Janice R. Andrews
Former U.S. President Donald Trump has stirred tensions with Canada by threatening steep tariffs and humorously suggesting the annexation of the northern neighbor. His remarks, while characteristic of his bold style, have ignited concerns about the potential fallout on the tightly linked economies of the two nations.
Trump’s Tariff Threats
In the weeks following his controversial re-election, Trump declared his intention to impose 25% tariffs on Canadian imports, including cars and auto parts, starting on his first day back in office. His statements, coupled with jokes about annexing Canada and calling Prime Minister Justin Trudeau the “Governor of the Great State of Canada,” have drawn sharp reactions from Canadian leaders and analysts.
The proposed tariffs could strain the robust trade relationship between the U.S. and Canada, valued at $699.4 billion annually. Canada is the largest importer of U.S. goods, with industries such as energy and automotive deeply interconnected across the border.
A Surprising Shift
Economists were surprised by Trump’s sudden focus on Canada. “It came like a bolt from the blue,” noted Douglas Porter, chief economist at the Bank of Montreal. “Canada wasn’t a major target during Trump’s campaign.” Analysts are now grappling with Trump’s unexpected shift, which started with concerns about border security and trade imbalances but has escalated to accusations of economic dependency.
The Reality of Trade Imbalances
Trump’s claims of an unfair trade relationship are disputed. According to the U.S. Census Bureau, the trade deficit with Canada was $55 billion in 2023, significantly smaller than the $270.4 billion deficit with China. Additionally, the U.S.-Canada trade imbalance has narrowed by nearly 30% in recent years due to the pandemic and the effects of the USMCA. Despite these improvements, Trump has labeled the agreement “the worst deal ever,” hinting at renegotiation.
Interdependent Economies at Stake
The U.S. and Canada’s economies are among the most integrated globally, with goods crossing the border multiple times during production. This interdependence is especially evident in the energy and automotive sectors. Canadian crude oil, for instance, is processed in U.S. refineries and re-exported as finished products like gasoline and diesel. In July 2024, Canadian crude exports to the U.S. hit a record 4.3 million barrels per day, showcasing the economic ties.
Alberta Premier Danielle Smith warned that tariffs would harm U.S. refiners and lead to higher fuel costs for consumers. “Any proposed tariffs would immediately hurt American refiners and also make consumers pay more at the pumps,” she emphasized.
The automotive industry faces similar risks. North America’s auto sector relies on highly integrated supply chains, with components crossing borders multiple times. Tariffs on Canadian auto imports could disrupt this ecosystem, increase production costs, and drive up vehicle prices on both sides of the border. “If you tariff at 25% every time an auto part crosses the border, the costs become ridiculous,” said William Huggins, an assistant professor at McMaster University.
Canada Prepares to Respond
In anticipation of Trump’s threats, Canadian policymakers have started crafting retaliatory tariffs on politically sensitive U.S. products. A similar strategy was employed in 2018 during a trade spat with Trump, targeting items such as U.S. steel and orange juice.
“They’ve only identified a handful of sectors because they don’t want to undermine their negotiating position,” explained Tony Stillo, Director of Canada Economics at Oxford Economics. Possible targets include U.S. steel, ceramics, flowers, and Florida orange juice.
Canada’s political situation adds further complexity. With Justin Trudeau recently stepping down, the country is in a transitional phase. The Liberal Party won’t choose a new leader until March, leaving Canada in a precarious position as it braces for Trump’s economic challenges.
Trump’s History of Unpredictability
Trump’s approach to trade has always been unconventional. Known for his confrontational style, he often uses aggressive rhetoric as a negotiation tactic. Despite playing a key role in crafting the USMCA, Trump now derides the agreement and hints at scrapping it for a “better deal.”
“We’re not dealing with an enlightened multi-step U.S. policy,” Huggins remarked. “We’re dealing with a bully who said, ‘Give me your lunch money.’”
Canada’s Long-Term Strategy
While the immediate economic impact of Trump’s threats could be significant, Canadian policymakers are likely to adopt a long-term perspective. The deeply entrenched trade ties between the two countries ensure that both economies would suffer in the event of a prolonged dispute. “Thirty years from now, Donald Trump won’t be alive, but Canada will be,” Huggins noted.
Canada’s leaders are expected to focus on stability and strategic planning, leveraging the nation’s resources and trade relationships to mitigate any disruptions. However, the challenges posed by a Trump-led White House—including potential trade wars and renegotiations—will require careful navigation.
The Road Ahead
Trump’s rhetoric, while not new, underscores the fragility of U.S.-Canada relations. Whether his threats are a negotiating tactic or part of a broader strategy, the stakes are high for both nations.
As Canada prepares for a possible trade showdown, its leaders must balance protecting their economy with managing a challenging and unpredictable partner. One thing is certain: the coming months will test the resilience of the U.S.-Canada relationship like never before.
