Tariff Debate Takes Centre Stage

[DRAMATIC MUSIC]
FRANK MCKENNA: When Congress voted, with Republicans supporting Democrats against tariffs against Canada, now that is really big.
PETER HAYNES: Welcome to episode 75 of Geopolitics, a monthly TD Securities podcast. My name is Peter Haynes. I'm the host of this podcast where I get to speak to my colleague, the Honorable Frank McKenna, about global geopolitical issues. It's February. It's cold outside. But we got a lot of topics to cover over the next 45 minutes or so. So let's get right to it.
Now, Frank, I said that it is cold outside, but we're T-minus 21 days until spring. And you know with spring, that brings baseball. And I want to know, are you ready for baseball season and what we'll get this year, which is the ABS challenge system for balls and strikes? I saw a preseason game the other day where an umpire was challenged five times in a row, and the ump was wrong every time. I think this will be fun.
FRANK MCKENNA: Yeah, Peter, I'm pretty excited, as I am every year about baseball. And this is the time of the year where we live in hope. And every team looks like a championship team. And I'm feeling pretty good about our Blue Jays. They've made some good acquisitions. We've got some guys from last year. If they perform at the level they performed throughout the year, it's going to be fun to watch. And if the team overall engages in the contact-hitting style that I really enjoyed watching last year, we're going to be a fun team.
PETER HAYNES: Yeah, I'm really excited too. It's going to be a great season. I can't wait for it to kick off. And we just came off the Olympics. We'll talk a little bit about that at the end. But, Frank, I think the majority of our discussion here today is going to be around tariffs. But just before we get to that, you're well-connected. You talk to lots of people. I'm just curious, what are you hearing these days?
FRANK MCKENNA: Well, yeah, we'll get into some substance, but we'll start with a couple of just off-the-wall things. We're going to be entering the midterms soon, actually. People are starting to get ready for them right now, and they're very consequential. If Trump loses the House and/or the Senate, it will really thwart his agenda. The House is reasonably certain to switch over, in spite of a wall of money and influence that will go against it.
The Senate, everybody thought it was out of reach, and it probably is out of reach. But it's getting a little closer now. And if that were to go over, that really means the power of appointments is in the hands of the Democrats. So one of the ideas being mooted now by the Republicans and being reported by our colleague Chris Krueger in the United States is that Alito, who's a right-wing judge-- a very conservative judge, very supportive of Trump's agenda, is probably 75 years old-- that he could actually resign during the course of the summer.
Which means then we have a battle for the nomination for the Supreme Court of the United States. There are a lot of conservatives who are not happy with Trump for a lot of reasons, but the one thing they're aligned on is they need to control the Supreme Court. It's given them Citizens United on campaign financing, Roe v. Wade, and just about every other decision has come down in favor of the conservative community in the United States.
So the theory is that if it looks as if the Senate's in play, and it looks as if the Republicans are not energized enough, a resignation by the judge would result in a much more energized party, who would get out to vote just to save the power of appointment of that judicial vacancy. So that's one idea that people should watch. It's a kind of a pull-the-goaltender idea from Republicans, but it's worth watching.
Second, really, pull-the-goaltender idea, Peter, that I find amusing to think about-- it's actually one that I'm personally quite attracted to. You know, 20 years ago, I spent time in the Turks and Caicos with Premier Daniel Smith, who wasn't premier then, the two of us working on how to get Turks and Caicos interested in Canada and vice versa. And we got right to the edge on that. And unfortunately, a federal election intervened. Otherwise, we might get there.
The same arguments for the Turks and Caicos are equally, and even more so, interesting for Cuba. And right now, Cuba is very much in play. The United States wants to overthrow the government there. People of Cuba are not big fans of the United States of America, but they are big fans of Canada. So imagine if we could go to the US and say, hey, we're going to do you a favor.
We're going to make sure that Cuba is in friendly hands. We're prepared to make it a territory of Canada. We are prepared to have it operating as a democracy with elections and so on. Canadians would be able to go to the sun, to their own country. They'd be able to use their own dollar. They wouldn't have to worry about health insurance. And they would keep the money within the country. Imagine how exciting that might be for the people of Cuba.
They're very close to Canada. Fidel Castro was at Pierre Trudeau's funeral. The Castro boys are very close friends of the Trudeau gang and many of the cabinet ministers in Ottawa. And as a bonus, Peter, there are 24,000 expatriate Cuban doctors that are in countries around the world sending remittances back to the government of Cuba. And a lot of those doctors would be available to us in Canada. And we need doctors and health professionals. Cuba could supply them.
And as an ultra bonus, we'd have access to some of the best baseball players in the world, if we could try to land for our Toronto Blue Jays. So there you go. What do you think of that case?
PETER HAYNES: OK, so I've got a lot of questions or thoughts because I didn't know where you were going to go with that. First thing I'd say is that Puerto Rico is playing on its own at the World Baseball Classic. So I think Cuba would probably stay its own team and not merge with Canada. So that's the first thing I thought of when you said that.
So I want to understand the balance sheet for Canada if we were to do that. And it's tragic what's happening in that country right now, obviously. The United States is starving them of energy, and we've all seen those terrible pictures of garbage in the street, et cetera. When you think about the balance sheet for Canada, what are we taking on there? Are we taking on a lot of debt? Or are we taking on just-- like, what responsibilities would we have?
I can see why the Americans would like it because it would get a Communist country off of their-- 50 miles away from their border into democratic hands. But what would be in it for Canada, other than what you mentioned?
FRANK MCKENNA: Yeah. So it's an interesting question. And somebody would have to do the math on it. What would benefit Canada is that we would have, effectively, a province that is sunny all year long. You would see a massive influx of tourism from not only Canada but from around the world. You'd see hotels being built. You already have Canadian investors in Cuba, by the way, both in the hotel industry and the mining sector.
So you would see money pouring in from a lot of places around the world, knowing that Cuba was going to have free and democratic elections. But at the end of the day, what you would have, really, is a place where Canadians could spend money and be in the sun but keep the money at home. And so you'd have to do the calculus on that. Cuba now has a very good health care system. So you wouldn't have to reinvent that, which is usually the biggest cost.
And you would just have to open up its economy to all kinds of the investment and see if it couldn't become a vibrant, almost self-sustaining economy of its own. It wouldn't be a provincial status. It might not even be a territorial status. It could be something like the Cook Islands. We looked at different mechanisms with Turks and Caicos. It could be just some type of territorial relationship. But it's worth thinking about just because of the friendship that we have with Cuba as a country and our ability to create a sun destination for us that would keep all of our money in Canada.
PETER HAYNES: What happens to the ideologues, the Communist ideologues? Do they just flee to Russia or something?
FRANK MCKENNA: I've been in Cuba before, and a lot of Canadians have been there. People there told me that if the United States would stop making them victims, their government would fall in a day, and they would become just regular people. I think most of their ideology is born out of their 60-year animosity with the United States of America. I don't think there's many people there that read the little red book every day or that are practicing communists.
PETER HAYNES: If the government's thinking about this, do they socialize it with Canadians? Or how does that work?
FRANK MCKENNA: Yeah. So, Peter, I doubt if there is a next step. I'm socializing it with you and the people listening. I don't think anybody else is taking this idea seriously. But if they are, then they should speak up and say, yeah, it's worth exploring. There are a lot of hiccups, a lot of issues, but it's like a lot of ideas. You need them to marinate. And who knows? Somebody might say, yeah, it's interesting.
It would only be interesting if the Americans were to say, yeah, look, we'd be very comfortable with Canada being a protector of Cuba. And as long as there were free and democratic elections and all kinds of other things that they care about, I'm not sure that they want to actually own Cuba and be responsible for it. And I don't know that Cubans would go willingly that way. But it's just one of those ideas that is interesting.
PETER HAYNES: Yeah.
FRANK MCKENNA: But a long shot, a real long shot.
PETER HAYNES: The first topic you discussed was the Supreme Court there. And I recall that Ruth Bader Ginsburg not retiring prior to her death is the whole reason we have a supermajority in the Supreme Court. And obviously, if Alito is concerned about his health or might run the risk of passing in the second term when the Senate is controlled by the Democrats, that becomes a problem for the Trump administration.
FRANK MCKENNA: So, Peter, you're totally astute. If Judge Ginsburg had have left when she should have left, that would have been a Democratic appointment. It would have changed the context of the Court completely. The difference here is that the Democratic Party essentially are playing with a different set of tools. They're coming in with feather dusters and the Republicans have knives.
There's just no comparison in the level of aggressiveness in the two parties. So whereas the Democrats would be incapable of moving Alito out, if the Republican Party decides that he's a liability for them and that he could turn into an asset by stepping down, let me tell you, they can bring a lot of force to bear on that decision.
PETER HAYNES: OK, well, let's stick with this, the Supreme Court, Frank, and talk about the ruling last Friday that forced the cancelation of President Trump's cornerstone economic policy in the second term. And that is the Supreme Court decision to strike down the IEEPA tariffs in a 6-3 vote, the exact opposite ratio of the current supermajority. President Trump immediately pivoted to Section 122 tariffs, which set a flat tax across all countries of 10%.
I know he mused about 15%, but I believe it is sticking at 10%. And importantly, Section 122 tariffs, which have never been used before, were actually put in place by President Nixon to potentially defend the US dollar when the country moved off the gold standard in the early 1970s. And these tariffs last only for 150 days, and they lack the flexibility to be tailored as a negotiating tool. What do you make of the ruling, the Trump pivot, and the potential for litigation on 122?
FRANK MCKENNA: The ruling is monumental because it's the first time this court has stood up to the president. Out of 26 cases, the president has won 21 of them, and the Court have really bent over backwards to try to support his agenda. So that was significant. And what was significant as well is the extent to which he excoriated the court. He basically called them fools and lackeys and tools of foreign influence.
And in any other country in the world, somebody would be impeached for impugning a court in that manner. But he really gave it to them hard, especially the Republicans on the court. So that was kind of not amusing to watch. For a lawyer, it was hard to watch, actually, the disrespect for a court. But the ruling is monumental because the ruling effectively said these tariffs are a tax. Tariffs and taxes belong in the purview of Congress, not the president.
And that statute has to be read literally. And so it really gave him a stinging defeat. But, of course, the president is determined to throw up a wall of tariffs to try to replace those tariffs. That's just his personality. He's been a tariff man all his life, and he's surrounded himself with tariff people. So they are going to replace the IEEPA tariffs with Section 122 tariffs, which was intended to be stopgap tariffs around trade deficits.
And it's intended that after 150 days, they go to Congress. The president does not want to go to Congress because he doesn't want Congress to reject his tariff ideas. So after 122 days-- or after 150 days, he will replace those tariffs with Section 301 tariffs. They require more process, so they require investigation. So he started those investigations. Now, those are around unfair trade practices. That's the motivation for Section 301 tariffs.
He'll also introduce Section 232 tariffs, which are sector-specific, and that's around national security. And he's already introduced a number of those. Steel, aluminum would be two of the most notable ones. But he stretched the elastic to the breaking point on that. He included under national security concerns kitchen cabinets and furniture. Anybody would find that laughable in itself, but not the president and Peter Navarro, his tariff advisor.
So he'll do more of those. There are nine more Section 232 investigations underway. So bottom line is he's rebuilding his tariff wall, but his tools are not as good as the IEEPA tools. I think all of this makes it more likely that Congress will start to weigh in on the use of tariffs in this manner.
PETER HAYNES: Will there be a class action lawsuit immediately or a similar lawsuit that ultimately went to the Supreme Court? Is 122 going to be in the Supreme Court before these new five-month tariffs expire?
FRANK MCKENNA: So the problem with that, yes, there are already people mooting the idea of launching litigation under Section 122 because it's applying to countries that don't even have a trade deficit with the United States. It's a very blunt tool. And by the way, just to show how unpredictable it is, he started off by saying it was 10%. Then he went to 15%. And then it turned out to be 10%.
The end result of that is that there are some countries that are importing cars to the United States that will be coming in at 10%, whereas in North America, we've got a 25% tariff on vehicles. So it's going to be easier for countries around the world to import cars into America than it is within North America. That's just crying out for redress of some kind.
So the answer is yes, there'll be an attempt at litigation, but it's going to take more than 150 days to get litigation through the court system. So what he's got going for him there is the fact that the time limit is so short.
PETER HAYNES: Can he just re-up the 122s again, if he wants to, for another five months? I read that somewhere. I want to know if that's possible.
FRANK MCKENNA: No. He has to go to Congress.
PETER HAYNES: OK. So that's good to know. Now, on the tariff revenues, the whatever-- $150 billion in revenues that were paid to the government. I know Ontario Premier Doug Ford said he wants to sue to get tariff revenues back. How do you expect the refund process to play out, given that the Supreme Court essentially punted that issue to the lower courts? And is Canada due any IEEPA tariff refunds?
FRANK MCKENNA: We actually have very little IEEPA exposure because we have CUSMA, the free trade agreement, which covers now 90% of trade virtually. So the only IEEPA tariffs that we had were on the remaining amount of trade, which is very, very little. So out of $150 to $200 billion in IEEPA tariffs, Canada only has circa $2 billion, $2 and 1/2 billion, which is almost nothing, insignificant, considering the volume of our trade.
So what we have now is just a giant ball of you-know-what. The courts didn't opine on the return of the tariffs, the money. There are 1,800 legal actions that have started now to try to get that money back. Nobody knows. Is it the person who paid the tariff who has the right to get the money back? What if that person has basically paid the tariff but then increased the price of their product to the end user? Does that person have a right to get the money back?
All of that is wide open, up in the air. It has the potential to drain the US government of a lot of revenue. It has the potential to tie this up in court for a long time and increase the repugnance that the business community have for these tariffs. So we don't know where it'll all end up. I think it'll end up going through different courts. And the government of the United States has got a small problem.
In law, we call it estoppel. And that is that you're estopped from making an argument when you've already made the previous argument. All the way through the litigation process, the government of the United States has told the courts, don't you worry about even delaying this, because ultimately, if we lose, we're going to have to pay all of this back.
Now, all of a sudden that they lost, they're saying, no, no, no, no, no. No, we don't have to pay this money back. So they may be estopped from using that defense because all the way through the court system, they made the opposite argument. So the lawyers are going to make an absolute field day out of the litigation that's going to surround this.
PETER HAYNES: I'm glad one of my sons decided to go to law school. So as you mentioned, 122 does have, in fact, a very limited impact on Canada. But the five-month window is pretty interesting because it'll end just when CUSMA is scheduled for renegotiation. US Trade Representative Jamieson Greer was interviewed by CBC after the State of the Union address earlier this week. And during that interview, Greer made it clear that Canada cannot expect to have a trade deal without tariffs.
And I want to quote Greer. "When we go to other countries and we make a deal with them, they agree that we can have a tariff on them," Greer told CBC News correspondent Katie Simpson. He went on to say, "If Canada wants to agree that we can have some level of higher tariff on them while they open up their markets to us on things like dairy and other things, then that's a helpful conversation. We don't want a situation where countries like Vietnam or China can send a bunch of stuff to Canada, do a screwdriver operation, and send it across the border into the United States duty-free."
So these comments lead a lot of questions, Frank. And I want to start with the first one. Does Greer actually think that Canada can become a back door to the US economy for other nations with higher tariffs? I thought that was Mexico.
FRANK MCKENNA: Yeah, no such thing. Mexico has been a bit of a halfway house for cheaper Chinese products. Canada has not. And so he's just absolutely wrong. It's like alleging that we're a source of fentanyl. We would have a thimble full of fentanyl. Mexico would produce a boxcar full of fentanyl. It's just a negotiating tactic. So that's just not true. And even when they talk about dairy, dairy would represent a percent of a percent of a percent of the trade.
But again, it's just a total red herring. And by the way, when he says every other country has agreed on tariffs, there's no other country that's got a free trade deal like we do in Mexico with the United States of America. And it's reciprocal. All parties are the beneficiaries. It guides over $2 trillion in trade and supports over 13 million jobs in the United States of America, as well as jobs in Mexico and Canada. So we are absolutely, categorically in a different time zone, in terms of tariffs than other countries in the world.
PETER HAYNES: So, Frank, you mentioned dairy. How do you expect the federal government to deal with that very delicate topic of supply management of dairy in the province of Quebec, where it's very much a third-rail conversation?
FRANK MCKENNA: Yeah it's unfortunate. By protecting the dairy industry in Canada, we really abandon other farmers in the country. Dairy represents a tiny part of our agrifoods production compared to the other farming in Canada-- potatoes and wheat and blueberries and pork and everything else. But it's politically sensitive, no doubt about that. So there are three ways that we're going to have to deal with it.
One, defensively, we've given up a percentage of our quota to the United States in the last round, and they haven't used it. And part of the reason is, is that some of the rules around it have made it difficult to access. So I think we can turn around and change those rules and make it easier to use. And we should. Truth is, we paid $3 or $4 billion to farmers for a small portion of that quota to give to the United States, and it hasn't really been exploited. So we should make sure that's available. That may be enough.
Secondly, I think we can go on the offense. The United States also has the equivalent of supply management. Around sugar, they've got a quota system to protect 85% of their sugar production. We could demand access to the sugar industry in the United States. And they would say no, of course, because it's sacred. We'd say, yeah, well, supply management's sacred as well.
Or we could go after guns and say, you're responsible for 80% of the guns that kill people in Canada. We want you to stop that. Stop all of the loopholes, the gun fairs and straw purchases and everything. And they'll say, we can't do that. That's sacred. And we'll say, yeah, well, we understand about sacred. We've got a political problem with dairy. So we have both defensive and offensive weapons to deal with that.
PETER HAYNES: So finally, I wanted to ask about the whole idea of tariffs. Given it's clear that any future trade negotiations with the US will now be bundled into CUSMA, do you expect Canada to end up with one-way tariffs to the US? And is that something we should accept?
FRANK MCKENNA: I don't think we should accept it. If it's a free trade deal, it's a free trade deal. But at the end of the day, it'll be a complex negotiation. And what we would ideally like is to get rid of the sectoral tariffs on steel, aluminum, and autos, et cetera, and simply have a free trade deal where we benefit and they benefit. We have a very closely matched trade relationship, very little disparity between Canada and the United States.
And we supply them with the raw materials, which create their jobs. Mexico actually produces manufactured products which take their jobs, but we supply oil, for example, and potash, steel, aluminum, other elements, which go to the United States in raw form and create jobs in the United States. Secondly, we have a massive services imbalance with the United States. They have-- I don't know-- something like a $36 billion balance in their favor.
And I think we should throw that on the table and say that we need some redress with respect to that. They should all be looked at the same way. All of this is around negotiating. But, Peter, I think we have got a very strong hand. We are not an enemy of the United States. We've been good trade partners. And the United States would be so much better off with all of the fights that it's picking around the world to have North America as a fortress, Mexico, Canada, and the United States working together than fighting each other.
PETER HAYNES: Well, Frank, just following on this claim around tariffs, President Trump at the State of the Union was focusing again on how tariffs are fueling the recovery of the US economy. And he continues to toy with this notion that tariff revenue can replace income tax revenues. So I asked my friend ChatGPT, how much revenue did the US government earn from federal taxes? The last number available was, according to ChatGPT, $2.2 trillion in 2023, which I think is 50% of the government revenues.
I believe that Trump's new tariffs generated somewhere around $125 billion of net new revenue in 2025 over and above 2024 or pre-tariff levels. So it's clearly a fallacy that he can replace income taxes with tariff revenues. Yet I don't hear much pushback from opposition politicians on talk shows and in the media. What's it going to take to dispel this theory? Is it a loss at the midterms? And how can the US public become better informed about the costs of tariffs and the fact that 90% to 95% of tariff revenues are, in fact, a tax on Americans?
FRANK MCKENNA: For the ordinary American, the biggest issue, every poll says, is affordability. And increasingly, Americans tie tariffs to affordability. And the Democrats are laser focused on tying affordability and tariffs together. So as we get to the midterms, this is going to become front and center, where Democrats, who normally are more prone to supporting tariffs, are going to be fighting hard against tariffs on the grounds they make everything more expensive for Americans.
So I think that's how it bleeds into the body politic. If somebody goes to the grocery store and the price is a little bit higher, they're going to now associate that with tariffs because that is going to be the narrative going forward. If you read The Wall Street Journal, which is owned by Murdoch, Rupert Murdoch, who owns Fox News-- but is dead set virulently against tariffs and ties them directly to the affordability issue. You'll see more and more of that.
We saw a sign of that on February the 11th, just a week or two ago, when Congress voted with Republicans supporting Democrats against tariffs against Canada. Now, that is really big because it puts Democrats firmly on the record and some Republicans firmly on the record. And hopefully we'll see that turn into a tidal wave as we get closer to elections.
PETER HAYNES: But, Frank, it just seems to be Republicans that are not up for reelection or retiring, that can't be primaried. What's it going to take for some of the other folks in the Republican Party that probably believe this but are afraid of being primaried?
FRANK MCKENNA: Just the heat at their feet. One of the Republicans is in Colorado, who I think is running again and is prepared to take this off. And he knows that he's going to have a primary challenge. Republicans are like all politicians. We all fear defeat. And if the polls show that there's a strong trend towards voting out the incumbents because of affordability issues, they'll start taking a stand, especially the people on the Northern border.
Something that our friend Chris Krueger mentions that hasn't been picked up enough is that the major battles, especially in the Senate, are all along the Northern border, places like Alaska and Maine, Michigan, and so on. And these are all states that are very friendly to Canada and rely on the Canadian relationship for a lot of their economy. So this could end up benefiting us enormously.
PETER HAYNES: It's a good reminder. We'll get Krueger on here in a couple of months ahead of midterms here to make sure we go through all of the permutations and combinations for both chambers of Congress. So let's move to Trump's foreign policy decisions.
Hawks in the Trump government will tell him he has never had a better time or opportunity to dismantle the Iranian leadership than now. With the US government moving significant military assets to the region, do you believe an attack on Iran is inevitable? And if so, then what would it look like?
FRANK MCKENNA: Yeah, so Trump essentially wants Iran to agree to the deal that he tore up with Obama, only perhaps with a little more detail here and there. And that is to not continue to proceed towards enrichment that could lead to a bomb. That's ultimately what they want Iran to avoid. Iran would like to continue enriching because they would like nuclear power as part of their energy source.
So Trump's in a situation now where he's really got some conflicts he's got to deal with. MAGA, generally speaking, is isolationist. They do not want more foreign intervention. So he's got to fight against that inertia within his own party. On the other hand, he's moved so much equipment-- men and materials-- into that theater that there will be a colossal loss of face if they don't do something.
He's got two carrier groups in there, and I believe each of those carrier groups has more firepower than any other army on the planet. So he's got over 12 destroyers, two carriers, over 125 attack aircraft. He's got 150 airplanes carrying defensive weapons like Patriot missile batteries and so on.
So he's got a massive amount of force there. And it's costing billions a day just to keep it in theater. So he's going to have to do something fairly quickly. So he risks a loss of face. If he gets too mired in that war, he risks the loss of MAGA support. So I think he will do something.
He'll either do a strategic strike that will warn Iran what's coming, or he'll force them to the table with some form of negotiation that might be quite similar to what Obama achieved. But Obama is gone. And Trump will say, I win. It's like somebody said about Vietnam. What the Americans should do is declare victory and get the hell out. At some point, he'll declare victory and move the troops back. And what kind of a deal he gets, it's hard to know.
But remember, Iran is not just a small and insignificant country. It's got a population of some 93 million people. It's relatively affluent. The median age there is 34 and 1/2 years. It's a very consequential country. A lot of their armaments are heavily fortified in mountainous territory and so on.
So a war with Iran is not going to be easy. The Americans will not want to put boots on the ground. It's going to be hard to do a regime change without boots on the ground. So all in all, it's much more complicated operation than Venezuela and fraught with danger, I would say, for all parties concerned.
PETER HAYNES: So, Frank, just before we move to other regions, one concern I hear from critics of the worldwide military buildup is this notion that countries spending trillions of dollars on defense might be more prone to want to test out some of the new military might, especially if ideologues become leaders in some of these countries that are now spending a lot more on defense. Do you share this concern? And how do we find the right balance globally between one's own defense capabilities and a newborn war culture?
FRANK MCKENNA: Totally share the concern. Peter, when you and I studied economics, one of the classical things we learned was the debate about guns versus butter.
PETER HAYNES: Yeah.
FRANK MCKENNA: And for the last 70 years, Pax Americana, so-called, has yielded a massive peace dividend, where we've been able to divert money away from wars and armament into peaceful expenditures, better pensions and health care and so on and so on. We're now going the other way. I think that there is a temptation, if you've got these big guns, to use them.
And secondly, I think that we're rapidly eroding any peace dividend that we had. And now we're grinding down all of our economies in ways that are not inherently productive. So I would love it if we could end up having more big power talk of peace than making war.
PETER HAYNES: And, Frank, how does Canada deal with, once again, another delicate topic, which is where they're ordering the military might from? If we're going to spend the money, the feeling in Canada amongst the government is they should be able to spend it where they want to spend it, not necessarily using US defense contractors. Do you think this is going to become a big topic of debate between the two countries?
FRANK MCKENNA: Well, it's already raised its head with respect to Europe saying the same thing. And in Canada, we spent 75% or 85% of our defense dollars in the United States. And now we want to divert it to the point where 70% of it is spent within Canada. And that means that we have to have a Canadian preference. And we want to have more civilian adaptation from the military expenditures.
Yeah, I think that could very much become a big source of debate with the US. The US is mad at us because we don't spend enough money, but all the money we spend, we spend in the US. Now we're going to spend more money, and they want us not to spend that money in Canada but in the US. So at some point, it's like so many of these issues. We're going to have to stand our ground and figure out what's good for our country.
And right now, I think we're really racing ahead very quickly to start spending defense dollars in ways that leverage civilian applications and that leave that money in Canada. The United States has created a great economy around military spending and keeping that expenditure in the United States. This probably will really reach its peak when we get into some high-profile issues like the F-35s.
We're legally obligated to take 16, and we're going to. We could end up taking another 50 or 60, or we could switch to something like the griffins and get twice as many for half the price, literally, but without the same capabilities. So all of this debate is coming at us, Peter.
PETER HAYNES: Frank, what's going on in Venezuela?
FRANK MCKENNA: Well, I'd say capitulation at this stage. The United States really executed a surgical strike. It was very effective. They've learned the lessons from Iraq, and that's not to decapitate people running the country. They seem to have been able to get the leadership to go along with them so far. I think it is going to result in exciting activity there.
This weekend, I talked to the owner of a drill rig company who's had drills operating in Venezuela for the last decade. It's two drills for decades. He said the orders now are just flying in for more drills, more drills, more drills. So some of the majors are moving men and equipment in to start drilling programs there in that extraordinarily prospective oil basin.
PETER HAYNES: And what about the people of Venezuela? I hear mixed stories about whether or not they're happy or concerned.
FRANK MCKENNA: Yeah, I think probably both are true. They didn't like the Maduro regime at all, but they don't particularly want to be run by the Americans. And I think what they'll care about is whether oil revenues will end up starting to flow back into the hands of people in the government through better services. In the meantime, I think it's just a wait-and-see. I think people simply don't know. They're not unhappy that Maduro is gone, but they're not sure of what comes next.
PETER HAYNES: It's going to be a topic to follow closely for sure.
FRANK MCKENNA: The Venezuelan expats that I talked to universally are happy. And remember, there's a massive Venezuelan expat community. Maybe over 9 million fled Venezuela from the horror show of Chavez and Maduro. So they see almost everything about the regime change as being generally positive. But I think now, people who are actually living in Venezuela are in show-me mode.
PETER HAYNES: Yeah, I would have used the word skeptical in the people that I've spoken to that are expats. So we'll definitely stay on top of that. Frank, you mentioned oil. I want to talk about a bit of a surprising development in the oil patch in Canada. And that was pipeline operator South Bow publicly musing earlier this week about revitalizing Keystone XL.
This would effectively double down Canada's commitment to refining heavy oil in the US. And it seems to run counter to recent musings from the Alberta Premier, Danielle Smith, and Prime Minister Carney, about the need to build more egress to the West Coast. What do you make of these musings?
FRANK MCKENNA: If I were in the government of Canada, I would be very skeptical about that. First of all, is it realistic? Yeah, it is. We've already spent a lot of money getting egress all the way to the border for TransCanada pipeline. Government of Alberta has actually lost a lot of money on this, and so has TransCanada. So I could see them welcoming this.
The trouble is if we do this, all we do is double down on a bad situation. The more oil that we send to the United States, the more we're captive to the United States, and the more they can discount our oil. And over the last 10 years, they've basically taken about $80 billion out of Canadian hands and put it in their hands by being a captive market. I mean, we're their biggest supplier of oil by far, 4 million barrels a day.
And it's not just South Bow who's partnering with Bridger on this idea, but also Enbridge are looking at adding 300,000 or 400,000 barrels a day, which also would take more oil south. So the problem with that, again, it's always good to get more oil flowing into other markets.
But if we keep doubling down, putting all our eggs in the US basket without getting anything in return, then we've undercut Canadian taxpayers who are missing out on all of those revenues that would come from better netbacks. So it would be better if we could get egress either East or West to tidal water. I think the optimum solution right now is Trans Mountain, which can add as much as 300,000 or 400,000 barrels a day by various debottlenecking techniques.
That would get us into Asian markets. That would allow us to get better netbacks and have more money for producers, more for money for royalties for provincial governments and federal governments. That would be the ideal solution. I'd be very careful about supporting projects that put more money into a market that already is discounting our product.
PETER HAYNES: Does this become part of CUSMA negotiations?
FRANK MCKENNA: Well, it was last fall. Your information is accurate. This was actually put on the table by Canada. But I think even oil producers in Alberta are leery about putting more oil down into that US market. With Venezuelan oil now coming up into the Gulf refineries, it just seems to me that we need to-- again, I repeat what I've said a number of times, to use Reagan's axiom a little bit differently, and that is to trust but diversify. America will be our best market. It should be. But we need to diversify. We need to keep them honest. We need leverage.
PETER HAYNES: Well, our prime minister is traveling again to the Far East this week.
FRANK MCKENNA: Yeah, it looks like some big deals coming. The Indian High Commissioner today said there's going to be a mammoth number of deals done with India. Now, that's encouraging.
PETER HAYNES: Yep. And he's certainly doing that diversification specification discussion. Maybe it is a bit to the chagrin of the US government, but nonetheless it's in the best interest of Canada. So over the past month, another conservative member of Parliament, Matt Jeneroux, crossed the aisle to the Liberals and was given a minor cabinet position. This puts the Liberals three seats short of a majority, with three seats currently open. How quickly will these open ridings be filled in by elections? And do you think Prime Minister Carney is risking some backlash in his caucus by moving Jeneroux into his cabinet immediately?
FRANK MCKENNA: Yeah, on the latter point, it was very little profile about Jeneroux. He's not moving into a major cabinet portfolio or anything. So I don't think that's excited the party. I think he would have to be very careful about taking any of these people and making it look like he bought their affection by making them a cabinet member. So both internally in the caucus, but also externally with the public, I think that's a no-go zone.
The by-elections will be called quickly. In my view, the math looks as if the Liberals are probably very safe in Toronto and the two ridings there. The Terrebonne riding in Quebec, it's a bit of a jump ball. There was only a one vote difference in that riding. The bloc are strong in that riding. It's very, very close. The Liberals can't count on getting that seat, which means they still need one or two seats in order to have a working majority.
PETER HAYNES: Do you think that the other parties will stand down to allow the bloc to not have any split votes against the Liberals in that Terrebonne riding because it will mean the difference between a majority and minority?
FRANK MCKENNA: I doubt it. So far, not that level of strategic alignment amongst the parties to see that happen. But anything's possible, and voters are volatile. Carney is very popular in Quebec. And the Liberal Party of Quebec, which was on the map very dormant, have stormed back quite a bit. And the poll that's out this morning, 30% would vote for the Party Québécois provincial election. And the Liberals are up to 27%.
So the Party Québécois have dropped four. The Liberals are up three. So the Liberals are trending in Quebec. We'll see. Federally, the Liberal under Carney are in very strong shape in Quebec. So quite frankly, Terrebonne could be-- it certainly will be a jump ball. But I wouldn't rule out either side winning it. A lot of resources will go into winning that riding.
PETER HAYNES: All right. So Frank, I want to finish up with a topic-- the Olympics. The world came together for another very successful Olympics in Milan, Italy. And of course, as Canadians, we had our hearts broken not once but twice to the US in women's and men's hockey. Overall consensus, though, suggests that Canada underperformed its expectations.
In fact, as a country, we placed 8th in the medal count in Milan, compared to 4th in Beijing the last time there was a Winter Olympics. After the Olympics, Canada's Chef de Mission, Jennifer Heil, warned that our country's results will continue to lag in the future unless governments step up funding. Now, I didn't realize this point, but apparently funding for Olympians in Canada is the same in 2026 as it was in 2005.
We seem to debate this topic every Olympic cycle, and then we forget about it until next time. If you were in a position of influence, Frank, what would you do to help Canada improve its Olympic fortunes?
FRANK MCKENNA: Well, to start with, I think a little bit of context. Certainly, in the Vancouver Olympics, we had a campaign to own the podium, and we effectively did. So it matters whether or not you take it seriously. And we didn't take this as seriously as we should. But it put it in context, there's a little bit of puck luck involved in that. We could have been the gold medal winners for both the women and the men with a little bit of puck luck.
I think you'd have to concede that. And in curling, there's not much government can do. We're strong in curling. We won a gold. Didn't end up winning in women's, but again, that could easily change. So those are areas where we could make very easy improvement. On the other individual situations, I think the government have to do their fair share, but we have to have the private sector and individuals also getting in to support these athletes.
And I think that we should. They work really hard. They're dedicated. They make the country proud. I supported a skater from Moncton in these Olympics, Courtney Sarault, and she ended up winning four medals. Made us very, very proud indeed. So we have to get behind these athletes and show some pride as a country in how they do.
I do think when I listen to these athletes speak on behalf of the country, when I watch the way they perform, we have so many reasons to be proud, Peter. These are not just outstanding athletes, but they're outstanding representatives of our country.
PETER HAYNES: And, Frank, just to finish up, I did have a few friends that were visiting Milan to see the Olympics. And a comment he made that really stuck with me was every time they ran into someone from the Ukraine when they were wearing their Canada jackets or their Canada jerseys, the Ukrainians were just so thankful and appreciative of everything that Canada has done for them. That really was touching and definitely a testament to the relationship that these two countries have.
FRANK MCKENNA: Agreed. Completely.
PETER HAYNES: OK, well, there we go. Lots to chew on, Frank. And there's a few topics that you left that we'll have more to say in the next few months as we learn a little bit more about how these events evolve. Thanks again for your time. And we'll chat again in late March, when it will be very close to opening day. And we have the World Baseball Classic coming up, so we'll be talking about that. Take care.
FRANK MCKENNA: Hear, hear. 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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