Canada Should Call Trump’s Bluff on CUSMA Trade Talks

“If Canada wants to agree that we can have some level of higher tariff on them while they open up their markets to us on things like dairy,” United States trade representative Jamieson Greer told a CBC reporter a few months ago, “then that’s a helpful conversation.”

• America’s unstable economy makes their hand in CUSMA negotiations weaker than it appears
• Canada should stop treating access to the American market as worth any concession
• Canadian negotiators should be prepared to walk away rather than accept a future of economic subordination to the US

Helpful to whom? It can feel like a luxury to look past the parade of breathless, Trump-induced headlines and focus on the larger trends. But as one-sided demands from American negotiators mount—from attacking Canadian digital regulations to complaints about provincial liquor-board bans and “Buy Canadian” policies—that broader view is more necessary than ever.

A February report from the US Congressional Budget Office (CBO) underscores what’s at stake as Canada approaches its next reckoning over the Canada–United States–Mexico Agreement in the months ahead. CUSMA governs a trading relationship worth more than $1.8 trillion annually and underpins deeply integrated North American supply chains spanning energy, agriculture, manufacturing, and the auto sector—making it one of the most consequential economic agreements in the world.

But what the CBO tells us should cause Canadians to think long and hard about what we are willing to sacrifice to retain CUSMA. Despite Trump’s bluster and bullying—and despite what seems like a reasonably stable US economy—the American hand is weaker than it looks.

The CBO warns that America’s ability to meet the interest payments on its ever-growing debt is becoming unsustainable. The basic math is this: a nation’s ability to service its debt is a function of whether its rate of economic growth (G) is greater than the rate of the interest costs (R).

If G is greater than R, a country can sustain its debt. Indeed, if G is substantially greater than R, the costs of servicing the debt can actually go down as a percentage of its economy because the economy is growing faster than its debt costs. In this way, a country can “grow” its way out of debt.

But, if R routinely grows faster than G, problems arise. Slowly at first, then with increasing pace, the country spends more and more of its economic lifeblood to pay the interest. The government is forced to reduce the amount it injects into the economy (social programs, for example) and to increase the amount it takes out of the economy (taxes) just to keep pace with the interest. As it does this, the economy contracts, and so the government must spend even less and take even more. Credit is increasingly restricted, causing the economy to slow ever further, and a vicious cycle sets in.

What the CBO is suggesting is that the US is perilously close to the moment when R overtakes G. The CBO estimates that this death spiral will happen by around 2031, but it could come sooner if US debt rises faster than forecast (nothing like a reckless war in the Middle East to accomplish that) or the US political system keeps indulging its apparently limitless appetite for tax cuts it cannot afford, while simultaneously increasing defence and social spending.

According to the CBO, the US national debt now stands at over $39 trillion (US). It grew by over $7 billion per day in the last twelve months (or $2.6 trillion for the year). Currently, the US spends $970 billion annually to service its debt, more than it spends on defence, and this is going up. Simply paying for the interest on its debt now consumes 13.8 percent of the entire federal budget. According to the Treasury department, the US government’s debt-to-gross-domestic-product ratio is 124 percent and growing quickly—meaning Washington now owes more than the total annual value of everything the American economy produces in a year.

It’s going to get worse. For years, the US government paid for much of its debt by issuing Treasury bonds that investors bought—essentially lending it money—at very low interest rates, averaging about 0.9 percent over the past fifteen years. That was well below the economy’s growth rate of about 2.2 percent, which made it easy to take on more debt because the country was growing faster than its borrowing costs.

Now that’s changing. Much of that cheap debt is coming due and has to be replaced—sold again to investors—at today’s much higher rates, around 4 to 5 percent. These rates reflect the markets’ view that buying US debt is now a riskier proposition than it once was.

Simply put, America’s R is soon going to pass its G, and the cost of servicing that debt is going to climb, and the total pile of debt will keep ballooning, all at the same time. Added to this, a number of major federal trust funds (money set aside to sustain major programs such as Social Security and Medicare) will become insolvent in the early 2030s if current trends continue. The clouds are gathering on a perfect storm.

Of course, the US economy is huge and complex. One indicator, however important, does not a meltdown make. But the crossing of G and R will be a significant moment. If confidence in the American economy starts to crack, the dollar could weaken, making an already staggering debt burden even harder to finance. More ominous would be any erosion of the US dollar’s role as the world’s reserve currency, which would push the US further into crisis. Already, many central banks have reduced their dollar holdings, and a growing share of energy trade is being conducted in other currencies.

The US economy may thus be sliding into a period of structural decline. The political system could correct the underlying trends through a concerted, bipartisan process of cutting spending and raising taxes, especially on the rich. But it seems incapable of doing so, and Trump’s policies—which include imposing hidden taxes on US consumers in the form of constantly varying tariffs—are rapidly making things worse. (Indeed, the cynical observer might just wonder if deliberately driving the country off a fiscal cliff is seen by some MAGA ideologues as a way to kill entitlement programs, such as Social Security and Medicare, once and for all.)

And so, as Greer’s quote admits, the US response is to screw unilateral concessions from trading partners to make up the deficiencies it can no longer manage at home.

Where does this leave Canada’s CUSMA calculations? The Mark Carney government claims our net debt-to-GDP ratio is the lowest in the G7, which gives Canada “immense” fiscal room to manoeuvre. But Ottawa has been accused by critics of playing lose with the accounting. By some estimates, our total public debt, including provincial debts, is about 110 percent, among the highest in the G7—but not as bad as the US.

When combined with other measurements—such as lower levels of economic productivity per worker and high levels of household debt—we have come to see ourselves as an economic laggard. The US economy is thus cast as the all-powerful white knight who will always save Canada from its own supposed complacency and laziness. On this understanding, almost any sacrifice looks reasonable if it maintains access to the American market.

But is that really true? More importantly, will it be true going forward, as the US economy begins to feel the growing pressure of the debt spiral? And will the US continue to permit the kind of trade access we are accustomed to? In other words, are Trump’s erratic actions a function of his style or a preview of what’s to come regardless of who succeeds him in the White House?

What sort of concessions should Canada make for CUSMA? Should we accept a permanent, structural, one-sided tariff system which incentivizes manufacturers to move jobs to the US? Should we accept a situation in which the US retains the right to unilaterally and impulsively change the terms of whatever deal it signs? Should we accept ultimatums that we give up our right to trade with the European Union and China, or anyone else, in order to preserve the Trump administration’s version of “privileged” access to the American economy?

And just what will such privilege mean if we have to accept these things and if that market is itself undergoing a debt-induced stagflation, or even recession, which could last years? Obviously, even a hobbled US is still a huge market. Access is always going to be worth something. But how much, and at what cost?

After all, commerce with the US existed before we embraced free trade, and it will continue afterward. Whatever doomsayers may warn, we are not faced with the binary choice of either a renewed CUSMA or zero trade with the US. We have stuff they need (whatever Trump says), and our market is an attractive one for American businesses. None of this is going to change.

Of course, if CUSMA eventually lapses, we won’t trade with the US the way we have for the last forty years. But basing our strategy on fears of losing the sort of access we once enjoyed is a false analysis. Trump is not offering Canada that same trading relationship going forward.

The real question facing Canada is no longer what free trade, as we once understood it, is worth. It is what value remains in a significantly reduced and chronically uncertain level of access to a much weaker US economy—one governed by hardball conditions and a constantly shifting tariff regime.

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Some in Canada will say yes to what is being offered, no matter what. Those sectors of our economy who have linked themselves inextricably to the US will be willing to pay any price and adapt to the new costs, largely by passing them on to Canadian workers and consumers. But other sectors may not think the same way. They may see the benefit of CUSMA on America’s new terms as no longer worth the price being charged by the Trump administration.

These are the choices which face us. We must be clear eyed about them. One place to start is to adjust our reflexive way of thinking about our economic relationship with the US. Instead of automatically thinking of America as a juggernaut pulling us along and assuring our prosperity, we should accept that it is becoming a slowing locomotive approaching an increasingly unstable bridge and could drag us down if we bind ourselves too tightly to it.

And we should not overlook the impact that Trump’s brinkmanship, leading to the closure of the Strait of Hormuz, has had on global thinking. Canada possesses, in abundance, the energy and other critical resources that the world needs. We are a notably stable, rule-of-law country. The inherent value of this stability has recently become all too real to billions of people around the world, and they may be willing to pay a premium for it.

If we can get over our internal bickering and build the infrastructure needed to get these resources to market, our future is brighter than many understand. Do we really want to accept Trump’s demand that we commit to sell these assets to the US first and foremost? Worse, that we do this in return for being locked into a deal that will feature aggressive moves to force Canadian manufacturing jobs to the US and the imposition of further tariffs at his whim? What kind of a deal is that?

It might be good to stiffen our spine and go into the CUSMA talks with this attitude. It would help us to find out just how willing the US administration really is to throw away a deal that its own business leaders overwhelmingly argue has greatly benefited America too.

Timing will be important. When the CUSMA negotiations get real this summer, Trump will be in a steadily weakening position. He will be few months away from mid-term elections, which are shaping up to deliver his party a historic thumping. The real costs (political and otherwise) of his idiotic war of choice with Iran will still be coming home to roost in the form of higher prices and increased concerns of the bond market as to whether US debt is a safe investment. He will face greater global instability generally to which his own policies have contributed greatly. And lurking in the background will be the reality that R will be that much closer to, and inexorably speeding toward, G.

Trump’s bombastic negotiating style is one thing that will not change. The closer we get to the CUSMA review, the nastier things are going to be. Strident threats of economic ruin and stern warnings that the US will leave the deal, or just negotiate with Mexico, can be expected. But Canada needs to take a deep breath. We don’t need to get a deal in 2026. While the certainty of a new agreement would be beneficial, particularly to industries battered by tariffs, this is only true if it brings meaningful tariff relief and certainty—neither of which seems likely.

If they don’t get a deal this summer, the parties to CUSMA can keep the pact in place for another ten years, with annual reviews, while they continue to negotiate. That would buy Canada time to cement other international trade opportunities and develop our economy internally.

Taken together, these considerations suggest Canada should not jump at any offer the deal-maker-in-chief throws on the table. We have cards too.