Tariffs a reminder of past economic spats

Opinion

Hey there, time traveller!
This article was published 10/02/2025 (244 days ago), so information in it may no longer be current.

The tariff offensive launched this week by U.S. President Donald Trump against Canada, along with Mexico and China, brings to mind a similar event over 50 years ago — an event which begins a train of events that lead to the current Canadian strategic dilemma.

After the Second World War — and after the inter-war period of protectionist mercantilism which is thought to have contributed to that war — there were negotiations, led by the U.S. and the U.K., to rebuild the world economy.

Canadian diplomats, small in number but skilled, experienced, and with a unique understanding of American and British motives and interests, played an outsized role, especially in the building of the World Bank and the International Monetary Fund at Bretton Woods, N.H. Canadians also played a large role in the negotiations for a General Agreement on Tariffs and Trade. The Canadian strategic interest rested in a rules-based multilateral economic system to counterbalance the centrifugal force of our proximity to the American market, to ensure access to Europe and the rest of the world.

The post-war Bretton Woods regime has been well-conceived (by John Gerard Ruggie) as the compromise of “embedded liberalism.” The American goal was a rapid transition to free trade, internationally and domestically. Canada, the Europeans, and most other countries were aware that too-rapid transition to free markets would be politically destabilizing in European countries where communist parties remained a lively electoral force, and outside Europe where the Soviet Union was ready to take advantage of political upheaval when unbridled capitalism put stable social structures at risk. So: liberalism, embedded in the social and political realities of the times.

The United States embraced the compromise because its hegemony set the pace and parameters of ongoing negotiations on tariffs and monetary policy, and left it free to pursue its own domestic policies. But by the 1960s the Americans were experiencing their own problems of inflation and unemployment. Lyndon Johnson’s Great Society domestic programs, an overhang of Marshall Plan dollars, spending on the Vietnam war, and multinational companies sending dollars and jobs abroad in investment, put pressure on the U.S. economy. Eventually there was not enough gold in Fort Knox for those abroad who lost confidence in American hegemony and wanted gold for their dollars at the Bretton Woods fixed price of US$35 per ounce.

On Aug. 15, 1971, then-president Richard Nixon effectively ended the so-called Bretton Woods system by delinking the greenback from gold and thereby raising its price. He put in place tariffs designed to entice multinationals to create and repatriate jobs in America, along with a freeze of prices and wages. America was no longer ready to bear the costs of its hegemonic rule; its own national interest was paramount.

It can be hot and humid in August in Ottawa, so everyone who can flees. The assumption was that by the time the heat blows over, Canada wold have been able to negotiate the usual kind of exemptions and exemptions from the Nixon measures. But by the time the foreign and trade policy mandarins could gather and make their case in Washington, it was clear that no exemption was forthcoming, and the shock was palpable.

Deeper strategic consideration was due, because the Americans had unilaterally changed the rules of the international trade regime, and everyone had to adjust.

The minister of external affairs, Mitchell Sharp, published a paper which set out the options: lie low and let the crisis blow over and return to the status quo ante; cosy up closer to the Americans in a North American embrace; cultivate new trading partners, especially in Europe and the newly-industrializing countries of the south.

The Pierre Trudeau government adopted the third 0ption, seeking to make the Canadian economy less vulnerable by diversifying our global economic partners. There were other less visible dimensions to the policy. In Canadian domestic politics, the principal electoral challenge to the Liberals was coming from the nationalist NDP, so the Liberals calculated there was room to move left and embrace industrial policy instruments designed to encourage processing of natural resources and pick winners in the advanced sectors of the economy. The instrumentality of the state was also reorganized to make external affairs a central agency of government designed to link domestic economic policies with the new direction in international economic relations. And, of course, the perennial goal of freeing the domestic marketplace.

By the early 1980s, it was clear that the favorite flavour for economic policy was neoliberal and not neomercantilist, and the Third Option was deemed a failure. The Mulroney government replaced the Liberals and in effect adopted Mitchell Sharp’s second option in the Canada-U.S. Free Trade Agreement, and then including Mexico in NAFTA. NAFTA was renewed under the first Trump administration.

The NAFTA agreements include legal protections against the kind of arbitrary decisions taken by Trump, but his declaration of a national security emergency on the borders is designed to side-step those protections for Canada and Mexico.

Canada is faced again with the kind strategic uncertainty posed by Nixon over 50 years ago.

Ernie Keenes is a retired journalist and political scientist.