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Trade intervention can also be good for a large exporter like China. To grab market share, China has heavily subsidized products like rare-earth metals, steel and aluminum. It can now exploit its market power by taxing exports.

Small countries like Canada are best off pursuing unilateral free trade, not by retaliating

Small countries like Canada are best off pursuing unilateral free trade, not by retaliating. Just because another country might wish to mess up its economy with taxes and subsidies doesn’t mean we should mess up our own.

The Trump administration has been schizophrenic in trade policy. While saying its tariffs are designed to promote reciprocal free trade, it bargains for more protective policies for the auto industry in NAFTA negotiations. This is not free trade.

Neither is Canada a pure free-trader. We impose limits on foreign ownership in banking and telecommunications. We protect dairy, egg and poultry producers, who are now each worth an average of $5 million in wealth. And we restrain log exports, lowering production costs for our forest-product producers.

Negotiations could improve free trade for Canada and the U.S. Game theory provides two useful insights.

First, the “threat” point at which a country is better off without NAFTA. About a quarter of our GDP is exported to the U.S. versus American exports to Canada which make up about two per cent of U.S. GDP. Thus, NAFTA is far more important to us, leaving us with little credible leverage.

Further, Canada has developed few alternatives for our major global exports: One-third are in energy and vehicles and parts, both of which are overwhelmingly sold to the U.S. (95 per cent and 83 per cent respectively). In particular, regulations have prohibited the development of alternative markets for oil and natural gas exports, and auto-trade pacts have historically joined the U.S. and Canada at the hip.