Democrats win midterm impact on Canada trade
Democrats won control of the U.S. Congress in a midterm election that will impact the Canadian economy and offer a path toward a better bilateral relationship, even as repealing existing tariffs remains unlikely.
The election outcome was a rebuke of President Donald Trump. Bruce Heyman, the U.S. ambassador to Canada under Barack Obama, urged the new Congress to prioritize reconciliation. “Canada is our neighbour, our friend and an essential partner,” Heyman wrote Tuesday night.
Trump retains significant power. He plans to use it. On Truth Social, Trump posted an image of a red ball cap with the word “VETO.” Democrats did not win enough seats to override a presidential veto.
Rising costs made the trade war a key issue in border states. In Maine, incumbent Republican Susan Collins lost to Democratic candidate Troy Jackson, even after Trump lifted duties on some Canadian goods to help her campaign.
Tariff Pressure Mounts
“These elections should be a nail in the coffin for price-hiking tariffs,” said Dan Anthony, executive director of We Pay the Tariffs, a coalition of 1,200 U.S. small businesses. They are urging Congress to deliver real tariff cuts.
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Democrats will likely resist tariffs through symbolic legislation and committee probes. However, they lack the power to reverse the executive trade authorities Trump used to impose tariffs on Canadian goods.
Those statutes are being challenged in court, but more damaging tariffs could be imposed before the legal process concludes. In August, Trump threatened to double the Section 232 tariffs on Canadian cars and trucks to 50 per cent starting Jan. 1. He also proposed extending those duties to auto parts. An executive at Honda called the potential tariff increase “catastrophic” for the auto industry.
That gives Canada reason to pursue a deal. Prime Minister Mark Carney said Tuesday that Canada and the U.S. are closer to a deal on tariffs. The White House has backed away from some “red lines” that caused talks to collapse in August. “They’re asking less and they’re offering more, but we’re not quite there,” Carney said. Last week, he told Politico he was willing to wait for a new U.S. president if needed.
Data Centre Crackdown
The election results also affect Trump’s “era of super intelligence.” Dozens of towns and counties passed ballot initiatives to restrict or ban data centre development. In Texas, Gina Hinojosa campaigned against data centres and ousted Republican incumbent Greg Abbott to become the state’s first Democratic governor in decades.
Democrats are expected to push for stronger AI regulation and more scrutiny over data centres. Share prices for some AI firms fell on Wednesday. This could prompt hyperscalers to build more data centres in Canada.
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Clean Energy Shift
The Liberals under prime minister Justin Trudeau responded to the 2022 U.S. Inflation Reduction Act with billions of dollars worth of tax credits to prevent capital flight, as well as production subsidies to attract projects such as the Volkswagen-backed EV battery gigafactory in St. Thomas, Ont. Trump’s “drill, baby, drill” agenda has obliterated many assumptions and dampened demand for renewables and EVs, leading the Liberals to scrap an oil-and-gas emissions cap.
With Democrats controlling Congress, expect a stronger defence of U.S. environmental regulations and the tax incentives in the Inflation Reduction Act, including credits to lower EV production costs.
The U.S. has a tax benefit called the Qualified Small Business Stock exclusion, which exempts up to 100 per cent of long-term investments in high-growth firms from capital gains taxes. The Council of Canadian Innovators has asked for a similar measure to encourage entrepreneurship. However, Sen. Elizabeth Warren, a Democrat, has opposed the benefit’s expansion, arguing it favours wealthy investors.
Warren is reportedly looking to play a bigger role in Senate leadership, where she could push to revisit the expanded tax treatment.
