Canada Subsidizes the U.S., not the Other Way Around
By Jim Stanford
Donald Trump’s erratic threats to impose tariffs on U.S. international trade (not to mention even more extreme threats, like taking over the Panama Canal, Greenland, and Gaza) are creating huge uncertainty in countries around the world. Canada is on the front lines of this dangerous new aggression. In this commentary, originally published in The Tyee, Vancouver economist Jim Stanford critiques Trump’s claim that Canada is unfairly hurting the U.S. with its exports.
U.S. President-elect Donald Trump has pledged to impose immediate across-the-board 25% tariffs on imports from Canada and Mexico, even higher tariffs on China, and tariffs on other countries as well. He says they will start with executive orders on the day of his inauguration (Monday, January 20).
Initially, these threats were interpreted as a strategy to exert leverage over other countries on a range of trade and non-trade matters: from border issues, to defense spending, to taxes and regulations on U.S.-based tech giants. That may have been wishful thinking.
Because Trump’s rhetoric has now turned more ominous. Reports suggest he may invoke a “national economic emergency” to activate special presidential powers. And he has spoken of using “economic force” to effectively annex Canada, as part of a broader strategy of territorial expansion (potentially including Greenland, Mexico, and Panama).
Trump’s aggressive and unpredictable approach means Canadians must take these threats very seriously. The impact on Canadian employment and GDP from a major across-the-board tariff on our exports to the U.S. (which constitute the large majority of our exports) would be devastating, almost certainly causing a protracted recession. Political division and uncertainty in Canada (made worse by intervention from Trump and his team, like Elon Musk, in our domestic politics) make it all the more dangerous.
Trump claims that the bilateral U.S. deficit in merchandise trade with Canada amounts to the U.S. “subsidizing” Canada. This claim has no economic merit whatsoever. Trump literally makes up numbers, and ignores fundamental precepts of economic theory. In reality, the U.S. benefits from the bilateral relationship at least as much as Canada does:
- Canada is the largest market in the world for U.S. exports. We purchased $440 billion of U.S.-made goods and services in 2023.
- The Canada-U.S. trade relationship is among the most balanced of all major U.S. trading partners. The U.S. sells 92 cents of exports to Canada for every dollar it imports from Canada – compared to less than 80 cents in its overall global trade.
- The bilateral deficit with Canada ranks 10th among U.S. trading partners, accounting for only 5% of the total U.S. trade deficit.
- Trump’s claim the bilateral deficit is $200 billion is an utter fabrication. The bilateral deficit was $40 billion (U.S.) in 2023 according to U.S. data, down 29% from 2022. It fell another 9% during the first 9 months of 2024.
- Compared to a two-way trade flow of almost $1 trillion (U.S.) per year, this imbalance is puny.
- The U.S. enjoys a strong surplus in services trade with Canada, which offsets much of the deficit on merchandise trade – and which is only partially reflected in official trade statistics. Trump never mentions this.
- The U.S. also enjoys a net surplus on investment income flowing out of Canada ($13 billion Cdn. in 2023). This further offsets the impact of the trade deficit on the overall U.S. balance of payments.
- Most Canadian exports to the U.S. are unfinished inputs that American businesses use in their own production – more so than with other trading partners. Tariffs would thus increase costs of these inputs (including raw materials, supplies, parts, and semi-finished goods), reducing the competitiveness of U.S. firms (including in export markets).
- Canadian energy (including oil, gas, coal, and electricity) made up 60% of the total bilateral merchandise trade deficit over the last decade. Having access to a secure and lower-cost energy source is a major benefit for U.S. businesses and consumers.
Trump’s claim Canada is subsidized by the U.S. through this bilateral deficit is laughable – and Trump’s economic team surely understand that. They are many things (aggressive, corrupt, and untruthful), but they are not ignorant. Rather, they are trying to drown out rational discussion of this issue in a barrage of threats and bluster.
In fact, in at least three ways Canada clearly subsidizes the U.S. – not the other way around. Unusual and sweet trade arrangements, deviating from normal international trade or business practices, effectively subsidize the U.S.:
- Secure, lower-cost energy, with unique opportunities for U.S. companies to invest in and profit from producing and selling those exports. Canada is the only large net oil exporting country without a state-owned oil producer, and U.S. companies own $55 billion worth of our oil and gas sector.
- Large Canadian imports of services from the U.S., many of which (like streaming and data services from companies like Amazon, Meta, Google, and Uber) are weakly regulated, underreported, and largely untaxed (and thus subsidized relative to other businesses).
- Canadian investors made $700 billion worth of low-interest loans to the U.S., fully offsetting the bilateral trade deficit over the past decade. Despite that, Canada incurs a large net deficit in investment income: $13 billion in net interest and profits flows south each year. It’s as if someone borrows from a bank, and then receives interest payments from the bank (rather than the other way around).
Canada has always faced a fundamental challenge in managing affairs with its larger southern neighbour. Today’s threats confirm that free trade deals (which Trump just ignores) will never protect us from arbitrary U.S. action.
To be sure, the U.S. possesses substantial leverage by virtue of its size, and the fact that disruptions in trade would hurt Canada proportionately more. That doesn’t mean we should accept Trump’s false economic claims. To the contrary, knowing that the U.S. would be hurt badly by a breakdown in economic cooperation with Canada can empower Canadian negotiators – and the Canadian public – to resist his intimidation.
Of course, economic logic won’t stop a bully from exercising their power. But having accurate knowledge of what’s at stake for the U.S. in a trade war, can help Canada construct a more credible and unified deterrence to that bullying.
Jim Stanford is Economist and Director of the Centre for Future Work in Vancouver, and author of the recent report, Who’s Subsidizing Whom? Myth and Reality about the Canada-U.S. Trade Balance.
