As U.S. President Donald Trump considers enacting tariffs against Canada as early as next week, a new report form TD Economics says Canada accounts for one of the smallest trade deficits with the U.S., existing only due to U.S. demand for energy.
TD Economists Marc Ercolao and Andrew Foran said in a report Tuesday that there is “no guarantee against future tariff attacks” ahead of a review of the United States-Mexico-Canada Agreement (USMCA) part way through next year. The report says that Canada is the largest export market for the U.S. and accounts for one of the smallest trade deficits.
“The bulk of the U.S. trade deficit with Canada is owing to energy. Outside of that, the scales tip into America’s favour. Even with this data, it’s proven insufficient to fend off trade attacks that will extend well beyond this current bout,” the report said.
The report comes amid suggestions from Trump that his administration could proceed with 25 per cent across-the-board tariffs on Canadian imports starting on Feb. 1, according to The Canadian Press.
The report says its “unclear” where Trump got his figures when he claimed the U.S. subsidizes Canada with around US$200 billion each year.
“In any event, rather than a subsidy, the U.S. trade deficit is a by-product of U.S. economic outperformance relative to other countries,” the report reads.
According to the economists, around $800 billion worth of goods crossed the U.S.-Canada border during the first three quarters of last year, equivalent to around $3.6 billion in total import and export flows each day.
“Trade between the U.S. and Canada is highly integrated. Most Canadian exports are inputs used by American businesses in their own production – more so than with other trading partners,” the authors said in the report.
“Thus, a disproportionate share of the negative tariff impacts on imports from Canada would be through the channel of business supply chains and productivity that would drive higher costs and inflationary pressures at the retail level.”
Since the first Trump administration, the report notes that the U.S. trade deficit with Canada “has deteriorated,” likely something the president is aware of. However, the economists said the US$45 billion shortfall relative to Canada in 2024 marks the second smallest deficit, lagging only France.
“That amounts to a mere four per cent of the overall U.S. trade deficit. So, in essence, reducing imports from Canada would barely move the needle,” the report said.
The economists also noted that energy “accounts for all” of the U.S. trade deficit with its northern neighbour.
“Last year, Canadian exports of energy products (oil, natural gas, power) to the U.S amounted to nearly $170 billion, or almost 1/3 of total shipments. In contrast, energy accounted for only six per cent of all U.S. imports. Put simply, Canadian sources are critical to U.S. energy security,” the report said.
Stripping out energy exports, the economists said the U.S. has a trade surplus with Canada of around $60 billion. Additionally, tariffs on Canadian energy could impact U.S. consumers, they added.
“If tariffs were extended to Canadian crude oil, it could lead to an immediate jump in U.S. gasoline prices of as much as $0.3-0.7 per gallon. One of the most price-transparent and inflation-sensitive areas for consumers is the movement in gasoline prices,” the report reads.
