Pres. Trump Says the U.S. Doesn’t “Need” Canada. Is He Right?

CHRISTIANE AMANPOUR, ANCHOR: Returning now to a trade war that seems to be spiraling out of control, the gloves are off between the U.S. and Canada. And Canada’s next prime minister has promised to stand up to Trump. Is there any way out of this cycle of economic violence? Eric Lascelles is chief economist of the Royal Bank of Canada Global Asset Management, and he’s joining Walter Isaacson to look at what this all means.

WALTER ISAACSON, HOST: Thank you, Christiane. And Eric Lascelles, welcome to the show.

ERIC LASCELLES, CHIEF ECONOMIST, ROYAL BANK OF CANADA GLOBAL ASSET MANAGEMENT: Thank you. It’s a pleasure to be here.

ISAACSON: There have been tariffs slapped on the United States by Canada and retaliation for Trump’s tariffs on Canada. And now, the Central Bank of Canada yesterday lowered interest rates by a quarter of a point. I want to read you something that the governor of the Central Bank said. He said, we’re facing a new crisis. And he said the tariffs on Canada could be severe. Tell me the state of play and what you think it might do to the Canadian economy.

LASCELLES: Tariffs are an enormous problem for the Canadian economy. This long friendship and partnership and North American relationship has really integrated these economies. And as it stands right now, about 20 percent of everything that Canada makes is ultimately directly consumed by Americans. And so you can imagine as these tariffs are put on and begin to impede those flows. It really is quite a concerning development for the Canadian economy. It’s certainly not great for the U.S. either, but it is profoundly worse for Canada. And so it’s hard to say with great confidence exactly what the economic damage will be in terms of magnitude just because there are so many swirling tariffs and on-again, off-again type of arrangements. But if significant tariffs are applied and if they stick, it’s not an exaggeration at all to suggest that it could be a fairly profound recession for Canada. And so here we now see policymakers responding to that and the Bank of Canada has cut interest rates. It might have done that anyhow, but certainly it is on a path toward additional rate cuts relative to what might have otherwise been appropriate. And I would certainly think that as we get some additional clarity on just what tariffs are in place and how long they stick around, I would think that fiscal policy will come into play as well.

ISAACSON: We’ve seen this go back and forth all the time. Do you think Canada will end up sort of accommodating whatever Trump wants? Or do you think it’s possible that Canada could fight and continue the trade war?

LASCELLES: Well, we’ve certainly seen Canada, I would say, maybe the more proactive of the two main North American partners in the sense that Mexico has been notably rather quiet, Canada a bit more pugnacious in the view that it is necessary to reciprocate and to punch back to some extent and recognizing that presumably a large fraction of this will come down to negotiations. And so there may be some advantage to having tariffs to lift on both sides of the border if those can be lifted. It’s clear that the White House seeks any number of concessions from many of its trading partners. And I think some of those are perhaps not entirely unreasonable and perhaps in particular the thought that military spending might increase. Canada has been very light on that front for quite some time. We’ve seen already additional resources directed toward border security, though I would argue that it’s much more of a Mexican issue than a Canadian one. Canada has put several billion dollars in that direction. And I think it’s a reality now that this USMCA trade deal will be renegotiated as well, and Canada likely in a position to oblige for that. I think maybe the bigger questions that exist, and this is relevant to all of the American trading partners, is the extent to which the thought of reciprocal tariffs seems to have grown beyond the idea of if you have tariffs on us, we’ll have tariffs on you. And it seems now to express some measure of objection to foreign countries, including Canada, that have sales taxes, that have exchange rates that perhaps aren’t precisely at their long-term fair value, and that have sectors that perhaps have some measure of protectionism, be it transportation, be it broadcasting and others, which the U.S. has as well. And so I say all of that just to make the point that I think some of the U.S. asks are going to be difficult to oblige to. And so, as a result, there is a real chance that these tariffs, or at least some fraction of them, stick around, because I’m not sure that negotiations will be entirely fruitful.

ISAACSON: Well, one underlying thing is that Canada has a pretty large trade surplus with the United States. Do you think that’s the reason Trump is trying to negotiate this? Or do you think he believes tariffs are kind of a good thing and we should start making aluminum and steel and other things in the United States and decouple a bit from the Canadian economy?

LASCELLES: I think there are a lot of swirling motivations. I’d be skeptical that it really is about Canadian border security, first of all, so I think that’s a bit of a red herring. It does seem to me that the White House has some protectionist instincts and the idea that it would be better for the U.S. to be self-sufficient. And I should say, there are economic losses when one tries to do that. And for a country with an unemployment rate that’s already fairly low, it’s not clear there’s room for additional industries to come in. And there always is a loss of selection and variety and quality and so on when countries try to go this alone, but I do think there is just an attitudinal shift that’s taken place. You’re right that Canada does have a trade surplus with the U.S. I would note that it’s not quite as large as has sometimes been articulated. It’s more in the realm of about a $60 billion annual surplus. A lot of that goes away if you include the service sector, which of course the U.S. is exporting all sorts of cultural services and entertainment and many other products as well. It’s been widely noted if you were to remove the four million barrels a day of oil that Canada exports to the U.S., which is done at quite a discount, it is generally considered to be a positive thing that surplus shifts to a deficit. And so, yes, there is a surplus. I think that’s part of it. But I think you would struggle to articulate why Canada is being so focused in terms of the tariff attack so far, simply because there are countries with far greater trade surpluses with the U.S. And I’m thinking Mexico and Taiwan and Vietnam and Germany and others. And yet they, at least so far, have not been hit to the same extent. And so I do think there is some measure of animosity that for whatever reason exists as well.

ISAACSON: Well, wait, let me — let me pin that down. Animosity, meaning, personal by Trump towards maybe personally towards Trudeau. Is this an emotional thing?

LASCELLES: I think possibly. I would struggle to articulate the reasons entirely behind it. But yes, it did seem as though that particular relationship was not entirely constructive. And, of course, as you know, Canada is going through a political change now that could perhaps lessen some of that impact. But that’s quite speculative.

ISAACSON: Well, let’s talk about that change. Mark Carney is the new leader of the Liberal Party. He’s about as stable, as knowledgeable, as down-to-earth and as calm as you could find anybody. Do you think if he eventually is elected in this new election that’ll come in a few months or so that he’s the right person for this time?

LASCELLES: Certainly, he has the policy chops and the economic chops. And so you can argue he’s the right person for the time in the sense that this is, for Canada, at least a time of really having to prioritize the economy and find a way forward from a trade perspective and sort out just what the right level of support is for an economy that could be significantly diminished. I might broaden it out a little bit, maybe cop out a little bit as well and say, he is the prime minister, at least shortly will be. There is an election that will have to be held at some point in 2025 for Canada. Let the record show until quite recently actually it was the opposition Conservative Party with a very large lead in the polls. That’s narrowed quite a bit, I suspect in part as there’s been a real sense of patriotism and nationalism expressed in Canada given recent threats toward the country. And so that has favored the incumbent liberals. And so now it’s a really close race. And so I wouldn’t want to prejudge exactly who is the prime minister coming out of this, but I would say that between perhaps Carney being somewhat more of an economic centrist versus a more left leaning set of policies that predated even under the same liberal party or a conservative win, which is also possible and also envisions some significant economic changes. I think either way, it’s probably one that puts Canada in a better position for growth and for productivity gains and so on. And perhaps in a slightly better position in terms of negotiating with the U.S. to the extent that there may, as you say, perhaps be some personal animosity at stake right now.

ISAACSON: Let me read you something that President Trump posted on social media, which is about Canada. We don’t need your cars. We don’t need your lumber. We don’t need your energy. And very soon you’ll find that out. Is he right?

LASCELLES: Well, gosh, it probably depends on timeframe. I think if we could fast forward 10 years, I don’t doubt — or even a few years, I don’t doubt that the U.S. could find other foreign providers for some of those products and could be in a position to increase its production of some of those products domestically as well, at a cost, I should say, because it would require then de-prioritizing other things the U.S. is already very good at. And, of course, that’s one of the central charms of international trade is you let countries specialize and everyone is better off as a result. And, of course, every dollar of trade that’s exchanged is entirely voluntary and so therefore to the benefit of all parties. But I do think in the short run that probably isn’t correct in the sense that it would be very hard for the U.S. to substitute away for many of the things that Canada makes. And so this is maybe stylized, but Canada provides a lot of raw materials to the U.S. And so when I think about the oil sector as an example or the four million barrels of oil a day are provided to the U.S. The U.S. consumes about 18 million. This is more than 20 percent of the oil supply. That’s not likely Americans are going to drive a whole lot less. It’s not likely you can suddenly get oil from another place in that magnitude. It’s not likely American refiners could refine any other oil if they were able to find it. That oil refinery is very specifically focused on Canadian heavy oil. For potash, Canada provides the great bulk of the imported potash. And while Russia and Belarus produce some, and one might theoretically think of a way in which that could be secured, they just don’t make enough for U.S. needs, even if you were able to swap all of the production over to the U.S. And, you know, the auto sector, this is a highly integrated North American auto sector. And so, of course, there’s pressure now for companies to shift some measure of production toward the U.S., but you can’t build factories in a day. You can’t even build them in a year. And very similarly, and perhaps that apropos, given that the steel and aluminum tariffs have come on, Canada produces the great bulk of the aluminum used in the U.S. We’re talking 10 times more than any other country provides to the U.S., far more than the U.S. produces. And aluminum is needed for motor vehicles, including pickup trucks. It’s needed for planes. It’s needed for construction. It’s needed for every soda can that you’ve seen. And there really isn’t another way to get that in any kind of timely way. And so, you know, the pain is greater for Canada, but the pain is significant for the U.S. And you would expect higher inflation, and you would expect palpably weaker economic growth as well.

ISAACSON: Well, that’s what you do at the Royal Bank of Canada or RBC, is you’re very good at making predictions about the economy, doing analysis. Let’s start with the United States. Do you think a recession is in the works in the United States?

LASCELLES: I’m doubtful about that. I can certainly say we’ve seen evidence of an economic deceleration. I can say that tariffs have applied in a significant way and there’s such radical uncertainty around that. You need to think in a scenarios context, but there are certainly ways in which there could be significant damage emerging from that. I still struggle to conclude that that’s a recessionary blow. It’s one that could significantly dim growth. It’s one increasingly that points to an economy that might grow at its slowest rate since 2020, since the pandemic to the extent these tariffs come on. To me, it’s not a full on recessionary blow. And I would say as much as markets are recoiling the sort of scale of market recoil is probably consistent with that as well. And so would you see higher unemployment? Absolutely. Weaker growth? Absolutely. To my eye, at least, probably not an outright economic contraction.

ISAACSON: Well, let me then ask you about Canada. Do you think it will be recessionary for Canada?

LASCELLES: Well, listen, if anything, like a 25 percent tariff comes on, on April 2nd, I think the answer is yes. I would assume the Canadian economy is beginning to shrink almost immediately at that point. I’d like to think there will be negotiations. I’d like to think that smaller tariffs will ultimately prevail within a matter of months or perhaps quarters. But either way, you would still have an economy that was shrinking initially and quite a bit of pain being felt. And maybe the only distinction I can make between the two, and it’s not really an economic one, is that Canadians are incredibly united around this and willing to suffer and broadly in line with the reciprocal tariffs being applied to the U.S. And so I suspect we will see Canadians rally and perhaps that will dampen some of the blow, but at a minimum. The government or the Central Bank likely to be rowing in the right direction.

ISAACSON: Explain to me something about the way Canada works. And we see Doug Ford of Ontario’s Premier, right, talking about putting his own tariffs on the United States and coming to meet with Howard Lutnick, the Treasury Secretary. Could he do things? What do you expect of that meeting with Lutnick? And could he do things that are non-coordinated with the central government of Canada?

LASCELLES: It’s certainly unconventional. I will say that he’s been among the more pugnacious of the provincial leaders. And so that’s been undeniable. I guess time will tell whether that’s the right strategy or not. It’s not — it’s not quite clear yet, but perhaps not the worst thing to be experimenting with different responses and engaging what the U.S. response to that is. You can argue perhaps there’s been some value in that just to the extent that, as you say, there is now a meeting schedule, but I would note prior meetings have not been overly fruitful. So I’ll believe it when I see it terms of whether there’s actual forward progress that occurs. But I will say that as much as we’re seeing slightly different strategies out of different provinces, and it’s unconventional for a sub sovereign level of government to be applying tariffs, ultimately, Canada is rowing in the same direction and these premiers and the prime minister and others are meeting regularly and are on the same page. And so I wouldn’t say that’s particularly concerning right now, but it does reflect the fact that in stage one of the Canadian retaliation is tariffs in a conventional way. You know, there are other options that exist, whether it be tariffing non-traditional items like electricity or limiting the export of certain critical products, and I’m hoping that bridge doesn’t get crossed, but that option does exist. And, of course, it’s so critical to Canada to get back to some sort of proper trade footing with the U.S.

ISAACSON: You made a very strong point about how coupled the Canadian economy is to the American economy and vice versa, the U.S. economy. Do you think that this sort of uncertainty is going to lead to a long term decoupling of the two economies?

LASCELLES: It’s a great question and it’s awfully hard to say because, of course, it’s difficult to say what trade policy might look like under a different administration four years from now or what it look like a decade or two from now. And I wouldn’t want to underestimate the — I mean, the long and incredible and almost unparalleled friendship the two countries have had. And so I wouldn’t want to write that off on the basis of a couple of bad months. But I would say that certainly Canada is of a mind that it needs to work harder to diversify its trade. It’s been such a positive partnership that Canada doesn’t trade that much with Europe or China or some of the other obvious markets. And so there is quite a scramble underway. I’m a bit skeptical of the ability of Canada to significantly pivot in short order, just because, again, these other places are far away. They’re already provided with perhaps the potash that they need or the oil that they need and so on. And it’s not particularly easy to transit some of these products to foreign shores. And so I think that we will see a scramble to reduce reliance on the U.S. And it’s been a real wake-up call, I think, for Canada and one I suspect that won’t be forgotten anytime soon. All the same, even with gargantuan tariffs, I very strongly suspect Canada’s biggest trading partner will be the U.S. And I would think it will be probably again a fairly close trading relationship within a number of years.

ISAACSON: But you say there’ll be a scramble to reduce relationships with the United States, trade relations. Do you think that would put Canada more closely aligned with China?

LASCELLES: It’s a great question. And I think the natural strategy is to flirt with other countries and perhaps induce some jealousy from the U.S. and the obvious flirting would be with China and Europe in particular. And so I’m sure those conversations will happen. Do note that Canada already has a free trade deal with Europe. And so I suppose the opportunity there is to trade more that the negative is there isn’t room for an explosion of trade because the barriers have already been fairly low. One of the challenges for Canada is that Canada and China have often had a contentious relationship, ironically, in part because of the U.S. And so, for instance, Canada put on a large tariff on Chinese vehicles to synchronize with the U.S. tariff on Chinese vehicles. China has just punched back at Canada in the last week and is now applying tariffs to various agricultural products on Canada. And so I wouldn’t say that the relationship is entirely proceeding in the right direction right now. And so there are challenges there, but I’m sure Canada will do its best to diversify as it can.

ISAACSON: Eric Lascelles, thank you so much for joining us.

LASCELLES: Thank you very much.