Trump and Lutnick are 'lying through their teeth' on trade war rationale: Economist

The U.S. leadership is “lying through their teeth” about fentanyl concerns motivating the trade war, Scotiabank economist Derek Holt says, arguing that “hitting back twice as hard” may be Canada’s only way forward.

In a morning note on Tuesday, Holt labels U.S. President Donald Trump, Secretary of Commerce Howard Lutnick and the administration in general “a pugilistic bunch of bullies,” pointing to data showing that “Canada is an immaterial source of fentanyl into the U.S.”

“That doesn’t matter because Trump and Lutnick are totally fabricating the issue so that they can declare a national security crisis,” Holt wrote. “Doing so enables them to apply tariffs in a way that bypasses Congress that typically has domain over trade policy.”

The Trump administration’s moves around tariffs, Holt argues, demonstrate that “everything about border controls is absolute rubbish” and Trump simply favours tariffs as a general policy.

“This means negotiation won’t work, hitting back twice as hard might be the only option,” Holt wrote.

As tariff threats ramped up in January, the federal government took several steps to address concerns about fentanyl and other border issues raised by the Trump administration. Among other things, the government invested in helicopters and drones to patrol the border and appointed a fentanyl czar to focus on issues related to the drug. But on Monday, in spite of these steps, Trump told reporters there was "no room left" for Canada and Mexico to avoid the levies.

"The U.S. made Canada pointlessly jump through hoops on border controls when it was all for naught," Holt argued.

In spite of the severity of the first moves in the trade war, market reaction has been “somewhat limited,” Holt writes, offering five possible reasons why.

First, he says, the market may have already priced in some tariff effects due to the winding narrative of threats, negotiations and reprieves over the past weeks. Second, the duration of this trade war is not known — Trump may have imposed the tariffs simply to be able to bring them up during tonight’s address to the U.S. Congress, Holt says, “but they may not last.”

“If they do last, then the effects on the [North American] economy and markets will be much larger. That might not take long, given guidance from the auto sector that shift cancellations and plant closures could begin within roughly a week.”

Desjardins economist Royce Mendes offered similar observations in a note Tuesday, pointing out that "global investors and businesses have had a month to plan for this event." Mendes adds that "hopes the trade conflict will be short-lived are also limiting market reaction, but that may prove to be too optimistic."