Prospectus on the US-Canada Trade War | Part 1

When Donald Trump was being sworn into office for his second term, I was watching the broadcast at the bar “La Botticella” in Trastevere, Rome. I had just joined a company of strangers. A Midwestern US federal judge, an Ukrainian couple who ran a plastic film factory in Kiev, and a commercial airline pilot from Miami, Florida. We chattered beneath the processions playing out on the TV screens, with somewhat ominous pauses in-between conversations. But as the night went on, we started buying each other drinks and had a good time.

Not two days later, on February 1st, Trump announced blanket tariffs on China, Mexico, and Canada. Like everyone else, I was baffled and angry.

Why? Just, why?

Trump’s “formal” justifications hovered around border security and the US trade deficit with Canada. The number of unlawful crossings at the US-Canada border has grown during the ongoing US migrant crisis. But less than one-tenth of unlawful migrant crossings. Fentanyl from Canada is a non-issue. Less than 0.1% of fentanyl seized by US customs were at the US-Canadian border amounted. And these are problems that you’d think would be better addressed collaboratively. If you yell and make threats at your neighbour, I doubt they’d go out of their way to help keep your side of the street clean.

On the economic side, Trump has made no secret of his scorn for the US trade deficit. Even though it’s based on a flawed understanding of international trade. But who can blame him? Most people are not well-versed in balance of payment accounting, including me. After all, he’s only the President of the United States.

But why did he target Canada first (alongside China and Mexico) before Liberation Day? My pet theory is that he didn’t like being cuckolded by Justin Trudeau.

It goes back to the 2019 G7 summit, which spawned a viral photo of Trudeau kissing First Lady Melania Trump while she held the President’s hand. One French news outlet reporting on the exchange lead with the headline, “Look of lust.”.

The first daughter was not spared the Trudeau photo trap either. Following the PM’s 2017 visit to Washington, one viral tweet wrote, “Get someone that looks at you the way Ivanka Trump looks at Justin Trudeau,” accompanying a snapshot of Ivanka gazing at Justin with a pondering hand on her chin.

Say what you will about Justin, our boy is handsome.

But however bizarre these or other reasons for the tariffs are, Canada is now in a trade war against the US, its closest neighbour and historical trade partner.

Mark Carney, the new Prime Minister after Trudeau’s resignation, said in his election victory speech that “Canada will win” the trade war. Pierre Poilievre, leader of the main Conservatives opposition, also stated that he favors a retaliatory response to US tariffs.

How might this play out for Canadian industries and workers? Let’s first take a look at the current state of affairs between Canada and its main trade partners.

Canada’s Trade Partners

To understand how Canada’s trade balance might evolve under the tariffs, let’s first look back at the good old days of 2024, the most recent year before the Trump regime.

In 2024, imports from the US totaled $360 billion, constituting about half of all $744 billion Canadian imports. Canadian imports from the entire European Economic Area plus UK and Switzerland (EEA+ for short; these are pretty much the Western European countries) totaled $103 billion, less than a third of US imports. After the US, China is the next largest single-country import partner to Canada at $88 billion.

Canada’s Top Import Partners (2024) Data from ISED Canada | figure by author

About three-quarters of total Canadian exports ($751 billion) went to the US ($569 billion), dwarfing Western Europe’s $70 billion. The next largest single-country export partners are China and UK, receiving a little less than $30 billion of Canadian exports in each country.

Canada’s Top Export Partners (2024) Data from ISED Canada | figure by author

Looking at trade through time, the share of US import to Canada has dropped by about 17 percentage points (from ~65% to ~48%) over the past 25 years. Imports from China and countries outside of Western Europe have picked up most of the difference.

Shares of Imports to Canada from Trade Partners Data from ISED Canada | figure by author

The share of Canadian exports to the US has also dropped about 11 percentage points (from ~88% to ~77%). The good news is that we appear to have been steadily diversifying from trade with the US. The bad news is that even though we are near historic-lows in reliance on US for trade, and we are still quite reliant. But that’s what happens when you have the largest consumer economy in the world as your next-door neighbour.

Shares of Exports from Canada to Trade Partners Data from ISED Canada | figure by author

Canada’s Trade Sectors

Here is a by-sector breakdown. I will say more about these later. I plan to update this post with figures breaking down trade by provinces also.

Imports by Sector (2024) Data from ISED Canada | figure by author

Exports by Sector (2024) Data from ISED Canada | figure by author

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Canada’s trade reliance on the US is stark, especially in terms of exports. Trump’s tariffs will take a large toll on producers in Canadian export industries, which will likely translate to a contraction in the economy (i.e. recession) and job losses. Canada’s counter-tariffs against the US will also raise prices for the targeted goods, though they are likely our most effective bargaining chip to negotiate an end to Trump’s unsolicited trade war (short of agreeing to annexation). These are the direct effects of the tariffs, which will propogate to other aspects of the economy as well.

Mark Carney’s visit to Europe after being sworn in as Prime Minister was a gesture to show his initiative in mitigating the damage that has ensued, but it’s clear that Europe cannot absorb anywhere close to US’s demand for Canadian goods. Carney is also campaigning with a plan to remove interprovincial trade barriers within Canada. I’m currently looking into the papers cited in the plan, but so far I’m skeptical that significant pains in the short term can be avoided. However, a detox from US trade was probably overdue. These plans to strengthen non-US trade relations and reduce internal trade barriers will pay dividends in the future.

But I will not lie, the current prognosis looks quite grim. Exactly how bad will it be? More to come in this series.