Globalization,  Macroeconomics,  Research

Who’s Subsidizing Whom?

Myth and Reality about the Canada-U.S. Trade Balance

U.S. President-elect Donald Trump has threatened immediate across-the-board 25% tariffs on imports from Canada, possibly as part of a plan to use “economic force” to annex Canada. Trump claims the Canada-U.S. trade deficit constitutes an “emergency” (thus justifying violation of America’s trade treaties), and amounts to the U.S. “subsidizing” Canada to the tune of $200 billion per year.

A new report from the Centre for Future Work exposes these claims as utterly false. Perhaps Trump’s lies are motivated by a plan to construct bargaining leverage with other countries once he takes office, or perhaps he has genuine territorial ambitions to expand the U.S. Either way, both Canadian trade negotiators, and the Canadian public at large, need to understand the economic reality of the Canada-U.S. trade relationship, so they can confidently reject Trump’s bluster. The fact that Trump’s threats come at a moment of political division and uncertainty in Canada makes them all the more dangerous.

The report documents how the bilateral relationship strongly benefits the U.S., including:

    1. Canada is the largest market in the world for U.S. exports: over $440 billion (U.S.) in 2023.
    2. The Canada-U.S. trade relationship is among the most balanced of any major U.S. trading partners: America exports 92 cents to us, for every dollar they purchase (far more than it does to the rest of the world).
    3. The bilateral trade deficit with Canada is small, ranking 10th among U.S. trading partners, and accounting for only 5% of the total U.S. trade deficit.
    4. The U.S. enjoys a strong surplus in services trade with Canada, offseting much of the deficit in merchandise – and only partially reflected in official trade statistics.
    5. The U.S. enjoys a net surplus on investment income flowing out of Canada ($13 billion Cdn. in 2023), further reducing the overall payments imbalance.
    6. Most Canadian exports to the U.S. are used as inputs by American businesses in their own production – more than with other trading partners. Tariffs would increase costs for U.S. producers, reducing their competitiveness (including in export markets).
    7. Canadian energy exports (including oil, gas, coal, and electricity) make up 60% of the total bilateral merchandise trade deficit, and an even larger share of the total deficit (including services). Access to secure and lower-cost energy is a huge benefit for U.S. businesses and consumers.
    8. The bilateral trade deficit with Canada has been fully offset by Canadian loans to the U.S. In effect, Canadian lenders are “subsidizing” the U.S. to continue consuming more than it produces.

Trump’s claim Canada is subsidized by the U.S. is laughable – and Trump’s economic team certainly knows it. Indeed, in at least three ways Canada is clearly subsidizing the U.S., through trade arrangements that diverge from normal international trade or business practices, including:

    1. Large shipments of secure, lower-cost energy, with unique opportunities for U.S. companies to invest in and profit from those exports.
    2. Large Canadian net imports of services from the U.S., many of which (such as digital, streaming, and data services) are weakly regulated, underreported, and largely untaxed (and thus subsidized relative to other businesses).
    3. Low-interest loans provided by Canadian investors that provide the U.S. with purchasing power fully equivalent to the bilateral trade deficit, yet despite which Canada continues to incur a large net deficit in investment income. It’s as if a borrower received a loan from a bank, and then also received interest payments from the bank (rather than the other way around).

In aggregate, the U.S. would be harmed by disruptions to this bilateral relationship as much as Canada. And while that harm would be dispersed across a much larger economy and population (and hence not be as proportionately disruptive), significant regions and sections of the U.S. economy (including border states, energy-importing regions, and key cross-border industries like automotive manufacturing) would suffer greatly from Trump’s proposed actions.

Showing that the U.S. benefits from the existing bilateral relationship as much as Canada does, may not convince a bully to stand down. But showing the other side that we are aware of those benefits, and the costs to the U.S. of a potential breakdown in trade, can temper their aggression, and reinforce Canada’s bargaining position. Meanwhile, showing Canadians that Trump’s claims of “subsidization” are false, and that the bilateral relationship is mutually beneficial, can solidify Canadian support for their negotiators to fight for a fair resolution.

Please see the full report, Who’s Subsidizing Whom? Myth and Reality about the Canada-U.S. Trade Balance, by Jim Stanford, Economist and Director of the Centre for Future Work.

Jim Stanford is Economist and Director of the Centre for Future Work, based in Vancouver, Canada. Jim is one of Canada’s best-known economic commentators. He served for over 20 years as Economist and Director of Policy with Unifor, Canada’s largest private-sector trade union.