Uncertainty. Change. Growing polarization. Perhaps no election cycle has been more fraught with risk than the run-up to the 2024 United States presidential race. For Canadian businesses, managing the challenges and recognizing opportunities south of the border will be a major focus over the next 12 to 14 months.
Few people understand Canada-U.S. relations better than David MacNaughton. As Canada’s former ambassador to the United States, he was instrumental both in making the case for Canadian investment and trade to the Trump administration and building alliances among American industries and other levels of government. MacNaughton is now president of Palantir Technologies Canada Inc., and continues to serve on numerous boards. Before his time in Washington, D.C., he served as a strategic advisor to governments and companies.
We turned to MacNaughton for help understanding the risks and potential benefits ahead, especially with Donald Trump once again seeking the Republican nomination in a country that’s become increasingly polarized over his candidacy and America’s role in the global marketplace.
While the former ambassador sees huge opportunity for Canada in the year ahead, he says Canada has to move beyond being satisfied with mediocrity.
Chris Hall: As Canada’s former ambassador to Washington, what should Canadian businesses be watching for as the U.S. presidential race heats up?
David MacNaughton: I think the underlying trend in both the Republican and the Democratic parties is increasing isolationism and protectionism. In the United States, we’ve seen the ebb and flow of protectionism and isolationism going back a long way. I think what you have right now, in both parties, is some elements of both. You see a whole group in the Republican Party that is against NATO, against helping Ukraine. And even though Biden has done a reasonably good job of reaching out to allies and pulling together a coalition to support Ukraine, there is still that underlying protectionism within the Democratic Party. Both of those developments have consequences for Canada and for Canadian business.
Chris Hall: Elaborate on that. What are the potential consequences? Because as ambassador during the first Trump administration, you dealt with these trade issues and the sense of protectionism.
David MacNaughton: If you look at the so-called Inflation Reduction Act, it was essentially a massive subsidy to U.S.-based industry to adapt to green energy and we had to look at matching or coming up with similar subsidies. You saw it in terms of the money that Canada and Ontario put into batteries and the investment tax credits that [Deputy Prime Minister and Minister of Finance Chrystia] Freeland had in her budget. So at the governmental level, they’re trying to figure out how to remain competitive with the subsidies happening in the U.S.
What I found when I went to Washington is that they will pursue what they think is in their best interests and that’s normal for any country. What they don’t appreciate is that Canada has a really important relationship with the United States, on both security and trade, and unless we remind them of it and enlist supporters, we will end up on the short end of the stick because they just don’t think about us. I mean, it’s just, “Canada, they’re nice people, they say sorry all the time,” and “You know, not a bad place to visit.” But there’s no sense of the integrated economy.
Chris Hall: Donald Trump is running again. While I don’t want to prejudge the outcome of that nomination race, he has proposed at least one thing: that a 10 per cent tariff be imposed on all imports to the United States, regardless of country of origin. What are the implications of a renewed protectionist trade policy for a Canadian business looking for opportunities south of the border?
David MacNaughton: First of all, let’s discuss that proposal. My guess is it will have trouble getting through Congress. But the fact that he’s proposing it is an indication that there is an element in the United States electorate that sees foreign competition as being bad and unfair. I remember the first time we met with Trump and Prime Minister Trudeau raised the softwood lumber issue. [Commerce Secretary] Wilbur Ross was in the meeting and said, “You know the Canadians subsidize their timber.” Of course I challenged him on that. And then Ross said, “Mr. President, we have tariffs on at the present moment but we’re negotiating a quota arrangement.” And Trump’s response was, “I like tariffs. I don’t like quotas. Quotas tend to drive prices up.” And you just kind of shake your head and say, clearly, there’s a kind of gap in understanding of economics there. I think Trump doesn’t have deep policy expertise or views. He is tapping into a sentiment in the United States, and I think it’s that sentiment we have to be concerned about.
Chris Hall: You mentioned that protectionism is part of the ethos now of the United States. So what strategies can Canadian businesses and investors adopt to try and deal with that?
David MacNaughton: It’s kind of a combination of working collaboratively with the people in the United States who understand Canada’s importance and occasionally showing a little bit of toughness.
We can’t get into a full-scale trade war with the United States. We depend far more on our trade with them than they do on their trade with us. Having said that, there are important elements where they do rely on us. We can remind them of the importance of that two-way trade and keeping it open.
Chris Hall: You helped negotiate the new trade agreement [CUSMA]. Presumably, this will become a target for candidates looking to score points with the American public in the next year and a half. To what extent is it in jeopardy?
David MacNaughton: It’s quite possible that it’ll become a subject of some discussion. I think that what you will find is that the principal target of the American discontent will be Mexico because they have a whole series of other issues, including the border. The Canadian issues tend to be isolated, whether it be software or supply management. During the negotiations, in the first instance, the Americans wanted to specify that a certain amount of automobile content had to come from the United States. Basically, that would have killed our auto industry because there would have been two sources of automobile production. One in the United States and the other in Mexico.
Obviously, we were trying to figure out how the heck we were going to get in that tent with the Americans. Luckily, one of our trade officials came up with an idea and said, “Why don’t we propose that percentage of the automobile be produced in factories that pay their workers a minimum of $16 an hour.” All of a sudden we were on the same side of the table as the Americans because no Mexican plants paid an average of $16 an hour. So it’s a combination of cajoling, some targeted threats and some creativity.
Chris Hall: You haven’t mentioned the push that came after the Trump administration for nearshoring or onshoring supply chains. Is that something businesses should continue with no matter how the election turns out?
David MacNaughton: Yeah. What the Obama administration called it is friend-shoring. But most of the friends that they’re looking at actually are in the United States as far as I can tell.
But there’s a huge adjustment going on in supply chains in terms of looking at reducing dependence on China, and seeking both secure and friendly places to get supplies from. That adjustment to global supply chains is going to take time but it creates opportunities for Canada. If you look at critical minerals, Canada’s got a huge number [that are] currently supplied from China, some from Africa, some from South America. We have to figure out how we’re going to get those resources to market quicker. I talked to a former senior security advisor to the United States government a while ago and was asking about critical minerals and I said, “Would you be prepared to sign a sort of take-or-pay long-term contract in order to get access to Canadian minerals?” He said, “Yeah, sure, but we’d like to have the delivery before 2050 because it takes you guys so long to get your act together.”
Chris Hall: Something to consider. Can I ask you about politics, too? Looking to the Americans, there is a sense in this country that they are more deeply divided, more polarized politically than perhaps any point in recent history. What’s your assessment of the implications of a country (that) divided along party lines?
David MacNaughton: Well, I think it’s serious and very worrying. But the other thing, the reality, is that I worry about it infecting our own politics in Canada. I think it already has, not to the degree that it has in the United States, but the Americans have a remarkably resilient country. They have a huge economy, the largest economy in the world still. It’s very innovative and productive. I’m not saying they can get away with being stupid about their politics, but they can get away with it a hell of a lot more than we can. And what we were able to do when we faced an existential threat, which was the threat to get rid of the free trade agreement, Canadians pulled together, the federal and provincial governments, the private and public sector unions, Indigenous people. I mean everybody worked together in this country to help us succeed. And I think what’s happened in the last couple of years is that sense of common purpose has broken down and we have become much more fractured in terms of our approach to things. I’m not blaming the right and I’m not blaming the left. I think both sides are to blame for this kind of polarization. As a country of 40 million people with productivity issues and not a big enough domestic market to thrive, we just can’t afford that.
Chris Hall: Let’s get a broader picture from you of U.S. leadership in international affairs. Trump isn’t a huge fan of NATO or global co-operation on climate change. You’ve talked about a global goodwill here. Are you worried that support for these initiatives could dissipate as we look ahead to November 2024?
David MacNaughton: I do worry about the ability for the United States to provide international leadership in a number of those forums. But I think the other thing we’ve got to realize is that some of the international institutions we’ve relied on since the Second World War to maintain peace and prosperity have broken down. They don’t work. I mean the United Nations is, I won’t say useless, but it’s hardly a vibrant organization. The World Trade Organization is a bit of a joke. So we need to think about our alliances as being based on a gathering of the willing … and to work with the Americans on hemispheric challenges, including migration in Central and South America. Canada can’t be a freeloader or a free rider anymore. On things like climate change the discussion is a really, really complex one. Anybody who says you’re going to solve the problem by having a bunch of people go to Paris or wherever and agree on targets, that’s just naïve. I would like to see plans rather than targets in terms of achieving some sort of an energy transition.
We’ve been missing in action on a lot of those fronts. We’ve been heavy on rhetoric and agreeing to targets and weak on practical plans that can help achieve global solutions rather than simply Canadian ones.
Chris Hall: Last question. I get a sense that you see far more risk on the horizon than you see benefits for Canadian business. Is that fair?
David MacNaughton: Step back and look at the globe today. Look at Canada and ask, where is there a country that has our advantages? We’ve got natural resources. We’ve got a positive attitude towards immigration. We’ve got an educated workforce. What else would you want to have to make this a leading economy in the world? Well, we seem to be satisfied with mediocrity and that’s not just a knock against government. I think some of industry is the same way, too.
We don’t encourage, in my view, enough competition within the marketplace. So, on the one hand, I look at it and I see a huge opportunity for Canada. But we can’t achieve great things if we insist on scoring cheap political points on our opponents rather than having a vision where we can work together towards common objectives. If Canadian governments don’t get their act together and work with the private sector, I see lots of threats. If we do, I just see huge opportunities for this country.