Breakdown of the USA/CAD Trade Dynamics
In this report, I will be covering the following topics:
What Just Happened?
Import/Export Trade Snapshot Between USA & Canada
What Comes Next for Canada?
Conclusion
“Complete free trade is not politically feasible. Why? Because it's only in the general interest and in no one's special interest.”
- Milton Friedman
What just happened
On February 1, 2025, the U.S. announced that it was imposing tariffs of 25 per cent on Canadian goods, and a tariff of 10 per cent on energy exports from Canada, imported into the U.S. from Canada effective February 4, 2025.
Now before we continue, lets get a starting definition of what a Tariff is:
A tariff is a tax or duty imposed by a government on an imported or exported good.
For the better part of four decades, trade between Canada and the U.S. has been governed by a succession of free trade agreements. The Canada-U.S. Free Trade Agreement (CUSFTA), implemented in 1989, was the first of its kind, followed by the North American Free Trade Agreement (NAFTA) in 1994, which added Mexico. The most recent evolution of this agreement is the Canada-U.S.-Mexico Agreement (CUSMA), which entered into force in July 2020 which balances trade relationships across the North American continent and facilitates trade across all sections of the economies.
Pause in USA/CAD Trade War
Now before you continue to read the following report, the night prior to this being published, we found out that the meeting between Trump and Trudeau yielded a 30-day pause in tariffs being put into place. Trudeau said Canada will be pressing ahead with a $1.3-billion border security plan will be reinforcing the border with new choppers, technology and personnel and stepping up its co-ordination with American officials to stop the flow of fentanyl.
Trudeau said, all told, there will be 10,000 front-line personnel working along the border to address Trump's stated priority: a major crackdown on drugs and migrants. He also mentioned launching a Canada-U.S. Joint Strike Force, that will be tasked with combating organized crime and money laundering
The Canadian government's plan is based on what it calls five pillars: detecting and disrupting the fentanyl trade, introducing new tools for law enforcement, enhancing operational coordination, increasing information-sharing and tightening the immigration and asylum system
The prime minister also made a series of new commitments to Trump, including a promise to appoint a new fentanyl czar who will lead Canada's efforts to crack down on the deadly drug. And he promised to list Mexican cartels, one of the top purveyors of fentanyl and other drugs in Canada and the U.S., as terrorists under Canadian law.
FYI on a side note, Canada still takes a loss having to spend money it does not have regardless. It is not like the welfare government of Canada is going to redirect spending by cutting it off elsewhere. It will be a non productive investment that will yield no fundamental improvement in the Canadian economy. It will be more liabilities put on Canadian taxpayers. Let’s hope Trudeau doesn’t go misleading Trump and make this worse for Canadians.
Back to Original Scenario - Trade War
Now let’s go ahead and resume the scenario that the trade war does continue and Tariffs are put into place. For now it remains a thought-exercise.
Canada's Tariff countermeasures includes:
Website → Canada announces $155B tariff package in response to unjustified U.S. tariffs - Canada.ca
Imposing tariffs on $30 billion in goods imported from the U.S., effective February 4, 2025, when the U.S tariffs are applied.
The list includes products such as orange juice, peanut butter, wine, spirits, beer, coffee, appliances, apparel, footwear, motorcycles, cosmetics, and pulp and paper.
Announcing that the government intends to impose tariffs on an additional list of imported U.S. goods worth $125 billion.
A full list of these goods will be available shortly for a 21-day public comment period prior to implementation, and includes products such as passenger vehicles and trucks, including electric vehicles, steel and aluminum products, certain fruits and vegetables, aerospace products, beef, pork, dairy, trucks and buses, recreational vehicles, and recreational boats.
The Canadian Government said all options remain on the table as the government considers additional measures, including non-tariff options, should the U.S. continue to apply unjustified tariffs on Canada. They claim that these countermeasures have one goal: to protect and defend Canada’s interests, consumers, workers, and businesses.
Can you really believe that? I do not believe the Canadian government retaliating with this “we’ll show you who’s boss” mindset will do us any good. This is just going to make a bad situation even worse for Canadians. The trade relationship between the United States and Canada is one of the most extensive and integrated in the world. But as you will come to see further into this report, the economic realities of the trade dynamics between these neighboring countries do not favor Canada. Canada is likely to suffer more due to its greater dependence on U.S. trade, smaller economic size, and limited alternative markets. However, the U.S. will also feel pain.
Even Chat GPT and X’s Grok 2.0 when asked “who will see the greater economic shock from the USA/CAD trade war?”…. Canada is also their conclusion.
The image above of Trudeau is a perfect representation of the Canadian culture and the perceived threat of the Canadian government wanting to engage in a tariff war.
Post by Trump on Tariffs on Canada
Trade Snapshot
2023/2024 Export/Import Stats
U.S.-Canada Trade Overview Canada is the top U.S. partner for trade in goods and services. In 2023, Canada exported 77% of its goods to, and imported almost half of its goods from, the United States. According to the U.S. Bureau of Economic Analysis and Statistics Canada, as of 2023, the United States is the largest source of foreign direct investment (FDI) by stock in Canada (C$618.2 billion/about $455 billion), and Canada is the third-largest source of FDI in the United States ($671.7 billion).
Source: CRS, with U.S. Bureau of Economic Analysis data, December 2024.
2023 : U.S. trade in goods with Canada
Exports → 354.35 Billion
Imports → 418.62 Billion
Net→ -64.26 Billion
2024 : U.S. trade in goods with Canada
Exports → 322.24 Billion (decrease from 2023)
Imports → 377.24 Billion (decrease from 2023)
Net→ -54,999.5
→ Source: Trade in Goods with Canada – Census.gov
TD Bank Economic Report:
→ Source: Setting The Record Straight PDF TD BANK
OVERVIEW OF CANADIAN EXPORTS
ScotiaBank Report → Canada-US Trade: Getting Up To Speed
Canada’s top exporting sectors in 2023 were energy (18%), automotive/parts (11%), metals and non-metals minerals (10%), and consumer products (9%).
Canada’s top two exporting provinces (ON and AB) accounted for 60% of overall exports in 2023. This is partially explained by regional concentrations of oil production and automotive/parts manufacturing.
As a share of GDP, Saskatchewan (45%), Alberta (38%), New Brunswick (35%) and Newfoundland and Labrador (32%) rely most on international trade.
The US is the export destination for roughly 77% of Canadian goods traded, and no other country accounts for greater than 5% of export volumes.
Canadian Export Mineral Breakdown → Natural Resources Canada, Statistics Canada.
The value of mineral exports to the United States in 2023 amounted to $83.8 billion
The United States remained Canada’s top destination for mineral exports in 2023, representing 56% of total shipments. Other key markets included China (7%), the United Kingdom (6%), Japan (4%), South Korea (3%), and Switzerland (3%). Together, these six countries accounted for 79% of Canada’s mineral exports.
Most of Canada’s mineral trade is concentrated in Ontario and Quebec, with these two provinces accounting for 42% and 24% of exports, respectively. (Mineral Trade)
Source: Sources: Natural Resources Canada, Statistics Canada.
The leading mineral exports in 2023 included:
Iron and steel ($20.0 billion, or 24% of the total)
Aluminum ($15.2 billion, or 18% of the total)
Gold ($12.5 billion, or 15% of the total)
Potash ($4.9 billion, or 6% of the total)
Copper ($4.9 billion, or 6% of the total)
→ Sources: Natural Resources Canada, Statistics Canada.
Canada also plays a crucial role as a supplier of critical minerals to the United States, including tellurium, niobium and uranium.
Zinc: 76% of U.S. imports come from Canada.
Tellurium: 75% of U.S. imports come from Canada.
Nickel: 56% of U.S. imports come from Canada.
Vanadium: 54% of U.S. imports come from Canada.
→ Source: Setting The Record Straight PDF TD BANK
→ Source: Setting The Record Straight PDF TD BANK
Canada is the single largest foreign supplier of energy to the U.S. The bulk of the U.S. trade deficit with Canada is owing to energy. Outside of that, the scales tip into America’s favor.
The United States (U.S.) remains the primary destination for Canadian crude oil, receiving approximately 97% of Canada’s crude oil exports in 2023. The remaining 3% was exported to non-U.S. destinations including the Netherlands, United Kingdom, Germany, Spain, France, Norway, Italy, and Hong Kong (Figure 1). Alberta, Canada’s largest oil producer, is also the largest source of crude oil exports to the U.S. (Figure 1). In 2023, Alberta contributed 87.4% of the total volume exported to the U.S. followed by Saskatchewan with 8.9%, while Newfoundland and Labrador, British Columbia (B.C.), and Manitoba contribute 1.9%, 1.3%, and 0.4%, respectively
Canada is even more dependent on the U.S. for natural gas exports than oil exports. In 2023, Canada exported approximately 84 billion cubic metres of natural gas—all to the U.S.—via 39 pipelines, again leaving producers in Canada vulnerable to U.S. policy changes.
→ Source: CER – Market Snapshot: Almost all Canadian crude oil exports went to the United States in 2023
OVERVIEW OF CANADIAN IMPORTS
ScotiaBank Report → Canada-US Trade: Getting Up To Speed
Canada’s largest importing sectors were consumer products (15%), motor vehicles and parts (15%), electronics (9%), and metal and non-metallic products (7%).
Ontario also led mineral imports, representing 62% of the total, while Quebec followed at 17%. This pattern reflects the significant processing of mine outputs within these provinces before export, along with the high concentration of manufacturing industries. It also highlights the strategic importance of Ontario and Quebec as entry points for Canadian imports, due to their proximity to major consumer markets. (Mineral Trade)
As a share of GDP, Ontario (41%), New Brunswick (34%) and Manitoba (33%) import the largest volume of goods. High shares may be partially due to imports of intermediary goods for use as inputs by manufacturers.
The US is the country of origin for 44% of Canadian imports. Other top spots are occupied by China (11%), the EU (10%), Mexico (5%), and Japan (2%).
In 2023, the U.S. exported minerals valued at 30.7 billion U.S. dollars to Canada.
Canadian Import Mineral Breakdown → Natural Resources Canada, Statistics Canada.
In 2023, Canada’s mineral imports from the United States increased by 3% to $57.3 billion.
The leading mineral imports from USA in 2023 included:
Iron and steel ($17.1 billion, or 30% of the total)
Gold ($5.6 billion, or 10% of the total)
Aluminum ($4.1 billion, or 7% of the total)
→ Sources: Natural Resources Canada, Statistics Canada.
→ Source: Natural Resources Canada, Statistics Canada.
→ Source: Canada: Value of imports and exports for mineral and metal products, including fuels, for select countries and regions | Natural Resources Canada
Noticeable Takeaways from RBC report titled “A US-Canada trade shock now in play: first economic takeaways”
Canada’s manufacturing sector – which accounts for approximately 9% of Canada’s GDP and 70% of total trade with the U.S. – is particularly vulnerable to tariff impacts. Canada’s top 15 industries by trade with the United States, most of which are manufacturing based, represent nearly 3.1% of the country’s total workforce. A key area of concern is Canada’s motor vehicles sector, which is exceptionally integrated with the United States and Mexico. Parts can cross the border multiple times, meaning an end-product like a car may incur several rounds of tariffs.”
What Comes Next?
What can make things worse that need to be watched:
Duration of the Tariffs
Evolution of retaliatory/escalation of U.S. tariffs
If the trade war escalates further, both sides could be long-term losers, especially if businesses relocate production or seek alternative trade partners. But who has more to lose?
What could soften the impact for now in the short-medium term for the Canadian Economy if the tariffs do end up going through:
A weaker Canadian dollar (stronger U.S dollar): That said, any additional weakness in the Canadian dollar will buffer the price shock for Americans and reduce the expected drop in demand for Canadian tariffed goods.
Fiscal policy response.
o The right amount of support.
o The right targets for support: Broad-based support, as we saw in the pandemic, is likely to be less effective than appropriately targeted support that stops the bleed from tariffed sectors to non-tariffed sectors. Decoding which sectors need the urgent support will be a critical first step. We will write more on this in the coming weeks.
o The balance of short-term vs. long-term support.
As we know, the Canadian economy has become very much dependent on government fiscal intervention to keep the illusion of economic strength/”growth” maintained. This is very much an expected response by the Governments both Federally and Provincially, as they will want to subsidize the market through further deficit spending to hide the impact of this trade war. Question becomes how much deficit spending will this sort of response drive and for how long will it have any positive impact?
A supportive monetary policy response: A tariff shock may very likely produce a recession (even if it has inflationary elements) would put the BoC on an even more dovish track when it comes to rate cuts. All central banks are challenged by tariff shocks because they tend to raise prices but also lower growth. This can having rippling consequence on the labor market as employment is a primary mandate of the Central Bank of Canada. The monetary policy response will need to be calibrated with the fiscal response ahead (more fiscal implies less need for monetary and vice versa).
“Our expectation is that, based on what we know now, the risks of additional easing over the baseline expectations for 2025 is growing. Regardless, we’ll be monitoring for commentary (and/or) action from the BoC that would ameliorate interest rate burdens (and indirectly help support further weakening of the Canadian dollar).”
→ RBC REPORT
Federal Government Promises Support for Canadian Businesses
→ Source: Canada's response to U.S. tariffs on Canadian goods
“As a first line of defence, Canada's robust system of economic support programs is available to help businesses and workers directly impacted by U.S. tariffs. This includes financing and advisory supports for businesses through financial Crown corporations and supports for workers.
The government is also taking steps to mitigate the impact of its tariff countermeasures on Canadian workers and businesses by establishing a remission process to consider requests for exceptional relief from the tariffs imposed as part of Canada’s immediate response, as well as any future tariff actions.”
CONCLUSION
Canada has a heavy dependence on the U.S. economy for both imports and exports.
Over 75% of Canadian exports go to the U.S., while only about 15% of U.S. exports go to Canada. This asymmetry means that Canada has fewer alternative markets to offset trade losses
The U.S. GDP is roughly ten times larger than Canada's, meaning it can absorb economic shocks more easily.
A trade slowdown will hit Canada harder as exports make up a larger share of its economy.
If trump’s intention is to “Drill Baby Drill” which he has stated numerous times, then his policies could be a significant market shock in a positive way – opening up the land to be mined/extract oil and removing the extremely lengthy bureaucracy in mining and energy industries that plagues America. Of which the Biden administration did a lot to hurt the energy industries of America.
The so called “leaders” of Canada who are no actual leaders but rather mere politicians playing politics who should learn the ideals of building fundamental relationships with our greatest ally/trade partner/neighbor. Canadians mocks American culture and politics as if they are superior……….. such false sense of moral superiority. This new found sense of nationalism as this trade war escalates is also a fascinating development from the Canadian culture. Especially seeing this from the liberals is intriguing, but not surprising.
Our government in Canada spends too much appeasing foreign institutions and nations that we forget a powerful and enduring relationship with the economy we depend the most on is so critical. And it appears that Trump is aware of this.
Don’t forget that the Canadian economy is not very adaptive and industrial from a private market standpoint as the economy has become heavily dependent on Government spending and employment.
Between 2019 and 2023, the share of Canadians employed in the public sector grew by 13 percent–3.6 times more than private sector employment, which grew by 3.6 percent.
According to a new report by the Fraser Institute, from 2019 to 2023, the number of public sector employees rose by 490,000–from 3.7 to 4.2 million, making up 46.7 percent of the period’s total job growth. As of September 2024, the number of public sector employees totaled 4.4 million, or 21 percent of the total workforce.
Will Government be the only “solution” to sailing the Canadian economy out of this trade war?
Will the private sector be able to adapt?
Just look at what has developed with Mexico on the tariff front.
Looks like 2025 will be another fascinating year of economic chaos.