From the Fraser Institute

By John Ibbitson

Because we live in dangerous times, and because an honest country keeps its word, Canada should meet its NATO commitment to spend at least 2 per cent of GDP on defence. But there’s another reason to live up to that promise—it’s good for trade.

Countries that are able to defend themselves earn the respect of their allies. That respect can provide tangible benefits. Consider Cyprus and the Auto Pact.

In the winter of 1964, in the depths of the Cold War, violence between Greek and Turkish Cypriots threatened to escalate into war between Turkey and Greece. President Lyndon Johnson, anxious to prevent war between two NATO members, was hugely grateful when Prime Minister Lester Pearson agreed to dispatch a peacekeeping force to the island.

“You’ll never know what this may have prevented,” said Johnson. “Now what can I do for you?” As Pearson noted in his memoirs, “I had some credit in the bank.”

A year later, Canada and the United States signed the Auto Pact, which guaranteed minimum levels of production for the Canadian auto industry. “I believe that Johnson’s willingness to agree to the Auto Pact the next year, an agreement that hugely benefited Canada’s auto sector, may well have been Pearson’s reward for Cyprus,” wrote historian J.L. Granatstein years later.

Canada’s relations with its NATO allies cooled in the years when Pierre Trudeau was prime minister. Trudeau considered pulling out of NATO entirely, but in the end contented himself with greatly reducing Canada’s troop presence in Europe. But Trudeau began to show new respect for NATO when he sought to diversify Canada’s trading relationships. “No tanks, no trade,” West German Chancellor Helmut Schmidt reportedly told him. Trudeau subsequently boosted defence spending and Canada acquired German Leopard tanks.

In the 1980s, as Brian Mulroney sought to improve relations with the U.S., his government maintained  defence spending at or near 2 per cent of GDP, even as the government reduced spending in other areas to bring down a chronic deficit. On Mulroney’s watch, Canada retained a robust commitment to NATO and NORAD. In February 1990, former Cold War antagonists agreed to a process for German reunification during the Open Skies conference in Ottawa; six months later, Canada joined a U.S.-led coalition that ejected Iraqi forces from Kuwait.

And in the midst of this stalwart support, Canada and the U.S. negotiated their historic free trade agreement.

Then came the so-called Decade of Darkness, as Jean Chretien’s government cut funding to the military to help balance the budget. In the 2000s, Stephen Harper ensured that the Canadian mission in Afghanistan was properly equipped, but his government further cut spending in the wake of the 2008-09 financial crisis. By the time Justin Trudeau came to power, defence spending was at 1 per cent of GDP.

While it appears Justin Trudeau’s government increased defence spending, part of that is the  accounting trick of putting veterans’ benefits in the budget. In fact, Canada remains virtually the sole outlier among NATO members in having no credible plan to get to 2 per cent any time soon.

Last spring, 23 U.S. senators (both Democrat and Republican) issued a letter taking Canada to task for failing to meet its defence commitments. And they spoke plainly. “We are concerned and profoundly disappointed that Canada’s most recent projection indicated that it will not reach its two percent commitment this decade.”

In that sense, Donald Trump was speaking for everyone in Washington when, as president-elect, he told reporters that “we basically protect Canada… we’re spending hundreds of billions a year to take care of Canada.”

That doesn’t in any way excuse the punitive tariffs the administration imposed on Canada and Mexico over the weekend. Those economic sanctions are capricious, vindictive and mutually damaging. Canada had no choice to but to respond in kind.

But it’s also true that other countries no longer take this country seriously. During the Biden administration, the U.S., the United Kingdom and Australia entered into the AUKUS security pact. Canada wasn’t invited. And QUAD security dialogue involving Australia, India, Japan and the U.S. is not QUINT, because we weren’t asked to join.

Canada will have a new federal government within months. Its highest priority must be to restore free trade with the U.S. One way to negotiate seriously with the Trump administration may be to offer a specific concrete program of investment in the NORAD partnership, in exchange for the removal of tariffs.

If the Americans agree, it wouldn’t be the first time that trade and defence were intertwined.

John Ibbitson

From the Fraser Institute

By Cornelis “Kees” van Kooten

According to an announcement on Friday by White House press secretary Karoline Leavitt, President Dondald Trump will implement a 25 per cent tariff on Canada and Mexico (and a 10 per cent tariff on China) beginning Saturday, Feb. 1.

Over the last few weeks, Canadian policymakers have been rather naïve in responding to Trump’s tariffs threats. They seem not to have figured out what Trump really wants (although perhaps no one knows what he really wants). But the Canadian side has focused on retaliatory measures, lobbying to ensure certain industries are exempt, and an advertising campaign to get consumers to prefer Canadian products—a “Made in Canada” preference.

It’s also been proposed that by lowering trade barriers between provinces, the Canadian economy can offset a trade war with the United States. But this raises the question—why hasn’t this already been done if it leads to such great benefit?

It’s clear that Canadians don’t want to be part of the U.S. However, given Canada’s dependency on the U.S. economy, Canada’s lagging productivity, the inefficiency of separate currencies, and the effect of changes in the Canadian-U.S. exchange rate on prices in Canada, it’s surprising that some kind of economic union with the U.S. is not being considered or even discussed. Or at least it does not appear to be something that politicians north of the border consider.

The post-war European enterprise can serve as a model for how Canada might approach the U.S. In Europe, the Germans remain German, the French remain French and the Dutch remain Dutch. This, despite the fact that the European enterprise has gone well beyond that of economic union. The Maastricht Treaty (1992) created the European Union (EU) by combining the three European Communities—the European Atomic Energy Community, the European Coal and Steel Community and the European Economic Community—into a single entity. While it set the stage for a single currency (the Euro), the Treaty was seen as a first step toward an eventual political union. While the EU has taken large steps toward political union, the enterprise is not going as well as envisioned. The United Kingdom left the EU principally because it did not want to take orders from Brussels. The U.K. was interested in an economic union, but not political union.

The lesson for Canada is clear—we do not want political union, but should be open to economic union with the U.S. This would essentially mean two things. First, eliminating the border with respect to trade in goods and services, and free movement of investment capital. Whether this would include labour would need to be addressed, although economists would argue that, from an efficiency point of view, it should. As a blueprint, one might begin with what’s referred to in Europe as the Schengen Area, which is a group of EU countries that have eliminated all internal border controls and established common entry and exist requirements. This would require that the effective border protects both Canada and the U.S. simultaneously—the northern U.S. border moves to the Pacific, Arctic and Atlantic oceans. If a person qualifies to come to Canada, they automatically qualify to come into the U.S. and vice versa.

Second, monetary union under those circumstances makes a lot of sense. It would be simple to implement. For example, we might say that one Canadian dollar is on par with one U.S. dollar, or that it’s equal to US0.85 or 0.90. The exact value is less important as wages and other costs will adjust with increases in Canadian productivity that will then lead to increases in wages.

Finally, Trump insists that Canada commit 2 per cent of its GDP to defence. I would argue that, given a willingness to negotiate an economic union, and a commitment to increase defence spending to meet the 2 per cent target by 2030, would be sufficient to remove the Trumpian tariffs.

By agreeing to negotiate an economic union, Canada may convince the Trump administration to remove the tariffs. If an economic union were a threat to Canada’s viability, to our Dominion, then we do not deserve to be Canadian. I would venture that our national identity vis-à-vis the U.S. is strong enough to survive an economic union.

Cornelis “Kees” van Kooten

Professor of Economics, University of Victoria