Highlights

  • Canada is the largest export market for the U.S. and makes up one of the smallest trade deficits, owing largely to U.S. demand for energy-related products.
  • Trade in the auto sector is balanced between the 2 nations. While President Trump has mused that the U.S. could replace Canadian auto exports with its own domestic supply, the highly integrated North American supply chains is a major complicating factor.
  • Flipping this argument on its head, Canadian auto manufacturing has room to expand. Canada produces only 14 car models but consumes 325 models. The U.S. produces 121 models of the 328 models consumed by Americans.
  • With respect to Trump’s assertion that the U.S. subsidizes Canada to the tune of US$200 billion per year, it’s unclear where this number is derived. 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.

Canada is America’s second largest trading partner and number one export market, with nearly $800 billion of goods and services crossing the Canada-U.S. border in the first three quarters of 2024. The trade between the U.S. and Canada is highly integrated, with most Canadian exports being inputs used by American businesses in their own production. A disproportionate share of the negative tariff impacts on imports from Canada would be through the channel of business supply chains and productivity, driving higher costs and inflationary pressures at the retail level.

From the American lens, trade with Canada is balanced, with Statistics Canada data showing a merchandise trade surplus with the U.S. last year of C$100 billion, equivalent to 3.2% of Canadian GDP. However, the U.S. enjoys an edge in services trade, mainly related to Canadians flowing over the American border, shrinking the trade surplus to C$85 billion, or 2.8% of Canadian GDP. Applying Census Bureau figures, the U.S. is on track to record a trade deficit with Canada of roughly US$45 billion in 2024 (or a mere -0.2% of U.S. GDP).

Since Trump 1.0, the U.S. trade position against Canada has deteriorated, with a modest annual average surplus with Canada of around US$20 billion between 2016 and 2020. This weakening of the U.S. position with Canada remains below its record of almost US$75 billion in 2005.

In 2024, Canada’s balance is tracking a surplus of $99 billion, while for services, Canada is tracking a deficit with the U.S. of $15 billion, putting Canada’s total trade surplus with the U.S. at around $84 billion. The U.S. trade deficit with Canada is the second lowest among trading partners, with a 4% shortfall. Reducing imports from Canada would barely move the needle, as the U.S. trade deficit with Canada was 1/8 the size of China’s and 1/5 that of Mexico.

The U.S. is a net exporter to Canada of manufacturing goods, particularly motor vehicles and parts. The auto sector is the poster child for integrated trade between the two countries, as North American auto parts cross all three borders up to 7 to 8 times prior to final assembly of a vehicle. Canada supplies around 8% to 9% of what Americans consume annually, while Mexico is closer to 20%, with U.S. production satisfying about 50%. Given this high integration, the auto sector would face some of the deepest negative impacts from tariffs.

The U.S. trade deficit with Canada is primarily due to energy, with Canadian exports of energy products accounting for nearly $170 billion in the last year. Energy accounts for only 6% of all U.S. imports, making Canadian sources critical to U.S. energy security. The U.S. enjoys a trade surplus with Canada of around C$60 (US$45 billion) ex-energy. 

Canada’s trade advantage in energy has been rising steadily, particularly with the Transmountain Pipeline Expansion (TMX), which has boosted Canadian oil exports to the U.S. west coast and Asian markets. Canadian crude is a key supplier to U.S. refining, with a growing share in the Gulf coast. Countries like Mexico and Venezuela could fill the gap, but would require lifting sanctions. Mexico already enjoys the second largest trade surplus with the U.S., potentially allowing it to overtake China in the pole position. If tariffs are extended to Canadian crude oil, it could lead to an immediate increase in U.S. gasoline prices. Ontario also directly supplied electricity to 1.5 million U.S. homes in 2023.

Bottom Line

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. In mid-2026, the USMCA comes under review. Regardless of the deals that will eventually be struck between countries, the lesson that should be learned in Canada is that there can be no guarantee against future tariff attacks.

Source: Toronto Dominion Bank