Canada may be Trump's biggest mistake. Not Iran.

The war in Iran is a blunder, to be sure. But it isn't like it would be the first failed middle eastern conflict by the US. And it isn't like anyone expected them to win. The impacts of the mistake may be some of the largest of any such US offensive, such as the knock-on inflation and oil prices. But there is actually a silver lining there. America is one of the least impacted. And if everyone else hurts roughly the same or more than you, it is not actually that big of a failure. Especially in the longer term.

The trade war with Canada is something entirely different and will, I think, be the subject of a great many PhD papers over the coming decades.

How could Canada be the source of America's largest blunder this Presidential term (or really stretching back a great deal further)?

It is true that the Canadian economy is something like 1/14th that of America's. But the loss isn't the direct loss due to tariffs and failed trade negotiations. Though, even on that front, it looks an awful lot like Canada is actually suffering less than the US. And that is hilarious because it isn't even required to make my point.

So, let's just cover that quickly before getting into the meat of this. 

Around the time of the CUSMA (USMCA) agreement, it became obvious both to normal Canadians and politicians that we needed to diversify trade away from the US. Setting that mentality and compounding it with the very rapid set of deals achieved by Mark Carney resulted in a significant shift in our exports.

And, while we may be a massively smaller market on paper, we have one benefit a lot of people overlook. The composition of our exports. It is overwhelmingly natural resources. The US doesn't buy from Canada because it wants to. It buys because it needs to. With enough time they could likely deal with this, but not on any timescale that will be relevant to this trade war. And the war in Iran actually conflates this by increasing oil and gas taxes which has provided some assistance in funding aid to affected industries. 

But as I said, that is just the short-term story. The real loss here is the longer term impacts. Those started in Davos. If anyone hasn't listened to Mark Carney's speech there, they absolutely should. That speech alone will, quite likely, be the subject of a great many research papers. I'm sure great speeches are given daily around the globe and fail to deliver the impact they deserve. What made this one special was the media attention combined with the message. It didn't just galvanize Canadians. It was wildly popular in Europe and elsewhere abroad.

Initially it was just words. It was the sort of speech that says something we all know is true and accept. But there is a reason why these truths haven't been meaningfully acted on in decades. You need to see tangible proof that the stakes are real at a time when these notions are still front and center on people's minds.

Whether a response to this speech or other factors (or a combination), it appears that the Trump administration took the bait. Much of what followed between Canada and the US painted a clear picture reinforcing the dangers mentioned in the Davos speech at a time when it was still something people were actively thinking and talking about. 

There are a few ways that the US could have defused the situation; do nothing, act in a way contrary to the claims, or attempt to nullify the speech through brute force.

The easiest would be to do nothing - speeches are just words and fade from people's minds over time without a catalyst. Carney wasn't saying anything that people didn't already know and accept on some level. Business as usual would defuse the issue with time. This is likely the path any other administration would take. Though, it is also hard to imagine any other administration creating the circumstances for this speech to exist. 

Offering an olive branch to Canada on trade in the form of an actual mutually beneficial trade deal would go further and argue that the US deserves it's hegemony and that the world benefits from it. This is the least likely option as far as I can tell. The US is consistent in its pattern of bettering things for the US, not giving up concessions (that is just good economic and political policy most times).

The last option, the one they chose however, only works if the US pulls it off successfully. And that is saying "you may be right, but you can't do anything about it". The last minute bait and switch attack on Canada's sovereignty would have done that perfectly. US officials thought their position so powerful that they could extract clearly extortionary demands from Canada. The country that delivered the Davos speech would have effectively submitted completely to being a US vassal state. The momentum would have been lost.

The bulk of the damage was done the second the US allowed Canada to deliver the narrative that we walked away from the deal. The illusion of absolute economic power and control from the US was shattered in that instant. And it is MUCH more embarrassing given Canada's economic size and dependency on the US. So much of the rhetoric online immediately following the trade breakdown revolved around how doomed Canada was. That it was impossible for an economy of our size to hold out against the US. 

The impact of this resistance was magnified further by the fact that pretty much every other nation is currently subject to tariffs or lopsided trade deals with the US and looking at this from the outside with very great interest.

That resistance, which has at time of writing this, lasted months continues to grow on the path Carney laid out in Davos by establishing Canada as a country serious about working on a path forward for middle powers. While, coming into the home stretch of the midterm elections, things seem to be speeding toward a possible resolution. But Carney's position (which hasn't been publicly refuted by Trump or American officials) is that the progress is being made because the US is moving toward Canada's position. 

Basically, the US is crawling back to Canada to get a deal. And they aren't directly refuting that. Let that sink in. While they are definitely spinning what they are discussing as a victory at home, they are letting Carney hold to his messaging. That is an optics catastrophe. Yes, they will change gears after an agreement is signed or talks fall apart for other reasons. But that gear shift is the message for the electorate, not the global audience. Keeping their mouths shut is a sacrifice to appease Carney and is what the global audience is seeing. They aren't attending Trump rallies. And as Doug Ford can attest, we know they are watching what Canadian politicians are saying.

Even a deal at this point wouldn't likely harm Carney's position regarding his Davos speech. In fact, it might actually strengthen it. Trump's claims are largely perceived as bluster meant to draw up election support for the midterms and aren't largely regarded as reliable outside his support base.  

Writing this on the morning of the US midterm elections, the fact that a deal has not manifested speaks volumes. Holding out past this point was always a symbolic line in the sand. One that cements a narrative victory for Canada on the global stage. The optics are locked in: for Canada to actually suffer a "trade defeat" now, any final agreement would have to be so obviously destructive to Ottawa that it undoes the geopolitical reality already established. Short of that total capitulation, the damage to the image of the US as an absolute, unyielding economic power has already been done.

On the broader expansion of the Davos vision, it helps that Canada is uniquely positioned in terms of what it offers economically.

Canada is a bit of a global oddity. We're a prosperous G7 nation with abundant resources in many categories that exceed our own needs greatly. The benefactor of our resource glut for generations has primarily been the US. And we were already seen by many as a vassal state. This time, they played their hand too soon and discovered that we weren't quite as stuck in the arrangement as they thought. And now they are at risk of losing what was effectively exclusive access and control over their golden goose. Every trade deal that diverts natural resources and critical minerals abroad is a blow to the US in the longer term. Their needs for these things will grow as our need to trade them to the US lessens. 

Beyond this though, as this continues and the impacts of the speech at Davos sink in, other countries are also diversifying away from the US. The US has inadvertently triggered their own decline. And the catalyst that proved that the US is not too large to stand up against was Canada. No other country on this planet is as deeply integrated as we are and many are also economically larger than us to begin with. It will be generations before countries have an appetite to sink so many eggs into the basket of the American economy.

So, while the war in Iran is indeed a big misstep. Internationally it is far from unexpected. And, the relative impacts could end up as a gain to the US. The fumble on trade with Canada is, at this point, a uniquely self-destructive failure setting up years relative economic losses for the US image and economy while aiding a lot of nations in their own moves away from US markets.

If you doubt the scale of this blunder think on this: 

Trump has succeeded in completely reversing Canada's long-term trajectory. Without global tariffs and economic friction on this scale, Ottawa would have never found such urgent cooperation on the world stage. Lacking a clear external threat to rally against, Canada likely would have continued down its prior path of passive dependency. Leading to a future where becoming the 51st state, or an outright vassal state of the US, wasn't actually that far-fetched of an idea. Instead, the exact opposite now appears most likely. By forcing Canada to stand on its own two feet, the administration has triggered a previously unimaginable change of direction for both countries.