so in the last year and a half the pugnacious dog fraud has gone from proposing a quote fortress north america of trade you know allying with the us to running ads on us tv trolling trump by quoting reagan against protectionism back to proposing a fortress north america which was what just a couple of months ago to saying kiss my ass now okay he swings an awful lot and he's very volatile and so forth but it's not that people in canada are intrinsically hostile and it's not that people in canada want to rip up this relationship you know it was only what a couple of months ago that carney was taking this much more emollient line just because he recognized the the importance of the u.s to canada canada's tried to diversify trading with asia trading with europe and hasn't really got anywhere as yet just because geography is destiny so you know canadians are, I don't know if they're baffling because they're used to it now, but it is just extraordinarily destructive.

13:09Alan Beattie: And as Rob says, a lot of this appears to be incredibly performative. If they are trying to do geopolitics, I really don't know what they're doing because they can't, you know, maybe Trump does, but no one else really thinks Canada is going to be the 51st state. So what they're doing, I don't know.

13:25Rob Armstrong: But so there's a couple of interesting things there, though. So one of them is that like, there is a grassroots rejection of American produce in Canadian shops, right? You know, they're not buying American alcohol. And that's a big problem in like bourbon producing states, for example. And there is this kind of buy Canadian thing going on. There's this team Canada, Canada strong kind of vibe. That sort of, like I say, annoys certain very specific producers in the states. But also like, what are the big levers that Canada can pull here if it really wants to upset america what can it do if they really wanted to go for it the

14:04Alan Beattie: pugnacious dog ford family of ontario has actually threatened this in past they could cut off electricity supplies right because they actually generate electricity and send it over the border they could cut off energy supplies there's a fair amount of domestic resistance into that in canada and alberta and so forth but if they really really wanted to go for it that's what they could do I don't think it's necessarily in their interest to do it because they are, after all, much, much smaller than the US is. And as I was saying before, if you actually look at what Trump is tariffing, it looks very dramatic.

14:37Alan Beattie: There's a 50 % tariff on it. It's actually only about 5 % of Canadian exports. It's not that big. you know it's going to that plus the retaliation the modeling i saw um take 0.3 percentage points off growth over the net canadian growth over the next year 0.2 percentage points in the long run you know you compare that with something like brexit in the uk which is a permanent reduction of six seven eight percent um in gdp it's at these levels of course if you ripped up the USMCA deal. At these levels, it's not that huge.

15:12Rob Armstrong: But yeah, I thought the Supreme Court told the administration to knock it off with tariffs. So the courts say, knock it off. The counterparts in negotiations say, knock it off. We're just not playing anymore. So have we gone past peak tariff now? I know you said like the US is likely to kind of cling to it in some sort of form, but maybe once this administration is gone, the rest of the world can just say, well, that was stupid, isn't it? Maybe we should just give up.

15:39Alan Beattie: I mean, I think we have even under this administration, but not quite for that reason, you know, the Supreme Court struck down one of the tariffs they've been using before the emergency economic tariff. They've now brought in a bunch of tariff authorities or carried on using a bunch of tariff authorities, which lawyers think are more likely, much more likely to survive challenge in the Supreme Court. I mean, there are other reasons you don't use them for revenue, of course, if you want to negotiate tariffs down, then you don't want to um you'll get rid of the revenue if what you want to do this is the this is the great contradiction of trying to do multiple things with tariffs if you're trying to use them to raise revenue and you're trying to use them protect industries you need to pick one of those you can't have both because if you are if if you know imports are still coming over over the top of the tariff um and people and therefore people are paying tariffs then you're not protecting your industry are you i think even under trump we've reached peak tariff just because the really violent market reactions financial market reactions you saw last year when he announced them just plus the fact that you know it turns out china has much more leverage than the us does because of its control of uh rare earth trump has backed off a long way from this and you know he's still trying to use it for coercion but what he's done is negotiate a bunch of agreement bad though they are which have brought Tyus down.

16:57Alan Beattie: I just don't think we're going to go back to the levels that we saw last summer, not because he's changed his mind as such, it just recognises it's not going to be possible to use them on the scale that he wanted to.

17:10Rob Armstrong: But also, does the rest of the world, I'm thinking particularly here of the EU, do they look at Canada telling Trump to take a running jump and say, actually, this emboldens us to push back at some US demands as well? I mean, I note that like Canada is talking about getting closer in trade to the EU. But yeah, maybe like the rest of the world should kind of do a Canada.

17:33Alan Beattie: It could be. I mean, I think it depends what the US asks for, because at the moment, most of the rest of the world is in this sort of uneasy equilibrium. You know, the EU did a deal with Trump last year and it's very unsatisfactory at the time. And then Trump has done some violations since and so on and so forth. But I think most countries at the moment, their sense is, you know, if you have a deal, just leave it in place. Don't start tearing it up yourself. Of course, there are some countries, Indonesia, for example, who did a deal with Trump. And then because their tariffs were struck down by the Supreme Court, they've never ratified that deal.

18:07Alan Beattie: But I think if Trump comes again and asks for more things and tries to use these sort of tariffs on everyone else, it might well be everyone looks at Canada and says, hmm, you know, maybe we should do the same. Now, me personally, being an instinctive free trader, what I'd really like some country to do is if when Trump comes and puts tariffs on them, just shrug and go, OK, fine. You make stuff more expensive for your own economy if you want. Fool, and then carry on taking U.S. imports. But I understand that that's politically very difficult to do. And I have not had to be elected to anything for a long time.

18:39Katie Martin: I think we should elect Alan to something.

18:42Alan Beattie: You mean you actually make columnists electable in an elected position? But we'll have to promise like three columns a week or something. Free for everyone. Yeah. And lower taxes.

18:54Rob Armstrong: Yeah, exactly. Alan, it's a lot of drama. It's high drama for trade nerds. Thank you for taking us through it. We are going to be back in just one second with Long Short.

19:13Rob Armstrong: Okie doke. It is time for Long Short. that part of the show where we go long a thing we love or short a thing we hate alan beattie trade

19:22Alan Beattie: nerd what are you saying i'm going long bitching and moaning and specifically i'm going long bitching and moaning from farmers and specifically from american farmers because i've had a week now of american farmers complaining about their energy costs have gone up and their fertilizer costs have gone up actually they've come down again and i look at it and i think you are the people who voted for trump and not just once the votes in farming counties have gone up each time since i realized there are small farmers that are in trouble genuinely in trouble if you're a big grain farmer and you're in the midwest you know american agriculture is only what one percent two percent of gdp but my god they punch above their weight when it comes to the output of bitching and moaning they really are but it does make me think about the old saw that people vote with their

20:09Katie Martin: wallets they really don't that's just not true no yeah well actually a lot of farmers don't really

20:15Alan Beattie: make that much money from farming they make it from other things and they have farmland for the

20:19Rob Armstrong: tax breaks and so on so forth well as a farmer's daughter i'm allowed to say they really do whinge a lot about everything um but uh rob what what are you saying i'm long the ai boom you know i'm i you

20:33Katie Martin: You know, I saw those NVIDIA results last night and, you know, NVIDIA just casually said, oh, Wall Street's projections for our revenue next year, they're short by$100 billion. Right. And, you know, in a business like theirs, they have an order book. You know, they have pretty good visibility pretty far into the future. So I'm not saying, you know, I've been a kind of worry about it all ending in tears, guys. but boy that horizon the tears horizon is being pushed into the future so for now i'm long the

21:07Rob Armstrong: ai boom well i am long the latest column in the ft by some guy called rob armstrong extolling the virtues of investing outside the u.s i don't that's not how we characterize the column at all that's what the commenters are saying and that's what i'm saying this is basically 800 words of Rob Armstrong saying, Katie was right and I was wrong. So I'm taking a victory lap on this. We can talk about it more next week, but I'm fully along this. Now, listeners, one thing before we go. Since the launch of this pod three years ago, time flies, we've worked with a production company called Pushkin. They've been our friends and got us off the ground, and we've really loved working with them.

21:55Rob Armstrong: But now we're heading our separate ways. So Rob and I just want to thank them, wish them all the best, all the team there, but especially Jake and Bryant, who've been there every episode. They've put up with us and they've tried to make us good at this mixed results, frankly. But anyway, they have tried and we couldn't have done it without you guys. So so thank you.

22:15Katie Martin: I'll second that and say so much of what is good about this show is because of Jake and Bryant. And so it's been a joy to work with them. And I'm really looking forward to our professional paths crossing again.

22:26Alan Beattie: yeah I'm sure they will

22:28Rob Armstrong: listeners we will be back on Tuesday Alan thank you again for mucking in today so we'll be back next week after the nice long weekend in the UK so listen up then and thank you again to our Pushkin friends