Arguments need Evidence!

And numbers need context. Without that, what do you really have?

There has been a lot of talk about Canada’s trade relationship with the United States. This conversation has been particularly loud in the United States, where elements of the MAGA movement often complain bitterly about “unfair trade practices” and Canada’s enormous tariffs.

Inevitably, that finger gets pointed at dairy, poultry and eggs. Yes, tariffs on imports can reach extreme levels, as high as 298% on butter, but those tariffs only apply after imports have reached a certain threshold. These tariffs are based on a tariff rate quota or (TRQ). Stay below the TRQ in tonnage, and tariff rates can be very low, to nonexistent. Go above the TRQ and those tariffs ramp up. This TRQ system is mostly limited to the supply managed industries of dairy, poultry and eggs. And these sectors represent a tiny fraction of exports from the United States to Canada. And this process was agreed to in the USMCA, the trade agreement that Donald Trump signed with Canada.

Of course, if you were to listen to many in the MAGA crowd, you’d believe that all dairy, poultry and eggs exported from the United States to Canada are subject to these tariffs and that simply isn’t true at all. Furthermore, many in the MAGA crowd would argue that these are representative of the tariffs charged on all U.S. goods entering Canada. We've already looked at how that claim applies to dairy. Let's examine how well it applies to the rest of the trading relationship.

In 2024, Canada imported $377B(CAD) in goods from the United States. The Canadian government collected roughly $1B(CAD) in tariffs on goods entering Canada from the United States in 2024. That works out to an average tariff rate of 0.27% on goods entering Canada from the United States.

Now, it’s true that American tariff rates on Canadian goods were lower, coming in at roughly 0.09%. This sounds like a big deal, even though both percentages are very low indeed.

However, the story isn't quite as simple as "Canada has, albeit still very low, higher tariffs than the United States."

You see, tariffs are often influenced by the net benefit that an import has to the local economy. The more the benefit, the less the tariff.

Why?

Because, tariffs are an added cost and if all you're going to do with the import is to use it to make products that you can sell elsewhere at a profit, why would you discourage the import through tariffs, paid by your own producers, particularly if you don't have a domestic source to replace it?

And this brings us to what America buys from Canada.

Almost 40% of Canada’s exports were energy and raw materials and this heavily influences that difference. Typically, because they can be used to add value and power an economy, energy and raw materials are rarely tariffed. Neither Canada nor the United States tariff these products.

Now, you may argue that America exports energy and raw materials to Canada too. And that's true. In fact 15% of what America exports to Canada is energy or raw materials.

At first glance, it may seem like the imbalance isn't really all that large, so how can it justify the difference it tariffs?

Well you see, roughly half of those exports from the United States are energy exports and the vast majority of those energy exports are either refined petroleum products, or electricity.

Now here's the thing. Much of those refined petroleum products were produced with oil imported from Canada. America is buying oil from Canada, refining it and selling the refined products back to Canada, at a profit. Why would you tariff the raw material, if it's going to make the finished product more expensive and therefore less competitive?

As for electricity, America, in its trading relationship with Canada, is very much a net importer of electricity. But, it does export some electricity back to Canada. In fact, about 0.5% of electricity produced in the United States is exported to Canada. Of course, roughly 8.7% of electricity generated in the United States comes from oil, natural gas or uranium imported from Canada. Again, why would you tariff the raw material, if it's going to make the finished product more expensive and therefore less competitive?

So, Canada's exports to the United States are very heavily weighted toward products that are useful to an economy and that countries rarely tariff.

American exports to Canada are heavily weighted toward finished goods. Roughly 85% of what the United States exports to Canada are agricultural products or manufactured goods. These are the sort of products that receiving countries have fewer opportunities to add value to and that provide less economic value. As such,  these are the sorts of goods that countries often tariff and yes, Canada and the United States tariff these goods, often at fairly similar levels.

So, why were Canada's tariffs a bit higher than America's?

That was heavily influenced by the fact that much of what Canada imported was stuff that countries tend to tariff and much of what the United States imported was stuff that countries tend not to tariff, because they see profit to be made from importing and processing them for resale.

The tariff imbalance that existed, as small as it was, wasn't the result of unfair trade practices. It was mostly the result of what was being traded.

And with this, I will finally get to my point. America’s trade deficit with Canada isn’t some trade abuse being perpetrated by Canada. In many ways, America’s economy is strengthened as much, if not more, by what it imports from Canada as by what it exports to Canada.

And this brings me to my analogy for the day.

Let’s say you’re a farmer, and you sell the vast majority of your produce to Walmart.

Sure, you’ll probably go to Walmart to shop, but not all of your shopping will be done at Walmart. Some of that money you earned dealing with Walmart will go elsewhere.

So, does this mean you’ll have a trade surplus with Walmart?

Of course!

Walmart is giving you more money than you're giving them. Does this mean that Walmart isn't profiting from its trade with you?

Not a chance.  In addition to what they sell you, they sell to others what they buy from you, at a profit. In fact, they probably profit more than you do.

When you look at trade between Canada and the United States, Canada is the farmer, and the United States is Walmart.