Canada-U.S. relations have always had a strong economic bond.
Now, however, tensions in the trade market have cast these ties into doubt.
US President Donald Trump threatened to impose sweeping tariffs of 25% on Canadian goods. This has shaken investor confidence, and brought Canada’s economic dependence on its southern neighbor into the spotlight.
Although the temporary suspension of tariffs has given us a breather, we are already feeling its effects.
Businesses are losing investment, the industries are changing their supply chain, and politicians are scrambling for a response.
Canada is too dependent on US.
Canada has relied on trade for many decades.
In 1988, the Canada-US Free Trade Agreement was signed. This was followed by NAFTA 1994 and USMCA 2020.
Today, Canada exports 80% to the U.S. making it the country with the highest trade dependence in the entire world.
Canada, by comparison, accounts for just 3% of US economic output.
This imbalance gives the US more power in negotiations. Trump’s tariff threats have exposed Canada’s weakness.
Even the mere suggestion of tariffs caused investor anxiety.
The tariffs could cause a major economic impact on Canada, including job losses and rising prices for consumers, as well as a decline in industries such manufacturing and energy.
Trump knows he has the upper-hand in the trade relationship. That’s why he claims he would like to turn Canada into the “51st state.”
Trade deficit Myth
Trump has used the US-Canada trade deficit as evidence that America “subsidizes” its northern neighbour.
The deficit he claims is $200 billion is actually $63 billion in 2024, a mere fraction of US trade deficits totaling $1.2 trillion.
The trade deficits themselves are not subsides.
US trade is in deficit not due to unfair policies, but because the US consumes more than what it produces.
Canada is the biggest buyer of US goods according to the US Census Bureau. It will spend $349.4 Billion dollars in 2024, which is more than Mexico and China combined.
The US also benefits from the cheap Canadian imports of oil, aluminum and other commodities, as these lower the production costs in American industries.
Canada is losing investment
Businesses have been driven out of the country by uncertainty.
According to a recent KPMG study, nearly half of Canadian companies plan to move production or investments to the US in order to avoid tariffs.
In the automotive industry, companies depend on seamless supply chains across borders.
New trade barriers will increase the cost of auto parts manufactured in Ontario. They can be transported up to 8 times across the border before they are assembled.
Bank of Canada has recently reduced interest rates in part due to a decline in business investment.
The GDP per capita in Canada has fallen eight out of nine times over the past nine quarters. Economists say that Canada is not prepared for a possible trade war.
Job creation and economic growth may slow if investment declines.
Can Canada attract new energy buyers?
Energy is one of Canada’s largest exports to US.
About one third of Canada’s exports are oil, gas and electricity.
Canada may struggle to find other markets if the U.S. places tariffs on such commodities.
It lacks infrastructure that would allow it to redirect oil to Asia or Europe.
The US refineries are also heavily dependent on Canadian crude oil, for which they have facilities specifically designed.
The US relies heavily on Canadian oil imports for its refinery needs, despite increasing domestic production.
Tariffs are unlikely to be imposed on Canadian oil because it would cause major disruptions in US energy markets.
The Canadian economy needs a wake-up Call
This crisis has taught Canada that it needs to diversify trade relations.
The US has become a major source of dependence for many governments, yet little progress was made.
Canada’s current trading patterns are a result of infrastructure constraints, regulatory obstacles, and the lack of trade agreements.
Renewing the discussion about eliminating interprovincial barriers to trade has proven an immediate response.
The provinces have begun to realize that the internal trade needs to improve in order for the country to be more resilient.
The political will is growing to build infrastructure such as ports and pipelines that can help Canada reach global markets.
This crisis will be a priority for the next Canadian government.
To achieve economic resilience, a combination of infrastructure investments, trade diversification and regulatory reform will be required.
Canada can’t escape the economic bonds it has with the US but they certainly have ways to reduce their vulnerability.
As new information becomes available, this post may change.
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