USA DOES NOT “SUBSIDISE” CANADA. This statement arises from a misunderstanding as to what a foreign trade imbalance represents.
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Argus reports that the US trade deficit with Canada is largely a result of America’s thirst for energy and should not be confused with a “subsidy”, according to TD Group, one of the largest retail and wholesale banks in US and Canada.
“With respect to Donald Trump’s assertion that the US subsidizes Canada to the tune of US$200bn per year, it’s unclear how this is derived,” TD Economics said today in its “Setting the Record Straight on Canada-US Trade” Report.
“In any event, rather than a subsidy, the US trade deficit is a by-product of US economic outperformance relative to other countries”, and arises from energy imports. Outside of energy products, the US has a trade surplus with Canada.
The US is on track to record a trade deficit with Canada of roughly C$65bn (US$45bn) in 2024, but that would flip to a C$60bn surplus for the US if energy were removed from the equation”, said TD Bank Group.
About 80% of Canada’s 5mn barrels per day of crude production is consumed by refineries in the US, with many in the Midcontinent having no practical alternative. Trump’s tariffs will mean that US gasoline prices – currently about $3.50 per gallon – would move higher by 30-70¢/USG if applied to Canadaian oil, TD Bank calculates.
However with energy included, the US deficit with Canada only represents 4% of the US overall trade deficit, so “reducing imports from Canada would barely move the needle,” according to TD.
Trump has promised to “overhaul” the US trade system to protect domestic workers and to start to “tariff and tax foreign countries to enrich our citizens”.
The report also highlighted that Canada is the single-largest market for American goods, with at least 34 states selling more to Canada than to any other foreign country.
Report by Brett Holmes of Argus.
In 1776 (a busy year!) Adam Smith published “The Wealth of Nations” explaining the power and value of free markets and demonstrating that 2-way trade could make both parties more wealthy.
Trump and his MAGA base understand the first point, but not the mutual benefit of foreign trade – they believe exports are “good” but imports are “bad”. This means they believe in the pre-Adam Smith theory of “Mercantilism”.
Nowadays most people believe that in the long run a nation’s total foreign trade should be balanced but (a) individual imbalances with individual trading partners need not be a problem and (b) a persistent overall long term deficit can be offset by selling services e.g. “fintech” – which is particularly successful in the case of the UK.