In this interview, National Post’s Rob Breakenridge speaks with Carleton University business professor Ian Lee about the need for Canadians to accept some of the basic economic realities we’re facing and the potential economic damage from a prolonged trade war. If we’re not careful, Lee warns that we could stumble into a recession or even see capital flight out of the country. For those prefering to read I provide a transcript lightly edited from the captions with my bolds and added images.

RB: Hey folks, I’m Rob Breakenridge for NationalPost.com, and NP comment. Well this unfortunate trade war between Canada and the U.S. has indeed escalated further this week. Canada’s counter tariffs on the U.S. have taken effect and in response the Americans have widened the scope of their own new tariffs on Canadian goods. So Ian Lee, professor at the Sprott School of Business at Carleton University, is joining us for some further thoughts on the impact of this trade war, where this is all going, what Canada’s strategy might possibly be in all of this. Professor Lee, great to have you with us here.  IL: My great pleasure. Thanks for inviting me, Rob.

RB: I think a lot of Canadians are looking at this with dismay wondering, you know, how did it get to this point? How did things go so sideways and would it otherwise been a productive trading relationship? Just your thoughts first of all on where we are right now.

IL: It’s almost a tragedy. This is almost a Shakespearean tragedy. I mean I don’t want to become overwrought and over the top but, I’ve been teaching business for 35 years. Before that I was nine years in commercial banking. I’ve lived in this country all my life but I’ve traveled around the world, lived twice in the States on sabbaticals, once in D.C., once in the West Coast just below Silicon Valley. I’ve traveled many, many times across the border because my sister’s an American and I’ve just never seen anything like this.

Our relationship, I mean I’ll say it again, we all know the history, it goes back a quarter of a millennium. It goes back 250 years, way before Confederation. We have the longest border in the world. I won’t even get into the border defended versus undefended. I mean it’s 8,800 kilometers long.It’s stunning.  And we have had a pretty good relationship during that time, you know, a few ups and downs. Every now and then Lyndon Johnson got angry at Lester Pearson when he criticized the Vietnam War but by and large it was pretty good. And the trade continues to flow because of the tremendous integration between the two countries and the relationship.

So I’m looking at this and it just seems, I don’t believe that there’s a geopolitical logic to this in the Kissingerian sense. I think that, some emotions have got out of hand, some very unfortunate remarks, yes, and yes, I’m not trying to sugarcoat Donald Trump. I don’t agree with anything he says on tariffs because I support free trade agreements. I supported every free trade agreement since 1988 and free trade agreements take tariffs away. They’re the opposite of tariffs.

But I think that we need to get back to the negotiating table. It’s not going to be easy. It’s going to be hard.Winston Churchill taught us it’s far better to jaw jaw than to war war. War is only the very, very, very last resort. Kissinger taught us that too. So I think there’s been mistakes. Yes, I’m a Canadian so I think more mistakes on the American side but still, I think we have to get back to the table and get back to negotiating because we can’t let this fall apart. 

RB: Right. And obviously with Trump the first time around we’ve managed to get a renegotiated free trade deal, what we refer to as CUSMA. Clearly Trump 2.0 has a different, more aggressive trade policy, a more protectionist trade policy and they’ve doubled down on a lot of those elements.  Do you think Canadians and maybe this government were not prepared for that shift or they didn’t see it coming or that we just sort of thought that, okay, we dealt with this already. We weren’t going to have to worry about these issues.

IL: I think so, I think that they were honest mistakes on our side. We didn’t realize that Trump 2.0 was going to be much more aggressive in his second and final term, limited by the Constitution, we know that, older, maybe not, maybe not wiser.  But certainly more aggressive in his speeches and comments in that second campaign. He was much more bitter twisted, you know, in terms of the way he’d been treated by the Democrats.  So I think mistakes were made there. We underestimated, maybe we didn’t do our due diligence. And then I think it was, I believe, it was exacerbated. I’m not trying to blame, put on the blame and, you know, I don’t want to offend Andrew Coyne and have him coming after me or anyone else because he makes these arguments that we’re blaming ourselves.

But I  know negotiations, whether it’s in a divorce or in a country to country or labor management, and I’ve certainly been involved in two of those categories, it involves both sides and there’s mistakes on both sides in negotiations and there’s interest in both sides. And I think that we used intemperate language at the beginning, at the very beginning. Yes, he was also, but I don’t think we should have responded.

I have all my life, I just  believe that using pejorative language and insults is not the way to get a deal. And so I think that we, you know, we let the tempers and the emotions take charge rather than the logic and the data, the reality of the self-interest in the negotiations. So the U.S. imposed tariffs on Canada, the U.S. has imposed tariffs on most of its trading partners, and that’s sort of the approach now of this administration.

RB: In terms of Canada responding and the impact of counter tariffs, and now we’re at the point where, as we mentioned at the outset, things have really escalated between the tariffs and the retaliation.  Do we have a good understanding in this country, Ian, of what it is we’re doing and the cost and the impact of these kinds of policies?

IL: I don’t, and I don’t belong to any political party, I do not donate funds to any political party, I don’t have a dog in this hunt, I don’t consult with any of these organizations, but I certainly have been teaching strategy in the capstone course and the MBA program and dealing, of course, necessarily with Canadian-American trade relations, because they are our largest trading partner and have been pretty well forever, and certainly in the 20th century and going forward.

I think that the emotions have become so raw and so heated that we have neglected to look, with very hard nose, at the results and the cost of this.  I quote Stats all the time, and I mean Stats Canada Stats, also World Trade Organization Stats, government Stats of trade relations and so forth. We are one-thirteenth the size of the United States, but there’s another figure I want to throw up because, probably people know that one.

You know, they’re 32 trillion, we’re about 2.2 trillion expressed in U.S. dollars in terms of GDP, so they dwarf us. I mean, Pierre Trudeau taught us that, you know, we’re the mouse, they’re the elephant. But there’s a lot of Canadians who say, well, you know, they really depend on us, or they’re dependent on Canada. And this has been driving me crazy because I knew that wasn’t true. I understand arithmetic. The totality of Canadian exports annually are about 400 billion. And most people say, wow, that’s a huge amount of money. It’s 1.5% of U.S. GDP.

The idea that they are dependent and we can, ”bring them to their knees”
is just a denial of arithmetic. 

This doesn’t require calculus.This doesn’t require a doctorate in economics. I really am being blunt here. You know, the U.S., if you look from a slightly different angle very quickly, the U.S. trades less with the outside world in percentage terms. The key point is we have to normalize the data to percentages. We can’t talk absolutes because the U.S. is so huge. In percentage terms, the U.S. trades less with the world than any other OECD country. 85% of American GDP is American companies trading with American companies in California or Illinois or, across the U.S., 15% with the rest of the world. And we’re a subset of that 15%.

So this idea that we can bring them to their knees because they’re completely dependent on Canada is just preposterous nonsense.The U.S. has relations with just about every country in the world because most countries in the world want to deal with the largest economy, the world hegemon. And so we do not have the leverage that many Canadians think we have. And so I think that that belief has caused us to perhaps be much less willing to compromise when it is in our national strategic self-interest to compromise.

RB: And maybe in certain states or certain industries, you know, Kentucky bourbon felt like it was punched in the nose. We can make, you know, little scores or little hits here and there. But in terms of something that’s really going to move the needle in terms of the American economy or overall cost pressures, is there much that Canada can do in that sense?

IL:  I believe there is. I keep quoting Kissinger just because I’ve always admired him. He’s brilliant. He was a strategy prof at Harvard for 25 years before Richard Nixon appointed him to the administration and he convinced Richard Nixon that his policy of refusing to recognize the largest population in the world called China, red China, was just a bad thing. And he caused the Americans to finally recognize China, even though it was then and now an adversary.

So to your question, I think that our emotions have put us into a box. Our reaction is completely:  How can we punch him back? How hard can we punch him back? We think only in mono response.It’s how much damage they just disrespected me. So how much disrespect back do we give?  Instead of thinking much more strategically, don’t get mad, get even type of logic, and saying, well, you know, there’s things that the Americans want from us and there’s things that we want from them. They were at the table. People seem to forget when they say Donald Trump doesn’t want to negotiate with us. You and I’ve been involved with the negotiations, not at the country level, but people only go into negotiations because they want something from the other side. If there’s nothing I want from somebody else, I’m not going to waste my time talking to them.

And the Americans were at the table up until the very day that it broke. So there’s something they want from us. And we can look at the record. We know that China has the United States by the throat on critical minerals. We know they’re deeply interested in critical minerals to reduce their dependency on China. We know that because it’s in every just about every article in Foreign Policy magazine, Foreign Affairs magazine in Washington by very senior former decision makers, Republican and Democrat, military, legal, commercial.  There is a unanimity in Washington, they see China as a mortal existential threat.

We think that this is all about the United States and Canada. It is not. This is really part of a much bigger crisis that’s going on, the whole debate over the so-called China shock 2.0. And those incredible, unsustainable balances, 1.4 trillion net exports and the Chinese Communist Party, the ruling Politburo has in their five-year plan a very short time ago, has promised to double their exports and their manufacturing.

So if we thought we had a crisis in the last 10 years with over-exporting by China, we haven’t seen anything yet. And so we are really part of a much larger issue. And we’ve got to recognize that, that they’re what they’ve said to us allegedly on China wasn’t because they were trying to ruin us or absorb us or put us out of business. It’s because they are focused on China. We mistakenly think they’re focused on us.  I go frequently to the United States, and  they’re not paying attention to us, but they are very, very aware of China and in every sense of the word.

And I’m not trying to demonize China. I’ve been teaching in China for a third of a century every year in an MBA program. And my Chinese students are outstanding. They’re amazing. They’re disciplined. I have great respect for the Chinese nation and the Chinese people.

But there is no question the studies have shown the China problem. The anti-dumping tribunals have ruled this, that China is cheating in terms of industrial subsidies, five times what they are in Europe or Canada or the US. German Chancellor Merz said last week said that the currency is undervalued by 30 percent. And that’s been very deliberate to, again, give them a competitive advantage.

So what I’m saying is we’ve got to step back. We, Canada, we the negotiators and say it’s not all about us.And we got to at least acknowledge the bigger, larger context that we find ourselves in and in returning to the table. And maybe that will temper our views so that we can make some compromises. And I think we’re going to have to make some compromises to return to the table.

I’ll be very blunt. I’ll put supply management right at the top of the list. It’s been on the US Trade Rep’s list report tabled in the Congress for 50 years. Every president since Reagan. I’m not here to defend Trump, I don’t agree with him at all. But this notion is false, that he’s made up all these ideas that he’s demanding compromises on and it’s never been demanded before by the US. Canadians should be downloading and reading the US Trade Rep report for each year for the last 10, 20, 30 years because they’ve been saying the same thing over and over and over and over again.

I’m not saying that justifies it, but at least it gives you a better understanding of where these demands are coming from.The way I like to put it very quickly, Rob, is the only difference, fundamental difference, aside from the fact he’s far more vulgar and he uses all kinds of language that’s just horrible. But Trump didn’t invent these grievances. They’ve been there for since Reagan, by and large.The difference between Trump and past presidents was past presidents said, look, we don’t like it.

Obama said that to the House of Commons. I’m two kilometers from the Parliament Hill in Ottawa. And he came down here. He said, we’ve got these unhappy irritants. We don’t like them, Canada, but you’re a great ally.We’ve been allies forever and ever. So we are not going to push it and and make it into a huge crisis, basically, was what Obama said. And past presidents said that, too.

The difference with Trump was he took the same set of grievances, threw in a few more, and then said, and this is not acceptable and I am going to punish you. That’s the difference between Trump and past American presidents. They knew about all these trade irritants.They’d been there for a very long time. We ignored them and they looked the other way. The difference is Trump said, I’m not looking the other way. In fact, I’m going to punish you.

And so instead of saying he’s trying to break us, rather he’s just trying to get to compromise and meet the demands that they want on these issues that are very important to  them. We have to decide which ones are worth dying on a hill for and which ones are not that important. I cannot see any serious argument that potentially risking a new CUSMA for 8000 dairy farmers in Quebec so that we can continue to double  the price of milk and dairy to low income and ordinary Canadians is a hill to die on. It is just not worth it.

We should do what the Australians and the New Zealand government did in 2000 when they paid off the farmers in supply management, gave them generous compensations and said we are ending supply. And they did. We’re the only country in the world now with supply management. That’s the kind of strategic thinking that we need instead of this emotionalism that is the name calling and so forth, because we need to get back to the table.

It’s in our strategic self-interest. We have this border. We have 50,000 businesses exporting to the US, most of them SMEs. Many of them are undercapitalized, like all SMEs, and they’re at risk of failing if they get lose access to that market. And so we can’t treat these ordinary Canadians and the people that work there in a such a cavalier fashion, such a callous fashion, and just say, too bad, we’re angry at Trump. And so you’re just going to be roadkill. I think we have to develop a more strategic approach that is more sensitive and more aware of the larger context. And we’ve got to get back to the table.

RB: So if we don’t and I guess it’s unclear at this point which way things are going to go. But if we do dig in our heels and this is prolonged with the American tariffs remaining in place, our counter tariffs remain in place. This will put costs, puts costs and pressure on the Canadian economy.  How worried are you about the fallout from this trade?

IL: I have already said and predicted from past experience. When I was at the Bank of Montreal, main office branch, Ottawa, right beside Westbrook, Parliament Hill. And that’s when interest rates went to twenty one percent. So when people complain about interest rates going to five or six, I said, that is a walk in the park. That’s a picnic. I was there when lending mortgage money was at twenty one percent. It was just unbelievable.

Businesses were going down like ten pins.The unemployment rate went to the highest level since the Great Depression. So I lived through that. That was the worst recession since the Great Depression, much worse than 2009 or any recession since. And it was horrible. And so if we lose access to the largest economy in the world and we have so many small businesses.  And according to stats can data from this morning, they account for 73 percent of all private sector employment in Canada, then I believe we’re going to go into a recession.

And we have to start saying, is that what we want? And can we afford this after doubling the debt because of the covid support? And now we have doubled it. And when you look at federal provincial municipal debt as a percentage of GDP, we’re at the same level essentially as the French. And that’s not a compliment. And that’s not we’re not doing well. Contrary to what Finance Minister Champagne says, because he just cherry picks the federal debt and doesn’t include all of the debt, which is the normal practice for the international financial institutions.

So my point is, you know, we could be looking at because, of course, we’re going to support these people. Of course, we’re going to have to inject enormous amounts of stimulus.And this comes right after covid. And it’s so unnecessary. And I still don’t see the exit ramp. So we do that. OK, great. So we do that for six months. Now we’re going to do it for another six months, do it for another year. We can’t do that indefinitely into the future. There’s got to be an exit ramp and we can’t just go on and on and on like this.

And that means, in my judgment, that we must return to the table. Yes, make some compromises on the things that are not critical in a national strategic sense and then negotiate a new deal. And it may be only for two years because we think that, after he leaves office, we can negotiate a better deal. OK, I mean, I have no problem with that, but forget this idea that we can just wait him out and suspend the Canadian economy somehow. We’ll just, you know, suspend it, you know, and if you can’t access the U.S. economy for the next two years, the private sector, well, it’ll come back maybe in two years.

You can’t run a country like that. You can’t run a society saying, well, we we think and we hope and we really are counting on maybe perhaps possibly getting a better deal in two or three or four years. We can’t go down that road. We have to deal with the facts as they are on the table.We have to deal with the reality. Pierre Trudeau famously said to govern is to choose to make tough choices. We it’s now the time for leadership in Canada to make tough choices and have a conversation, a blunt adult conversation with the Canadian people, putting facts on the table, telling Canadians they’re 13 times bigger.They are the world hegemon.

No, we’re not going to lie down on the railroad tracks and let them run over us.
But we are going to have compromises to enable our business sector to
prosper because we don’t want to slide into a recession
or something even worse with capital flight.

Rob, very quickly, I know I’m talking too much, but what really terrifies me is the capital flight. And people say and I get emails, well, this  this product,  a hockey stick or something, we can live with that. And so they try and nibble me in an argument,  you know, this little, micro tariff on this product, can we take the hit? That’s not my fear. It’s not the specific tariff of a specific industry or specific product.

My fear is what the KPMG study showed three weeks ago. Forty two percent of manufacturing businesses in this country are actively examining, moving to the States. In the words of the World Bank, that’s called capital flight. And it’s experienced normally, typically in developing third world countries that are massively mismanaged. Argentina has experienced massive capital flight. Russia has been experiencing massive capital flight the last three or four years.

And and when that capital leaves, those factories aren’t coming back.Those businesses aren’t coming back. They’re not going to say two years later, OK, you changed your mind. You figured out your problems in the States. I’ll come back now. Once they go, they’re gone. And that’s the backbone of our country.They employ 16 million of the 20 million Canadians.

The idea that the public sector is going to save us by buying some submarines and some helicopters is just fantasy. We’ve got to have a vibrant private sector.And so that’s why we’ve got to have a much more tough conversation and put some frank data on the table, one of which is that we cannot bring the US to its knees because that we are a tiny part of their economy.

And I’m hoping that Prime Minister Carney has some kind of a fireside chat with Canadians, a la the Roosevelt back in the back in the back in the in the Depression when he had those fireside chats telling everybody how horrible and terrible life was. He didn’t sugarcoat it.He showed leadership. Same with Winston Churchill. You know, yes, he had optimism, but he said these are very, very dark days.I remember him because my late father was a Brit.

They showed leadership in tough times.They didn’t pander to our worst emotions and anger. And so I’m hoping that Prime Minister Carney will show that leadership and have that tough frank talk with Canadians, because something like 75 or 80 percent of Canadians are saying things like don’t give up a thing to the United States.

Well, we don’t give up anything, then we’re not going to have a deal because negotiations involve giving and taking. That’s what negotiations are. And so that’s what we need in this country. And is that kind of that very hard nosed, tough minded conversation with the Canadian people in a fireside chat and not pour gasoline on the raging fire, making it even more inflammatory and inflamed?

RB: Well, we shall see.Professor Lee, really appreciate the insight. Thank you so much for joining us here. Thanks very much, Rob.Thank you. Really appreciate it. Ian Lee, professor of the Sprott School of Business at Carleton University.My name is Rob Breckenridge. Thanks again for joining us here.