Allies Look Away From the U.S. on Trade
Chinese President Xi Jinping meets with Canadian Prime Minister Mark Carney in Beijing.
Flustered and frustrated by America’s trade wars, traditional U.S. allies are considering alternatives to the world’s richest market, including expanding commercial relations with China – to considerable visible furor from Washington.
The palpable shift comes after a year in which world leaders typically flattered President Donald Trump. Those officials have been left reeling after his recent demands for the U.S. to own Greenland and his derisive comments about allies who fought in Afghanistan and Iraq.
Reeling and looking for the best way to say “no” to the globe’s biggest economic and military power, that is.
Eh Tu, Canada?
In the most recent example – and perhaps the most remarkable one, considering the historically warm bilateral relationship – Canada sealed a modest trade agreement with China. Trump responded by threatening 100% tariffs on Canadian exports and attacking our northern neighbors on social media.
It’s less the scope of the deal than the symbolic break with the United States, Canada’s biggest export market.
In 2024, Canada had followed America’s lead by imposing a 100% tariff on Chinese electric vehicles and 25% duties on steel and aluminum. Beijing retaliated with 100% tariffs on Canadian canola oil and 25% on its pork and seafood.
The new deal, which Canadian Prime Minister Mark Carney sealed during a visit to China this month, cuts Canada’s tariff on a certain number of Chinese EVs in exchange for Beijing lowering its import duties on those Canadian agricultural products.
Over the weekend, Carney ruled out reaching a full free trade deal with Beijing, saying, “We have no intention of doing that with China or any other nonmarket economy." He said the China agreement “is to rectify some issues that developed in the last couple of years."
Under the U.S.-Mexico-Canada trade deal negotiated during Trump’s first term to replace NAFTA, any participant looking to reach a free trade agreement with a nonmarket economy like China must notify the other two ahead of time.
Trump Objects
Trump initially welcomed the new agreement, telling reporters at the White House on Jan. 16: “That's what (Carney) should be doing. It's a good thing for him to sign a trade deal. If you can get a deal with China, you should do that."
On Saturday, however, his mood had soured: “If Canada makes a deal with China, it will immediately be hit with a 100% Tariff against all Canadian goods and products coming into the U.S.A.,” the president threatened in a social media post. He did not specify what kind of deal.
On Sunday, he declared, “Canada is systematically destroying itself. The China deal is a disaster for them. Will go down as one of the worst deals, of any kind, in history. All their businesses are moving to the USA. I want to see Canada SURVIVE AND THRIVE!” Later, he said “China is successfully and completely taking over the once Great Country of Canada. So sad to see it happen."
Private Sector Shocks
Trump’s theory is that his tariffs will force manufacturers to build plants in the U.S. (There is some evidence for that, though manufacturing employment is down for reasons that include but aren’t limited to tariffs.)
However, those import duties – and the on-again, off-again American approach to imposing them – can also prevent that kind of manufacturing investment. Business does not like uncertainty or pricey inputs.
So we get this, via Bloomberg: “Germany's Volkswagen Group will not be able to build a planned plant for its upmarket Audi brand in the United States unless tariffs are cut, VW chief executive Oliver Blume has said in an interview with German business daily Handelsblatt.”
"Given an unchanged tariff burden, large additional investment cannot be funded," Blume told the newspaper in comments released on Sunday. "Reduction of costs in the short term and reliable business conditions in the long term are what we need," he said.U.S. automakers have complained that the tariffs on foreign steel, aluminum and car parts have put them at a disadvantage. Indeed, those higher input prices have driven widespread unease in American manufacturing and some talk of offshoring production of products destined for non-U.S. markets.What if the U.S. is reliably … unreliable?
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