McLeod Group blog by Lauchlan T. Munro, March 27, 2025

Part 1 of this two-part blog is available here.

From 1945 until recently, the United States served as the cornerstone of the liberal rules-based international order in trade, finance and security. Sometimes, the US played this role unwillingly or half-heartedly, sometimes hypocritically. Occasionally, the US acted illegally and undermined that order, while supporting other aspects of that order, notably the economic parts. But those days are over. Donald Trump and Elon Musk appear hellbent on tearing up the liberal rule book. Amoral descendants of Thucydides, they believe that “the strong do what they can, and the weak [must] submit”.

Faced with this new reality, what should Canada’s economic and trade policy look like? The default of Canada’s political leaders, federal and provincial, has been a strange combination of rallying round the flag (“buy Canadian” and retaliatory “dollar-for-dollar” tariffs) and casting about desperately for ways to salvage the old rules-based order (reduce interprovincial trade barriers and diversify our international trade). These reactions, though necessary, are inadequate.

First things first. Debates about international trade have for the last few decades been dominated by mainstream (neoclassical) economists, who almost all believe that free trade promotes growth and efficiency. In following the neoclassicals’ quest for efficiency and welfare gains through ever-freer trade, we have lost sight of two key facts. The first is that international trade has distributional impacts as well as efficiency impacts. And, secondly and more importantly, that international trade is and has long been about national power and sovereignty. Heterodox political economists going back to Alexander Hamilton and Friedrich List have known this for two centuries.

First, the distributional issue. Even the World Trade Organization (WTO) admits that “although trade reform (i.e., trade liberalization) tends to create gains for the overall economy, those gains are unlikely to be distributed evenly” among different classes of society. While the distributional impacts of trade liberalization are complicated, trade is likely to have increased inequality in the rich countries, particularly when governments failed to compensate the losers from international trade, i.e., the working class in the rustbelt. Add in the shredding of the American welfare state, an increasingly regressive tax system and a refusal to countenance increased public debt or increased taxation, and we are stuck in our current morass.

The second is the link between international trade and national security. It came as a shock when, in 2020, we discovered that so much of the world’s personal protective equipment (PPE) was produced in a single province in China. From a neoclassical economic perspective, this made perfect sense, since China could produce PPE more cheaply than anyone else. Following the impeccable logic of free trade, the US became “the world’s largest importer of face masks, eye protection, and medical gloves”. But when the Chinese authorities blocked exports of PPE in early 2020, the effects rippled around the world.

Given the high benefit-to-cost ratio of PPE, it made sense from a risk management perspective and from a public goods perspective to make PPE at home, even if it did cost a bit more than importing it. This could be easily done, since PPE production involves an easily replicable set of production techniques that are in the public domain. Within a few months of the start of the COVID-19 pandemic, many countries had built their own PPE production capacity.

One big takeaway here is that market prices do not always reflect social and other costs, as neoclassical trade theory often assumes. Letting the free market run wild can be socially, politically and environmentally corrosive.

The other big takeaway is that relying on foreign countries for essential goods or services places any country in a vulnerable position when the supplier countries change policy or themselves enter a crisis that results in them being unable or unwilling to continue supplying us. The problem is aggravated when we rely on a single foreign supplier of an essential good or service or if we rely for a single foreign market to sell our key exports. If and when that country decides to exploit our vulnerability, then they have us over a barrel.

That is where Canada is today with respect to our southern neighbour.

So what should Canada do?

Diversifying our international trading partners and reducing interprovincial trade barriers will help, though the former at least will take years to achieve. Several provinces and municipalities have already committed to prioritizing procurement of domestically produced goods over US imports. Such things are, however, only piecemeal solutions.

Most countries now have some sort of coherent national policy framework or national plan. Many of the fastest-growing emerging economies have relied on such long-term policy frameworks and extensive government involvement in economic life. Several alternatives have already been proposed for Canada. We need more such thinking.

Most importantly, we need long-term, systems thinking, for two reasons. One is that every enterprise, every industry, is part of a broader ecosystem of suppliers, workers, customers, regulators and other stakeholders. While some changes can be made quickly (e.g., building PPE production capacity during the pandemic), many changes will take longer and be more complicated. It would take years to build a cross-country electrical grid, for instance. Building a mutually supportive national network of public and private enterprises in any one sector will take time, effort and planning. To do it in the many sectors that Canada needs to build, e.g., defence industries, IT, environmental technologies and affordable housing, will require additional effort.

The second reason we need systems thinking is that Canada needs to better weave environmental, defence and social (including distributional) thinking into our economic policy. For four decades, our main preoccupation has been economic growth and efficiency. Until recently, the free-markets-plus-low-taxes orthodoxy has swept environmental and defence issues under the carpet. Even Conservative leader Pierre Poilievre refused to commit to the NATO target for defence spending, preferring low taxes instead.

Apart from the usual bromides from all political parties about protecting Canadian workers, distributional issues go unaddressed, even as work becomes increasingly precarious and economic inequality grows. And, just a reminder: the combination of growing inequality and precarity, disintegrating communities and a frayed social safety net created the conditions of the rise of Trump and similar far-right movements.

This is not a call for indiscriminate protection or to a return to a mythical pre-1980s golden era of managed capitalism. Even the most ardent critics of free trade acknowledge that trade restrictions can have negative effects and must therefore be designed carefully and reviewed regularly. We must continue to draw the benefits of international trade where we can.

This is, however, an invitation to creative, non-ideological thinking about the place of international trade, industrial policy and related issues like regulation, taxation, income distribution and public procurement in building a strong, environmentally sustainable, socially equitable and sovereign Canada that is capable of making a positive contribution to the world. Let us hope that our political leaders have the imagination and the courage to think in new ways.

Lauchlan Munro is Full Professor in the University of Ottawa’s School of International Development and Global Studies. Before joining uOttawa in 2012, he worked for Canada’s International Development Research Centre, UNICEF and the Royal Government of Bhutan. Image: The Economist.