Diversify trade to survive tariffs, O’Toole says

Canada must respond to U.S. tariffs by finding new European trade partners in defence, the energy transition and green technology, according to the former head of the country’s Conservative Party.

Canadian companies need to take advantage of Europe’s new €800-million ($1.25-billion) defence spending plan and free-trade agreements with the EU and Asia, Erin O’Toole said Wednesday in Toronto at a speaking event. They also need to prepare for U.S. uncertainty lasting longer than President Donald Trump’s current term if the Democratic Party remains powerless.

“Don’t make any massive changes to supply chains yet, but look at markets for alternative supply chains and for alternative customers,” he said. “Companies have to plan for at least a five-to-seven-year window where we’ve gone from the post-World War Two free trade environment to what I’m calling managed trade.”

O’Toole, now president of the North American unit of Paris-based risk advisory firm Adit, spoke minutes before Trump made what BMO Capital Markets called the largest U.S. shift in trade policy in a century. Washington announced global reciprocal tariffs that will “crater” U.S. imports, according to BMO, and may cause a worldwide recession, JPMorgan and Fitch Ratings said. While the measures spared Canada and Mexico because of the continental free trade agreement, the duo still faces 25% U.S. duties on aluminum, steel and some auto parts.

US partnership

During the event at the Albany Club, which was sponsored by Paris-based Salveo, a trade advisory firm working with Adit, O’Toole also advocated for Canada to limit retaliation.

Ottawa should match American tax policies and work with Washington to build pipelines, a green electrical grid and projects in critical minerals like uranium that the U.S. needs, he said. All of this might help to convince Trump of reducing and eventually removing the 25% tariffs.

“What Canada should do is strategically retaliate, but not across the board,” said O’Toole, who has experience as a trade lawyer. “Let’s pick bourbon and a few other areas to pinch the United States, but drive towards a partnership.”

The federal and provincial governments will have to follow U.S. tax reductions, which could go as low as 15% for businesses under Trump when a decade ago they were 40%, O’Toole noted. Canada also must match any benefits for depreciation and research and development tax incentives, or else tax rates will hurt Canada’s economy more than the tariffs, he said.

“That’s why diversification – a market of 400 million in first-world countries with close alliances to Canada in the EU – is something that a lot of exporters are looking at,” he said. “We have some of the most unrestrained free market access in the world, but we haven’t taken advantage of it because the most voracious market in the world is just a few miles from where we produce.”

Canada’s free-trade pact with the EU deal has removed 92% of the tariffs that applied to Canadian companies, O’Toole said. The agreement has largely been in effect since 2017, though 10 countries – including France, Italy, Ireland, Poland and Belgium – haven’t formally ratified it.

“Their economies are rocking now, and Canada has a stellar reputation,” he said. “We’re there in some cases on goods trade, on agricultural trade both ways, mining investment, financial services. But there’s so much more we can do in Europe.”

Helicopter navigator

O’Toole, who served as a helicopter navigator for 12 years in the Canadian Armed Forces, cited the European Council’s March 20 approval of the Readiness 2030 defence spending plan as an opportunity for Canadian companies.

Ottawa should put the $19-billion (C$27.2-billion) F-35 fighter contract with Lockheed Martin and the $5.9-billion P-8A Poseidon maritime patrol aircraft deal with Boeing “on the chopping block,” he said. That would allow Canada to do business with EU and British companies instead.

“The F-35 was designed on the concept of the Joint Strike Fighter when there was joint defence, mutual reliance, mutual respect, security partnership,” he said. “If one partner changes that, all of the deals change, in my books.”

Turning to technology and energy, O’Toole said Ontario – Canada’s nuclear leader with 18 reactors – could benefit from increased trade with France, which operates 56 nuclear plants. The province’s grid operator forecasts it will need 75% more energy by 2050 to meet increased demand from data centres, artificial intelligence and electrification in industries such as steel.

Meantime, the rest of the world is looking to Canada, which is home to – or has trained – one-third of the quantum computing community, the former politician said. Leading companies include D-Wave Quantum (NYSE: QBTS), ​Xanadu, 1QBit, Anyon Systems and Agnostiq.

“We actually have more first mover advantage in quantum than we do in AI,” he said. “We’ve just got to get a little bit more ambitious on commercializing it. But all the ingredients are here. Sounds like I should be running again, right?”