AI image
Today might have been a turning point in Trump’s relationship with Canada though many would argue that it’s now beyond repair. Yesterday Canadian Prime Minister Mark Carney said:
“The old relationship we had with the United States, based on deepening
integration of our economies and tight security and military
cooperation, is over.”
Today though, Trump took a different tone with Canada, dropping the 51st State talk and didn’t address the PM as ‘governor’ while saying that there would be a good deal for the US and Canada.
I suspect the relationship has bottomed and that’s a big opportunity in many trades. That said, it’s difficult to have conviction in that call given all the unpredictability in the Trump 2.0 administration.
People outside of Canada don’t understand just how wounded the country feels but some data this week highlighted it with forward airline bookings to the US down 70% out to September. People also don’t seem to understand how phoney the talk of Canadian fentanyl and tariffs are.
Some facts:
1) Canadian tariffs don’t exist
The US-Canadian relationship is one of the all-time great truly free trade agreements. The average tariff rate of US goods going into Canada is 1.1%, per the WTO. So if they US wants to actually do reciprocal trade, then that would be fine.
Now you see some stupid charts floating around the internet about dairy and cheese tariffs but it’s nonsense. For one, every country protects and subsidizes their farmers (and perhaps none more than the USA). These are also very small parts of US-Canada trade and were negotiated in USMCA.
2) Canada doesn’t have a manufactured goods surplus with the US
Here’s a great chart from TD that illustrates that basically the entire trade surplus that Canada currently has with the US is energy — all in the form of highly-discounted oil and natural gas.
Ex-energy, the US has had a surplus with Canada for every year this century.
If you want to look at autos alone, the US currently enjoys a surplus in auto trade with Canada. Note that this chart also excludes services exports, where the US also enjoys a surplus of around $15 billion.
3) Based on the size of trade, the US deficit is small
Using US Census Bureau figures, the US total trade deficit with Canada of roughly US$45 billion in 2024, or a mere -0.2% of US GDP. It’s 4% of the overall US trade deficit.
Despite all of this, you have Trump repeatedly saying things like “we are subsidizing Canada by $200 billion a year”. Neither he nor the White House have ever indicated how this math makes any sense.
What’s the strategy here?
It’s hard to comprehend any kind of strategy, unless you believe in the 51st State line. Perhaps this is an extremely-aggressive escalation in rhetoric and some short-term tariffs in order to extract a slightly better trade deal. That’s my base case but it’s looking more and more like a foolish strategy that ultimately benefits no one.
I’ll be on BNNBloomberg on Monday morning talking about some of this. Tune in.
