A few weeks after winning the US presidential election, Donald Trump announced that he would impose a 25% tariff on all Canadian imports - including cars and car parts. Since then, the future president has further hardened his rhetoric against the country's northern neighbor, even joking that Canada could be “annexed” and become the “51st state”. Trump even mocked Canadian Prime Minister Justin Trudeau, calling him “governor” of Canada.
A serious threat or just Trump's usual rhetoric?
Some analysts believe that this rhetoric is typical of Trump, but many Canadian politicians and economists condemned the words of the future US president.
“It came like a bolt from the blue“, Douglas Porter, chief economist at Bank of Montreal, told DW, referring to Trump's attack. “Among his supporters, there were no people who saw Canada as an adversary“.
Porter believes that what Trump is saying is gradually changing as his inauguration approaches. “Initially, he emphasized the border issues, which I think Canada can solve. Then he talked about the trade imbalance between the US and Canada. And now Trump is threatening to create economic hardship for Canada,” Porter says.
The Trade Imbalance
Although Trump just signed the US-Mexico-Canada Agreement, which took effect in 2020, Trump is now claiming that the other two countries have not kept their promises - from border controls to trade.
In fact, the US has a significantly larger trade imbalance with China, Mexico, Vietnam, Germany and Japan than with Canada. In January-November 2024, the trade imbalance in question with Canada amounted to about $ 55 million. Meanwhile, the trade imbalance between the US and China is nearly five times higher over the same period - $ 270.4 billion. The trade imbalance between the US and Canada has decreased by about a quarter in the past two years. However, it was much lower before the pandemic and the entry into force of the US-Mexico-Canada Agreement.
Is Canada receiving a “subsidy” from the US?
“The US is effectively subsidising Canada through the trade imbalance between the countries,” Trump wrote on his own social network Truth Social. He claims that the world’s largest economy “can no longer tolerate the huge trade deficits that Canada needs to stay afloat.”
Trade between the US and Canada is particularly intense. In the first 11 months of 2024, trade between the countries amounted to $699.4 billion. Canada is the largest market for US exports, ahead of Mexico, Europe and China. U.S. exports include trucks, vans, cars and auto parts, as well as fossil fuels.
Problems for the oil and auto sectors
Crude oil makes up a quarter of Canada's exports to the South, which reached a record 4.3 million barrels per day in July 2024, according to the U.S. Energy Information Administration (EIA).
With its refining capacity, the U.S. refines crude into gasoline, diesel and jet fuel for domestic use and re-export - some of which goes back to Canada. Daniel Smith, the regional premier of the oil-rich Canadian province of Alberta, warned that the U.S. would shoot itself in the foot if Trump followed through on his threats. Smith wrote in X that: “Any proposed tariffs would immediately hurt U.S. refineries and force consumers to pay higher prices at the gas station.”
Trump’s ire has also been directed at the Canadian auto industry, which in recent years has shifted production across the northern border, causing layoffs for American workers. Yet the North American auto sector remains highly integrated with Canadian industry. Canadian auto executives have warned that tariffs could disrupt complex supply chains, leading to increased costs and inefficiencies, as well as higher prices for new cars in both countries. "If you impose a 25% tariff every time an auto part crosses the border, the costs become absurd," William Huggins, an associate professor in the business department at McMaster University, told DW.
This week, Canadian media outlet BNN Bloomberg cited economists who said U.S. tariffs could shrink Canada's gross domestic product (GDP) by 2-4% and lead to a recession.
Ottawa is preparing to retaliate
Canadian politicians are already making plans for what U.S. imports they could retaliate against if Trump follows through on his threats. The Global & Mail reported this week that Ottawa is considering imposing tariffs on U.S. steel, ceramics, glass, flowers and orange juice from Florida, among other goods.
But despite the short-term economic turmoil in both countries, one thing is clear: “In 30 years, Donald Trump will be gone, but Canada will be,” says McMaster University economist William Huggins.
Author: Nicholas Martin