Canada's New Prime Minister Joins the Tariff/Sovereignty Debate

FRANK MCKENNA: United States should be thanking us for being such a generous trading partner rather than saying that we contribute nothing to the relationship at all.
PETER HAYNES: Welcome to the March episode of Geopolitics with the Honorable Frank McKenna. My name is Peter Haynes at TD Securities, and I host this podcast series each month where we get to hear perspectives from Frank on global geopolitical issues.
Frank, I want to start today with a shout out to our friends of Canada in Colorado. Governor Jared Polis declared Saturday, March 15, Canada Friendship Day, and he raised the Canadian flag at the State Capitol in Denver.
This was a nice gesture at a time when all of us Canadians are feeling a bit hurt by our apparent breakup with our best friends and neighbors to the south. Meanwhile, Canadians are really upset. We know that. We're hearing the booing of the US national anthem at sporting events, and municipalities in Canada are starting to take down US flags that flew previously in unison with Canadian flags. Frank, where are we going here with our relationship with the US?
FRANK MCKENNA: Canada is being singled out by a country mile for the harshest treatment in the entire world, and the Canadians, of course, don't understand that. They also don't understand the talk of annexation coming from what they consider to be a most trustworthy neighbor and being called worthless, which is effectively what Trump has said.
You don't bring anything to the relationship, forgetting about oil, and gas, and potash, and steel and aluminum, and everything else. He's basically said, you're worthless. You're a worthless partner. So if that were in a personal relationship, how you would feel, and it's the same in a country-to-country relationship.
In this case though, it's not just Trump. We're hearing from all the minions as well, and we're hearing the same message. I'm reminded of a joke that used to be told about Margaret Thatcher when she was prime minister of the United Kingdom.
Thatcher took her cabinet out to a restaurant for dinner, and the waiter came over and said, Madame Thatcher, what would you like to eat? And she said, I'll have the beef and kidney pie. And he said, what about the vegetables? And she said, oh, they're going to have the same thing that I'm having.
So-- [LAUGHTER] what was true then is true today. If you listen to all the king's men, those people around Trump, they are using almost exactly the same words as he uses and echoing the same thoughts.
So to cut to the chase, people in Canada, they're hurt, feeling betrayed, and they're doing what they can in their own small world to try to deal with this. A lot of them are selling out. I talked to a Canadian yesterday who's headed home, sold his place in Florida, and he said six Canadians on the same street have all sold their homes.
So they're doing that. They're voting with their feet. They're canceling conventions, vacation, travel to the United States and shopping in Canada. They're buying Canadian over US-sourced goods. They're booing, which I can't say that I like but I understand, taking US flags down.
We're even reviewing the large procurement contracts, whether it be Starlinks in Ontario or whether it be buying Teslas, or the big one now that Prime Minister Khan has triggered is a review of the F-35 contract, which is a massive procurement contract with a US-based manufacturer, Lockheed Martin. So everybody in their own way, big and small, are doing what they can to try to register their disapproval with what's coming at us from next door and their support and love for Canada.
PETER HAYNES: Well, you mentioned everyone trying to do their little part. I know we talk about our pride in this country right now has never been at a higher level, at least in my lifetime, and I suppose that's a positive. We'll talk about some of the other positives a little later on in this discussion.
But you mentioned prime Minister Mark Carney. He's brand new as of Friday. And with the Canada-US relations remaining a hot topic and the ongoing economic trade war and threats of annexation being front and center, Mark Carney is definitely in the middle of the news cycle right now. He wasted no time in announcing his new cabinet.
I'm curious, Frank, are any of the appointments that Mark Carney made to his cabinet relevant, important, surprising to you? And I read a National Post headline today that said Carney is really supposed to be doing nothing. I think what they're referring to is we're about to go into an election cycle. So really, why do we need this new cabinet?
FRANK MCKENNA: Well, because we're literally on a, quotation marks, "war footing." I thought there were three or four signals out of the cabinet that people should interpret. One, he basically had the guts, which I counseled against, quite frankly, of moving down from 37 cabinet ministers to about 20. There's a lot of hurt feelings when you do that. A lot of places feel underrepresented. So I thought that was pretty gutsy, and that's sending a signal on itself, that he wants to lean, mean machine.
Secondly, he didn't introduce gender balance in the cabinet, and I think he was sending a signal, I'm not a Trudeau wokeism follower, so that was interesting. He kept Dominic LeBlanc, Mélanie Joly, David McGuinty, as our front line in the ongoing dispute with the United States of America. I think it's a clear indication that they've done a great job and he has trust in them.
He moved Francois-Philippe Champagne into the portfolio, which is most important in almost every government, and that's finance. And that's a real signal, and it's a signal of directional change, a change towards the center of the spectrum. I've talked to Francois-Philippe many times. He was never a fan of some of the more left wing vectoring from Trudeau. He's much more a centrist, pro-business guy.
So there's a real signal in Francois-Philippe Champagne and I would say, as well, Anita Anand, moving her to the biggest portfolio outside of finance and global affairs, which, as I said, the industry portfolio.
It's a reward for her. Everything she's touched, whether it was procurement, or armed forces, or whether it's now interprovincial free trade, she's proven to be very accomplished, very pro-business, very centrist, very astute. So I think he rewarded the people that have done a good job, and he's signaling that this is a down-to-business, very pro-private sector kind of government.
PETER HAYNES: Another aspect of Carney's early days on the job, literally two or three days, is the fact that he's decided to go to Europe for his first trip outside of Canada. This morning, he met with-- we're taping on Monday here. This morning he met with the president of France, President Macron, for lunch. And then he flew over to the UK, and he's meeting with the king privately, and then he's also meeting with Prime Minister Keir Starmer.
Now, this activity of deciding to go to Europe rather than somewhere else has caught the ire of Saskatchewan Premier Scott Moe, who criticized Carney for not traveling first to Washington. Carney says he has no plans to travel to Washington and will speak to President Trump at the, quote, "appropriate time." Do you agree with Carney's decision to meet with European partners before the United States?
FRANK MCKENNA: Yeah, respectfully, I think Premier Moe is wrong on this. Look, Premier Danielle Smith went off to Mar-a-Lago and went off to Washington, and as the Wags would say, all she came back with was a lousy t-shirt. It didn't help the cause at all, and genuflecting to President Trump, didn't seem to work very well for her.
So just to ask you, what would President Trump act like in a meeting with Prime Minister Carney? Would Prime Minister Carney be expected to grovel? Would he be expected to thump his chest? And how would that work out? You saw how it worked out with Zelenskyy when they had this confrontation on live television.
So I think the risk level for Carney and the country, in fact, is extremely high when you're having a one-on-one meeting with somebody as unpredictable as President Trump. I think a phone call, which is being scheduled, is an appropriate first step, so I would say I agree with him on that.
On the other hand, the moves that he has made, I think any independent observer would say, wow, he's moved quick and he's been very decisive. I met with Premier Ford very quickly on, appropriate, biggest province in Canada. Met with Premier Legault on the weekend, appropriate, second-largest province in Canada. I was in the St. Patrick's Day parade, appropriate for all of us who are Irish, of Irish heritage. I thought that was a smart thing to do.
Meeting with Macron on Starmer, what does that do? Makes you look like a prime minister in the company of prime ministers and leaders. And I think that's a powerful signal to send to Canadians, that look, I'm not just a leader of a party. I'm a prime minister. And the fact that he knows these guys I think is pretty impressive.
Then he's meeting the king, and for a lot of Canadians, that has meaning. And it's also relevant that the king is meeting with him, so that's important. And then he's stopping on the Arctic on the way back to make sure that he puts the flag on Canada's claim to the Arctic. So I'd say he's just touching all the right bases early on.
PETER HAYNES: Well, it's not going to be long before he's going to be in competition, and that competition is going to come through an election, which some political observers will argue is the most important in the history of the Dominion since our formation in 1867.
I'm curious, Frank. When you think about the tensions with the US and President Trump, a lot of Canadians will be making their voting decisions based on who matches up best in negotiations with the president and the United States.
Can you talk about the pros and cons of each of the two leading candidates, conservative leader Pierre Poilievre and Mark Carney, in terms of managing Canada's position in the ongoing trade and sovereignty debate with the US?
FRANK MCKENNA: Critics would argue that I can't do justice to both of them, but I'll give, I think, some of the generally well-known attributes of both. I would argue that the Mulroney free trade election was also a very, very important election in the history of Canada. We've really, in a hundred years, have hardly ever had an election on one issue, and that was an election on one issue, which was around free trade. So that was very important, as well.
But I would say that in the case of Poilievre, what you get is an extremely experienced politician. He's done it his whole life. There'll be no conflicts of interest because he's never really been in any sector outside of politics.
He'll be a very skilled debater. He'll be a very, very good campaigner, and he will bring with him an arsenal of weapons, $30 or $40 million in the tank, which they're going to spend on trying to attack Carney and probably a host of candidates who have already been nominated, and a machine, a very well-oiled election machine. So he brings a lot of tools to the fight.
He's also a conservative, and you would argue that, that would sit well with Trump and his courtiers. I've noted this before. He is not a MAGA type. I don't think that he's the kind of conservative that the Republican Party currently consists of. But he is a conservative, and in that sense, ideologically, he would line up better, probably, with the Trump people.
He's also committed to some of the measures that would shadow what the US is doing-- smaller government, lower taxes, deregulation, streamlined permitting, make way for the private sector. So those would all be pluses on his side.
In the case of Carney, I would say that he would have, surprisingly enough, some of the same characteristics as Poilievre in terms of where he's taking the government-- smaller government, tax reform.
He's already indicated the carbon consumer tax would be gone and the capital gains inclusion rate. Where there will be a difference between the two is on industrial carbon rates. Poilievre was out, I think, today saying that he would get rid of that. Quite frankly, I've found that industry has grown to accept that, but apparently conservatives think that should be gone, as well.
So there will be probably a difference there, differentiator. I would say that Carney would not have any political experience. He will be criticized for having come from the private sector in terms of conflicts.
He would bring, I think, a wealth of experience from that private sector, from Goldman Sachs, from Brookfield Asset Management, Streit, Bloomberg. See, these are some of the biggest, most respected companies in the entire world. So he brings that private sector experience. The crisis managed through two of the biggest crises in decades, the financial services crisis, and of course, Brexit as governor of two respective banks.
And he brings a global class pedigree, whether that's worth anything. I think it could be. Stephen Schwarzman, who's the CEO of Blackstone, competed to get Mark Carney with us at Brookfield. And he told me later, he said, you guys got the number 1 talent in the planet. He said, that guy's got a Rolodex. He could call anybody in the world, and they would take his call. So you're right at the top of the heap in terms of influence.
So is that a positive for a country? Certainly, we have a person who's got an extraordinary private sector and economic background, pedigree, a crisis management pedigree, but with very little political experience. And I think in terms of political experience, he'll be roughed up by Poilievre in debates and on the campaign trail, and people in Canada will have to decide.
PETER HAYNES: Do you think, Frank, it will come down to a decision on who is better equipped to debate with Trump, or is that being overplayed right now and maybe more on the short term?
FRANK MCKENNA: I think economic anxiety writ large will be the theme of the election, and that will be around our response to the United States in large measure but also about how we are going to reshape Canada. I think those will be the big issues du jour.
I don't think that Carney can outrun the legacy, for better or for worse, of the liberal government that he's part of, and that will be part of the debate, as well. He'll have accomplishments he could brag about, and he'll have things that people don't like that he'll have to defend. But I think in large measure, the issue will be around economic anxiety Canada vis-a-vis US, Canada's place in the world, how Canada can become a more competitive nation.
PETER HAYNES: Speaking of competition, taxes is a big issue in terms of competition. And our relative tax rates with the United States are obviously much higher. It seems to be a question that I keep getting about Carney. People want to ask-- keep asking me, what does Frank think Carney's position will be on taxes?
He has stated-- as you've already said, he's axed the retail carbon tax. He has stated his intention to reverse the capital gains inclusion rate, which went up, I think, in June of 2024. And with President Trump's efforts to woo global multinationals to invest in the US, and he's, of course, trumpeting the US's lower corporate tax rates, Canada is in a potentially uncompetitive position. Do you expect Carney to lower corporate taxes, and if so, will he be required to cut public spending commensurately?
FRANK MCKENNA: Yes, and yes. He will, I think, reduce the footprint of government. The time has come for some judicious pruning of government, number 1. Number 2, Carney will understand that we have to be competitive with the United States, and he's already signaled that we'll have to have a more competitive tax environment.
And that could mean lower corporate tax rates per se, but it could also mean things like accelerated depreciation, which tends to excite site investment, or other measures which would make investment in Canada more likely. So on all of those, I think you can be absolutely certain that he will do whatever is necessary to be able to compete with the United States.
PETER HAYNES: Frank, in your time thinking about tax issues across various governments during your time in public office, why hasn't Canada ever considered a model for capital gains similar to the US, where if you're investing short-term, it's treated as income, but if you're investing long-term, which in their case is one year-plus a day, then it's considered capital gains, and it has a much lower inclusion rate than we have in Canada? Why have we never experimented with that type of structure in this country? Am I missing something?
FRANK MCKENNA: I suspect that with Trudeau at the helm, there hasn't been a lot of thought about corporate taxation and how it could be more competitive. That's one of the things that you'll see extraordinarily different with Francois-Philippe Champagne.
He is a business guy through and through, and he's been out competing to try to get investment in Canada as the cabinet minister for industry and knows what it takes to excite investment. He is somebody, I think, who would look at this very, very quickly.
PETER HAYNES: So Frank, just before we pivot over to, obviously, the tariff discussion, which has to dominate our discussion here today, former Prime Minister Stephen Harper recently mused that his then-finance minister, Jim Flaherty, who I know is a good friend of yours, deserved most of the credit for Canada's navigation of the 2008 financial crisis and not Mark Carney, which of course, we know he gets a lot of credit for during his time as governor of the Bank of Canada. In your opinion, does Carney deserve some of the credit he is getting, or was it Flaherty that did most of the stick handling through the GFC?
FRANK MCKENNA: Prime Minister Harper, not surprisingly, is engaging in some revisionist history here. I don't think there's any doubt that the Poilievre campaign has put huge pressure on him to come out and say something publicly. Prior to that, he's been very praiseworthy of Mark Carney. I can tell you factually that he invited Mark Carney into his cabinet as finance minister, so that's the highest praise that you can get. But he's playing for his team, and so he's trying to find a way to respect Poilievre's interest in trying to defeat Carney.
My own view is they both deserve credit, and it's usually the case. I thought Flaherty was a good, steady hand at the helm during that period of time, and Mark Carney was an extraordinarily strong central banker at that time. And I think if you were to ask both of them, they would both give each other credit for having worked so closely together and navigating us through the crisis.
And by the way, because it was close to it, I can also observe that the five bank CEOs were also a major part of the Canadian response. And literally our CEO, Ed Clark, was really the leader of that group on the phone virtually every day with either the governor of the bank, or the deputy minister of finance, or others involved in helping to navigate our way through that.
I think it's a tribute to the leadership of that collective group that Canada probably emerged better than any other country in the world in terms of that financial services crisis. The soundness of our banks was an extraordinarily important characteristic, and the fact that we had small, intimate leadership who could literally phone each other in a small group call almost every day to navigate through it, instead of a multitude of regulatory agencies in other countries.
PETER HAYNES: History will definitely show that Canada survived the financial crisis in much better shape than many of the other G7 countries. Frank, two very popular East Coast premiers, Newfoundland's Andrew Furey and PEI's Dennis King, both resigned in late February, which in the case of Furey, was shortly after he had some very ominous comments about the Trump administration's true intentions upon returning from a trip to Washington. What do you make of these sudden retirements? Is it coincidence, or is there more to this story?
FRANK MCKENNA: There's not more to the story, Peter. Both of them were good premiers doing a good job. Both of them are good friends of mine, and in both cases, we had conversations before they left. I can tell you that there is nothing to see here.
In the case of Dennis King, he enjoyed his job and was doing a good job in PEI, but he was closer to being a liberal than a conservative, even though his title was conservative. And he was quite close to Prime Minister Trudeau, and he knew that Trudeau was the only person who could help him achieve what he wanted to achieve, which was to be the ambassador to Ireland. So he was named ambassador in the last several days of the Trudeau administration.
In the case of Premier Furey, we've had a lot of conversations over a period of time. His intention was to do a good job but not a long job. As premier of Newfoundland and Labrador, he was a superb premier, but he got stuck in the mechanics of the legislative process in Newfoundland and Labrador.
In Newfoundland and Labrador, if you were to leave, resign, an election has to be triggered within a year of that. So what Andrew Furey would have liked to have done was to have another election and continue his work for several more years.
The problem with that was that, that would result in a-- when he did leave, let's say it's a year or two years later, that would result in an election being called after an election had just been called. He did not want to put Newfoundland and Labrador through that, so he left earlier than he would have otherwise liked to have left.
But he did leave on a high, and we'll be having conversations I think in the next week or two about his future, because he's a really bright guy, great Canadian, and he should be on everybody's list of somebody they would want to have on their team.
PETER HAYNES: Well, I'm glad to hear that he'll be remaining on a team, hopefully in Canada here somewhere. Our Canadian political leaders have been very frustrated by President Trump and his inner circles. You referred to them as the minions earlier, repeated overstatement of US's trade deficit with Canada.
On March 13, Trump said, quote, "in the case of Canada, we're spending $200 billion a year to subsidize Canada," end quote. On its own, this number is a gross exaggeration. The actual deficit is more like $70 billion last year, and it has been well-documented, we've talked about it for months, as have many Canadian leaders, that this deficit comes from the US's net demand for Canadian energy products.
More recently, observers get the sense that Trump is including in his rhetoric the costs attributed to defending Canada. After all, it is no secret that Canada has failed to meet its 2% NATO defense spending pledge that's been in place since 2014, and for that, I think we all admit the country deserves some criticism.
I am struggling to understand whether it is as simple as figuring out how much Canada has under-contributed to its defense spending since the 2% commitment was formalized, and whether that amount is equal to how much the US has subsidized Canada. Can you help me circle this square, Frank?
FRANK MCKENNA: Yeah, there's a lot to unpack here, but I can tell you that what Trump is engaged in here would be unparliamentary to say that he was lying. I'll simply call it a gross exaggeration, and it's not dissimilar to other exaggerations which he's been guilty of over time. He fails to ever say anything good about Canada.
What he fails to say is it's the largest relationship the United States has in the entire world, commercial relationship, and you would expect that you would have the largest imbalance of trade with the largest relationship. That's not the case. Of 10 countries in the world, we're 10th in the world in terms of the imbalance to start with. So it's de minimis in terms of the size of the relationship.
Secondly, qualitatively, the imbalance in other countries which bothers the United States-- China, Vietnam, Mexico-- is on manufactured goods which are being imported into the United States and does, you could argue, undercut American manufacturing.
That's not the case in Canada. It's just the opposite in Canada. We supply raw materials. We effectively give away the value added and the value-added chain and give it over to the United States. And in the case of oil, it's at a 10% to 20% reduction in value.
So we literally are handing over tens of billions of dollars of value to the United States for them to add value to our raw materials. We do not have a surplus on manufactured goods. In fact, we're in deficit, and we're also in deficit on services by some $30 billion. On all of those characteristics, the United States should be thanking us for being such a generous trading partner rather than saying that we contribute nothing to the relationship at all.
And the other thing to remember, Peter, the one area where we do have manufactured goods is largely in the auto sector. We have about 10% of the autos in North America. Mexico is closer to 20%, but 10% would be more like our natural share.
As much as Trump might want to denigrate us, there are 40 million people here, and we do drive cars, as well. We should be entitled to some manufacturing and some auto parts to service the needs of that domestic constituency. But that's one of the areas where there's a perfectly integrated trade of parts and cars all across North America.
And Peter, it's not like this just sprang up from nowhere. We negotiated this. I was part of the negotiations all the way back in 1989. And the United States wanted energy security, and in exchange for that, they wanted us to agree on an integrated framework for trade, which we did and signed on to.
And then under Trump, he tore that agreement up, and then he negotiated-- because he said it was the worst trade deal ever. And then he negotiated CUSMA, which he said was the best trade deal ever. And again, on the basis of that auto part suppliers and manufacturers put together this integrated structure that has been the envy of the entire world.
We did not look, Peter, for other markets for our oil in the world. We didn't build pipelines, which we should have. We didn't find other markets for potash, and aluminum, and everything else, because we believed the United States at their word that this was a relationship where both parties were winners.
And now he's torn all of that up, and quite frankly, we're in outlaw territory now. Even though we have free trade deal, he's acting like a total renegade, completely ignoring the rule of law. So you can understand why any trading partner in the world would be frustrated under those circumstances. So he's just wrong on his numbers.
Now, you talked about military spending, and arguably, we should be doing more, and we will be doing more. But we do have to remember that all of the world have been reaping the benefit of a large peace dividend as a result of what I call Pax Americana, the peace dividend that's been delivered as hostilities have ceased around the world, and trading relationships have developed, largely as a result of American leadership.
So we probably were too complacent, so now we have to up our game. And we can do that. We're already reaching higher levels of commitment on military spending, and we can account for things differently. The Americans count all of their Coast Guard in their military spending. We would have to put a couple of guns onboard our Coast Guard vessels, but then we'd have billions of more on the accounting side of the ledger that we could end up putting in there.
The other thing that we need to remember and Americans need to remember is where we spend the money. We spend it in the United States of America. We spend vast quantities of our weapon procurement in the United States of America. That's not true for every other country of the world.
And we should also remember that we are an undefended northern border. We're literally the longest border in the world and the most undefended in the world. If America were neighboring any other country with more hostility than us, they'd have to have a huge amount of their military budget dedicated to protecting that northern border. I would say there's 0% of their budget is dedicated towards that northern border, because we're a friendly ally in so many ways.
So there are a lot of different ways of looking at this, but at the end of the day, we know that we need to do more, and we will. Before we actually commit huge amounts of dollars, I think we need to know where the world's going.
Right now, the United States is basically saying that Russia is their new BFF and Canada isn't. So should we rearm in order to be able to push back against Russia when Russia is now in the friendship circle with the United States, or should we wait to see how that shakes out?
And the United States is currently looking at a 10% per year reduction in their defense spending. Should we wait and see how that shakes out, as well? So a lot of moving parts here, but to cut to the chase, I think that the secular trend line for us should be a greater commitment to military spending.
PETER HAYNES: OK, so let's talk about how we get there. Your good friend, retired Canadian forces general Rick Hillier, and a few other former military leaders in Canada, suggested in a National Post op ed recently that Canada could raise money for defense spending from external sources by creating something referred to as a defense, security, and reliance bank that would then issue government-guaranteed bonds to buyers, potentially Canadian pension funds, and other potential buyers in this country.
The military leaders suggested that one place to increase spending is to fix the military barracks across Canada, which are by all accounts, pretty rundown, and this alone could increase spending one time by about $15 billion.
As well, Canada could pay its soldiers more, which would help with recruitment. What is your advice to the next Canadian government on how to tackle this area of exposure for Canada, and do you think our citizens are prepared for the sacrifices necessary in order to meet this defense obligation?
FRANK MCKENNA: I think that our citizens are prepared. I think our tolerance for pain is quite high in this country, which means reordering priorities. I think to some extent, we need to be more aspirational. We can't spend the $20 or $30 billion in one month that will get us to the number that some people want, but we need to be more aspirational.
I talked to the US ambassador about this once, not all that long ago, in fact. And he said, look, it would go a long way if your government would tell us we aspire to reach that goal and we're determined to get there.
He said Trudeau isn't even saying that. And Trudeau was never truly committed to this path, so I can understand why he wasn't saying that. Under the new management in Ottawa, they are saying that, and I think it's important that we aspire and demonstrate our aspiration and our conviction. That's one.
Secondly, I think we need to be much more intentional about where we spend. Should we continue to spend money in the United States of America? For example, we've got the F-35 contract, which is now under review. The alternative, I think, is the Swedish griffons, and it's my understanding they have similar capabilities. But in the case of the griffons, they're prepared to actually manufacture the plane in Canada in large measure.
Well, so we have to think a little bit selfishly. Should we be diverting some of our money away from the United States, since the relationship has become overly dependent, and look at other places in the world?
It's no accident, by the way, Peter, that European defense stocks are soaring through the roof and American defense stocks are going the other way. The whole world is getting this message pretty quickly, and it's not going to be a pretty one, I think, for the United States.
The other question is operability. We always wanted to be interoperable with the United States, but maybe that's changing now. Maybe we need to think about other forms of interoperability. A lot of weapons systems are controlled by the ultimate vendor of those weapons systems.
A lot of people in Europe are saying, we don't really want America to control the weapon system that we're using now. They may shut us off at the worst possible time, which is what, of course, Ukraine found out when it came to the intelligence platform.
So we need to think very deliberately and intentionally about that and not let our emotional attachment to the United States guide us. We need to think about where the dollars can be best spent, because it'll take tens of billions of dollars, and what benefits we can get for Canada.
And by the way, we're making some decisions now that will rapidly get us towards that number and beyond. The surface combatant vessels-- that program is $30 to $50 billion over time, and that program is well and truly launched.
So we have a lot of big expenditure decisions that are becoming operationalized, and I think we'll get to the appropriate number. But we do have to be deliberate, and intentional, and quite selfish, quite frankly, Peter, about how we do this.
PETER HAYNES: Yeah. The question is, where's that number going to end up? As there's certainly been some suggestions that 2% may not be the endgame. And you mentioned European defense stocks. I want to talk a little bit about Europe and European leaders.
With President Trump's recent actions towards Ukraine, I think it's become crystal clear to some of the European leaders that Prime Minister Carney met with today that the continent may be on its own as the US pulls back from its commitment to multilateralism.
Just over a year ago, British General Sir Patrick Sanders created a stir in a speech in which he outlined the state of the British Army, a group that is one half the size it was 30 years ago and that has suffered close to 30% cuts in funding in the past dozen years.
Sanders described the British people as part of what he described as, quote, a pre-war generation who may need to prepare themselves to engage an increasingly aggressive Russia and suggested the country may need to follow Sweden's lead in reintroducing some form of mandatory service.
And that was a comment that was quickly walked back by Britain's then-chief of defense, Admiral Sir Tony Radakin. Do you think European leaders truly believe it is a new paradigm? And if so, how do you expect the various countries to share the burden of defending the continent, and what role might Canada play?
FRANK MCKENNA: Yeah. Look, there's no doubt Europe, like the rest of the world, has been surfing on the peace dividend which has been taking place for some period of time. Now with a much more aggressive Russia and a much less friendly America, people are having to rethink their position.
I think the European leaders are there, quite frankly. Conscription is a different issue. I don't think we're there yet, although it was actively talked about by somebody in the last week or two for Canada, but nobody's there.
But I think European leaders are there. They are suspicious of America. They realize that they have to pick up their expenditures and their control of defense of Europe. They need to rearm, and you would have noticed that Germany has now come to an agreement with its new government and the greens on a massive new spending package, and I would say all of Europe is headed the same way.
Dramatic increases in defense production in Europe, using European capabilities, and they're going to want interoperability within Europe. They're worried about having the Americans with their fingers on the trigger because they're not sure that it's a trustworthy ally.
Now, it just pains me to be saying these words, but that is the world that we're living in. Canada was probably going to go down the path of looking at more interoperability with the Europeans. What that means, it's hard to say.
We've already got a big order in, I think, for 18 F-35s, three 6-packs, something like that, but the second phase of the order could go to another plane manufacturer. It would not be the preference of the Armed Forces to have two different airplanes to service, but it's possible we go that route. It depends just on how hostile the relationship with the US gets in the coming weeks and months.
So all of that to say that I think that Trump has done Europe a favor and Canada a favor in many ways, really woken people up to the need to look after themselves. I'd say Europe is starting to respond big time.
PETER HAYNES: So Frank, as you mentioned earlier, cuts to the US defense spending, do you anticipate that would be closing some of their forward military bases in Europe?
FRANK MCKENNA: Yes, I do. I think they'll definitely be repatriating military personnel from Europe. I thought that they should have been doing that throughout a period of time, quite a long time ago, but I think that'll happen. Certainly, it will result in the Pentagon having a smaller footprint, which-- not necessarily boots on the ground, but I do think it'll probably mean some repatriation of troops from Europe.
PETER HAYNES: OK. I want to switch back to tariffs, frankly, the topic of the day. The past couple of weeks have been incredibly difficult to follow in terms of the on-again, off-again tariff threats. At one point, President Trump threatened to impose 250% tariffs on dairy and lumber, and that's a threat that was walked back by Commerce Secretary Lutnick a couple days later, and he said that they would be applied on April 2.
There is so much misunderstanding of the topic of supply management as it pertains to Canadian dairy and was negotiated as part of the 2018 CUSMA Agreement, an agreement that you referred to earlier that President Trump has said was the best trade agreement ever negotiated and the one that he negotiated.
Can you please explain to our listeners how Trump's comments do not tell the story of how dairy supply management actually works? And also, for balance, can you please provide some equivalent special arrangements in CUSMA from the US side that work in a similar manner and were part of the US side of the negotiations in 2018?
FRANK MCKENNA: Yeah, so supply management is controversial even within Canada, and I think it's one area where the United States may do us a favor by provoking a serious look at it. We have a big agriculture sector. I'd start by saying it includes potatoes. It includes wheat and canola. It includes beef, and pork, and blueberries, and all kinds of other commodities, none of which is protected.
But for some historical reasons, dairy and feathers, we call them, chickens, eggs, and milk have been protected, and they're protected through a quota system. The United States are not wrong in focusing on that.
But they're wrong on their facts, unfortunately, because they've had access to our dairy market. In the last negotiation, they ended up getting access to it. We opened up the quota system to allow the United States to get access to some of our market.
And the dirty little fact that Trump isn't saying is that they haven't even filled half of the market that they're allowed to take. It's ironic that somebody would try to make it a target when you haven't even filled the market that you already have.
And secondly, you have to realize this is not a case of us having tariff-free access, and they aren't. They do have access, but they're not taking advantage of it. And we really aren't exporting our commodities because of our supply management system. We really aren't an exporter of these products around the world, which we shouldn't-- could be, but we're not. So it's not like we're flooding the United States with our products.
So that's important to realize in terms of the equities. And then secondly, the US has all kinds of areas which it protects itself, much more flagrant, quite frankly, than dairy. Sugar is a great example of that. Their sugar industry is so protected that confectioners flee to Canada to set up manufacturing operations and then put the product back into the United States as a finished product.
Cotton, I believe, is protected, as well. Peanuts, maybe, and there are always other commodities, as well. So every country in the world has some protectionism around agriculture. It's almost historical. It goes to try to protect food supplies for wartime. The Japanese protect rice, for example.
I wouldn't lose any sleep if our supply management system were changed, but it's not the bete noir that Trump is trying to make it out to be. He can produce all kinds of dairy products and send them to Canada right now with the room that he's got available in our quota system.
PETER HAYNES: So Frank, there was a lot of bluster last week started by Doug Ford when he put the electricity tax on, electricity exports to certain US states. That was followed by a meeting where he went down with Ambassador Hillman, Dominic LeBlanc, and I think a couple other folks where they sat down with the team with Lutnick, and as they said, got a masterclass in discussions around the Trump tariff positions.
So as I understand it-- and I want to get your perspective on this in terms of their logic and potentially what the counter to their logic is-- they said that they want to attack the $1.8 trillion deficit the United States had last year by three different avenues.
The first was through the budget, where they're going to offer lower taxes, but they must not result in a higher budget deficit, so that must be accompanied by spending cuts. And of course, we know there's DOGE, which is trying to reduce the overall size of the government. And then thirdly, there's tariffs, which they view as a new revenue source that will attract investment to the United States.
The flip side of that is that one of the significant costs of their deficit, I think, is interest coverage. And in the event that these tariffs result in higher inflation in the United States, which I think most economists would believe it would as they repatriate jobs and don't have enough people to fill those skilled jobs, that inflation will go higher and debt costs will go up.
Am I wrong to say that that's the likely outcome of this tariff attack that they have, where they may generate some revenue through tariffs, but that will be more than offset by higher interest costs?
FRANK MCKENNA: Yeah, clearly, there's a so-called grand design here. Trump veers from it from time to time because he's got all kinds of personal agendas and vendettas. But at the end of the day, what America is doing is finding another way to do something dirty, and that is to raise taxes for Americans.
Now, Republicans hate taxes, hate them. Grover Norquist runs a big nonprofit dedicated to no taxes. Told me once-- he was at my house when I was ambassador-- he wanted to make government so small that you could drown it in a bathtub.
And so when you've got that ideological allergy to taxes, you have to find another way to do taxes. So they call them tariffs, and that's what this massive tariff wall around the United States is. It's a tax on US consumers.
Unfortunately, probably the lowest-income people, who are going to be paying more money for all of the products that go into the United States-- every economist would tell you that, contrary to the rhetoric, it's not the sending company that normally pays the tariffs. It's the receiving company, the receiving consumer.
So it's a massive tax on consumption, which will take place around the United States, and that inevitably will raise inflation and inevitably will have an interest rate impact, just as you forecast, and probably a dollar response, as well, and a stock market response.
So if you can pull all of that off, then you're a real magician, but I think human behavior is such that people react when they're faced with higher prices and uncertainty in the market, which we're seeing now.
By the way, what's coming at us in the next couple of weeks, just for clarification, is two different waves of tariffs. One is so-called sectoral tariffs, and that basically is something that Peter Navarro has designed there. Anybody we can't get some other way, we're just going to call it a sectoral tariff.
So they want to throw more onto softwood lumber, for example. We're already paying, I don't know, 25% here. We have 25% of the US lumber market, and that seems to be offensive to some lumber barons down there who are getting rich on the higher prices but want to get richer.
So they basically want to throw even more tariffs up so they can raise the price of lumber even more, meaning the consumers just pay through the nose in order to build a house. If you're out in California trying to build now, the officials in California say it's going to take longer to rebuild because of the massive tariffs that are coming on softwood lumber from the United States government.
Then they're trying to expand that definition of softwood lumber to include value-added products like kitchen cabinets and so on. So this is Peter Navarro's pet project, I would say. In addition to that, they're trying to do all kinds of things, semis, semiconductors, all kinds of things where they're using sectoral tariffs.
But the main tariff barrage is going to be reciprocal tariffs, trying to put tariffs against anybody in the world who's got any kind of tariffs against the United States. I'm told by people who are inside the tent that there are three different levels-- large tariffs for the most serious offenders, middle tariffs against less serious offenders, and then the smallest tariffs against people who are the smallest offenders.
Canada should fall in the last category. We're part of a free trade zone with the United States of America. We don't have tariffs on their products, and they don't on us. So it's hard for them to say that we have a tariff which they should reciprocate against. The way they're going to try to get around this is to call our value-added tax the GST, nontariff barrier, and through that subterfuge, try to put some tariff up against us.
But at the end of the day, Yale did a study on this and said Canada should be the lowest tariff country in the world. Now, that would not fit with Trump's agenda or Peter Navarro, so they will find sectoral tariffs like steel and aluminum, which is primarily directed against Canada, softwood lumber directed against Canada, and so on to try and punish us or beat us up, I guess. So that's what we're facing, a massive new tariff wall taking two different forms, sectoral and reciprocal.
PETER HAYNES: Do you have a view on how this plays out, Frank, when the new tariffs go in in April you're talking about?
FRANK MCKENNA: Well, I think there's going to be a lot of naughty or nice stuff. President Trump likes to play God. So Vietnam's going to get hammered because they've got a huge trade deficit. But the president of Vietnam or prime minister will probably be over trying to cajole and grovel, as others do at Mar-a-Lago or in Washington.
So it'll be hit or miss all over the world. Some people who play nice with America may find ways to get exemptions. Some people will just eat the tariffs and life goes on. And then others, like Europe and Canada will retaliate with tariffs of our own.
I think when this comes, we've gone from a US-centered problem to a global problem. We basically are going to create massive uncertainty all over the world-- changing supply chains, manufacturing bases, and hubs, and all kinds of things, just a massive dislocation of the world economy. So if that's good for business, then it's going to be a great time to be in business. But if that dislocation is not good for business, then I think we're in for a rough ride.
PETER HAYNES: Frank, what advice would you have to the CEO of Ford as he's dealing with the integrated supply chain across three different countries and a president that wants him to fix that by April 2? What would be your advice, to just wait it out for four years?
FRANK MCKENNA: Yeah. If he can, I would try to rag the puck, but I think he's got to tell Trump the truth is that based on a binding agreement, we've done things which are locked in, and we can't build a new car plant on one month's notice. It may take years. And we still do have to supply the market in Mexico and Canada because they use cars too.
So can you carve out the auto sector as being a perfect example of where America wins big by working with its neighbors? If not, the end result will be very simple, Peter, and that is that American consumers will pay significantly higher prices for their automobiles.
PETER HAYNES: So Frank, I'm going to leave the discussion on energy for next month because there is going to continue to be a lot of discussions in the energy sector about how Canada is going to reduce its reliance on the US as the buyer, which you talked about earlier at a discount, and I want to dig in on that. It'll take some time next month.
But I want to finish here with maybe the more positive side, because I know in listening to you, Frank, you're not struggling to find silver linings in this wakeup call for Canada. So on the one hand, we mentioned-- I mentioned earlier, we're seeing an appreciation for our sovereignty like none of us have ever seen before, and there are other positives that have come out of this crisis.
So I'd like you to give us an update, Frank, on the latest developments in terms of the removal of interprovincial trade barriers. Is this something that you expect will be completed, or might it lose steam if tensions between the two countries are lowered? Because after all, there will be some losers when these interprovincial trade barriers are removed.
FRANK MCKENNA: So Peter, I think this is a brilliant question because I think both answers can be right at the same time. We do have good momentum. No doubt about that. But in my view, the premiers, having been one, we're a slippery lot, and we will try to get out of those engagements when we can because we don't like to experience pain. It's the human condition. We don't like pain, and some of these will cause real pain.
And I think whatever federal government is in Ottawa, they need to keep the pressure on, really put the pressure on and not accept even the current result as being acceptable. Every province has put exceptions in the window that they don't want 21 exceptions, 26, 25. I think the government of Canada has got to really whip them hard, even using financial carrots and sticks if necessary. Progress has been made, but it's not enough, so number 1.
Secondly, we may end up, benefit of Trump's presidency, getting a higher expenditure on military spending in Canada. That would be a good thing. We are definitely going to get other markets for our resources. I think Trans Mountain Pipeline is the low-hanging fruit.
We can literally put half a million to a million barrels a day into Asia, and those marginal barrels often set the price. And as a result of that, we're already seeing a narrowing differential, which is worth billions of dollars to Canada. We'll see that.
I think we'll see smaller government, more efficient government, more competitive tax rates. I think all of those are going to be the so-called peace dividend we're going to get from having a Trump presidency.
PETER HAYNES: Yeah, hear, hear. Let's find the positives here, and let's leverage those. So Frank, we're t-minus a couple days until the Major League Baseball season starts. In fact, it starts tomorrow morning at 6:10 AM in Japan, but that's just for a couple of early games. And I have to admit that I've caught the bug, and I've been sucked back into the Blue Jays vortex. I don't know how it happened. It just did.
Well, we might not be that happy, as both of our two prized assets we've watched grow up here in Toronto, Vlad Guerrero, Bo Bichette, both could walk at the end of this year because they remain unsigned. You have to think of the flip side, is that both of those players are going to have monster years as they want to get paid in free agency.
Plus, we've gotten through spring training so far, knock on wood, mostly healthy, while the evildoers down in New York have lost their number 1 and their number 2 starters, and Giancarlo Stanton seems to have tendinitis in both of his elbows, which nobody can figure out. Are you with me, Frank? Things might be a little bit better than we had thought.
FRANK MCKENNA: I'll never forgive the Blue Jays' management and ownership group if they lose, Bichette and Guerrero, because we grew up with these guys, and they're loved all across Canada. And there have been years to get them signed up, and I still live in hope that they will get signed up before we lose them, quite frankly.
Unlike you, it's spring. I live in hope, and I look at an Ernie Clement who looks like he's having a monster spring and Alan Roden, who looks like a real comer, Will Wagner, Addison Berger, and others. And some of these people may step up and just shoot the lights out, and we might just say, wow, where did that come from? And you've got Varsho and Springer there that you hope still have gas in the tank.
So yeah, I start the season off extraordinarily optimistic. Perfect record as of now, and I live in hope. I also live in hope that we'll end up having a more aggressive team that, even though we may be small, play big, are just more creative and so on. I live in hope of all those things, Peter. Right now, I am extraordinarily optimistic.
PETER HAYNES: Well, as you say, everybody's tied for first place right now, so we'll have fun again chatting about this in April. By that time, we'll have seen a couple of weeks of baseball. But thanks for all your thoughts today, Frank.
I know the people that we speak to are very appreciative of learning from you and the honorable Ron Ambrose, as well, and Chris Krueger in Washington, helping to demystify a period where we all just want information. We all want to feel a little bit better than we do right now, so thank you very much.
FRANK MCKENNA: Thank you.
PETER HAYNES: Thank you for listening to Geopolitics. This TD Securities podcast is for informational purposes. The views described in today's podcast are of the individuals and may or may not represent the views of TD Bank or its subsidiaries, and these views should not be relied upon as investment, tax, or other advice.

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