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Key Highlights

1. Trump-Era Tariffs: Imposed primarily on steel and aluminium imports from multiple trading partners, including Canada.
2. US-Canada Trade Volume: Approaching USD $800 billion in goods trade in 2024, making it one of the world’s largest bilateral trading relationships.
3. Canada’s Counter Tariffs: Initially valued at CAD $16.6 billion, targeting steel, aluminium, agricultural products, and consumer goods from the US.
4. Diversification Efforts: Canada is expanding trade with the EU (through CETA) and the Asia-Pacific region (through CPTPP) to reduce reliance on the US.
5. Infrastructure Investments: Port expansions and improved rail/road connectivity to bolster global market access beyond North America.
6. Energy Interdependence: Canada supplies over 60% of US crude oil imports, totalling 4.0 million barrels per day in 2024, and exports billions of cubic feet of natural gas daily.
7. Rare Earth Elements: Canada holds significant reserves (800,000–850,000 tonnes of rare earth oxides), offering an alternative to China’s global dominance in these critical minerals.
8. Trade Balance: In 2024, the United States had a trade deficit of $63.3 billion in favour of Canada, influenced by high energy prices and robust imports.
9. Tit-for-Tat Risks: Potentially high for the US if Canada decides to escalate retaliation, given deep energy and resource ties.

1. Introduction

When the Trump administration first announced tariffs on steel, aluminium, and various other goods from several major trading partners, including Canada. For Canada, which shares one of the most extensive and intertwined trading relationships with the United States, the challenge has been to protect its domestic industries while also exploring new avenues to reduce reliance on a single market.

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2. Overview of Trump Tariffs

2.1 Rationale Behind the Tariffs

The Trump administration, favour a protectionist trade agenda under two main justifications:

1. National Security Concerns: The administration argued that over-reliance on foreign steel and aluminium could undermine national defence. It will also improve and retain jobs in US.
2. Trade Deficit Reduction: President Trump repeatedly cited large trade deficits with major partners, as evidence of “unfair” trade practices.

2.2 Specific Tariff Rates and Affected Goods

1. Steel Tariffs:
   • A 25% tariff on steel imports from countries such as Canada, Mexico, the European Union, and China.
   • According to data from the U.S. International Trade Commission (USITC), the total value of steel imports subject to these tariffs reached well over $14 billion annually from these regions combined at the height of the dispute.
2. Aluminium Tariffs:
   • A 10% tariff on aluminium imports.
   • Canada, as a major aluminium supplier to the U.S., saw an impact on billions of dollars of exports—particularly in semi-finished aluminium products like sheets and plates.
3. Other Tariffs on Chinese Goods:
   • Additional tariffs of 10% to 25% on various Chinese products (electronics, machinery, and more) worth over $300 billion in total trade value.
   • While these measures primarily targeted China, they reverberated globally by disrupting supply chains.
4. Potential Automotive Tariffs:
   • The Trump administration threatened reciprocal tariffs of up to 100% on automotive imports. He is particularly critical of Indian tariffs on foreign made automotives. Although not fully enacted, this prospect caused uncertainty for Canada, especially for the integrated North American auto sector.

2.3 Global Trade Implications

• Supply Chain Shifts: Multinational firms looked for ways to circumvent tariffs, prompting some relocation of production facilities.
• Retaliatory Actions: Canada, the European Union, and other affected partners imposed counter-measures, leading to a cycle of tariff escalations.
• Price Increases: U.S. companies reliant on imported metals faced higher input costs, which in some cases translated into higher consumer prices.

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3. The US-Canada Trade Relationship

3.1 Scale and Significance

Canada and the United States maintain one of the largest and most deeply integrated trading relationships in the world. Their shared 5,525-mile border facilitates enormous daily flows of goods, services, and people.

• Latest Trade Volume and Balance.       In 2024, the United States had a trade deficit of $63.3 billion with Canada. This is a decrease of $926.9 million from 2023. Monetary policies may moderate growth in the latter half of the year.
• In 2024, the US exported $349.4 billion worth of goods to Canada, and imported $412.7 billion worth of goods from Canada. 
• The US and Canada are each other’s largest trading partners. 
• Canada is an important supplier of energy, metals, and critical minerals to the US. 
• The US is a net importer of 43 of the 50 critical minerals on the US government’s critical mineral list. 
• Canada has abundant reserves of cobalt, graphite, lithium, and rare earth materials. 

The trade balance is the difference between the value of a country’s exports and the value of its imports. 

3.3 Sectoral Breakdown and Key Industries

1. Automotive:
   • Combined automotive trade also exceeded $100 billion in 2024, reflecting the high degree of integration in North American vehicle assembly.
   • Supply chain disruptions (e.g., semiconductor shortages) caused some volatility, but cross-border flows remain strong.
2. Energy:
   • Crude oil, natural gas, and refined petroleum products dominate Canadian exports to the U.S.
   • Rising oil prices in 2024 boosted the dollar value of Canada’s energy exports.
3. Agriculture:
   • Canada exports wheat, canola, and other agricultural commodities to the U.S., while importing fresh produce, livestock, and processed foods.
   • Bilateral agricultural trade is typically in the tens of billions of dollars annually.
4. Machinery and Manufacturing:
   • Machinery, aerospace components, and consumer goods also form a significant part of bilateral trade, reflecting the advanced manufacturing capabilities of both countries.

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4. Canada’s Counter Tariffs

4.1 Diplomatic and Legal Challenges

Canada responded to the Trump tariffs with a mix of diplomatic engagement and legal recourse:

• Diplomatic Engagement: High-level discussions between Canadian and U.S. officials, emphasising the mutual benefits of free and fair trade.
• WTO and USMCA Dispute Mechanisms: Canada filed complaints with the World Trade Organisation (WTO) and used dispute resolution channels within the U.S.-Mexico-Canada Agreement (USMCA, which replaced NAFTA in mid-2020).

4.2 Specific Tariff Rates on US Goods

To offset the economic impact of U.S. steel and aluminium tariffs, Canada imposed retaliatory tariffs initially valued at around CAD $16.6 billion . These measures were updated as the dispute evolved. Key elements included:

1. Metals:
   • 25% tariff on certain U.S. steel imports.
   • 10% tariff on select aluminium products.
2. Agricultural and Food Products:
   • Tariffs of 10% to 25% on items like yogurt, coffee, ketchup, and various prepared foods.
   • These targets were chosen partly for their political sensitivity in key U.S. states.
3. Manufactured and Consumer Goods:
   • Additional duties (10–25%) on items such as household goods, paper products, and some appliances.

4.3 Economic and Political Rationale

• Reciprocal Action: Ensuring that the economic burden of U.S. tariffs did not fall solely on Canadian exporters.
• Domestic Support: Showing Canadian businesses and labor groups that the government would actively defend national interests.
• Negotiation Leverage: Maintaining pressure on U.S. policymakers to reconsider or reduce tariffs, especially in light of the integrated nature of North American supply chains.

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5. Reducing Dependence on the US

5.1 Diversification of Trade Partners

Realizing the vulnerability of heavy reliance on the U.S. market, Canada has accelerated efforts to diversify:

• CETA (Comprehensive Economic and Trade Agreement) with the EU:
  • Provisionally in force since 2017, CETA grants Canada preferential access to over 450 million EU consumers.
  • Merchandise trade between Canada and the EU rose to over CAD $100 billion in 2024, marking a significant increase from pre-CETA levels.
• CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership):
  • Provides market access to 10 other Pacific Rim nations.
  • Offers significant potential for expanding agricultural and high-value manufacturing exports to Asia.

5.2 Infrastructure and Supply Chain Investments

• Port Expansion:
  • Projects at the Port of Vancouver and the Port of Prince Rupert are increasing container capacity, aiming to serve growing trade with Asia.
  • These expansions help Canadian exporters reach global markets beyond the United States.
• Intermodal Connectivity:
  • Federal and provincial governments are investing in rail, road, and warehouse facilities to streamline logistics from central manufacturing hubs to coastal ports.
• Digital and Customs Upgrades:
  • Automation of customs clearance and digitisation of shipping documents to reduce border delays and administrative costs.

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6. Energy Supply: The Critical Canada-US Interdependence

6.1 Canada’s Role as a Major Energy Supplier

Canada is consistently among the top global producers of crude oil and natural gas. The majority of these exports go to the United States, making energy a cornerstone of bilateral trade.

6.2 Statistical Overview of Oil and Gas Trade (2022–2023)

1. Crude Oil Exports to the U.S.:    In 2024, Canada supplied about 61% of the crude oil imported to the United States, reaching a record of 4 million barrels per day (b/d).  estimated at 100 billion dollars.

Why Canada is a major supplier?

• Canada’s Trans Mountain Expansion (TMX) pipeline tripled the capacity of the line in recent years to bring more oil from Alberta to the west coast. 
• Refineries in the US Midwest depend on Canadian supply because they are landlocked and have limited access to other sources of heavy crude. 

Other US crude oil suppliers are Mexico, Venezuela, Brazil, and Iraq. 

• Natural Gas Exports:        In 2024, the United States imported 8.6 Billion cubic feet (Bcf) of natural gas from Canada, which was the highest amount since 2011.
• The price of natural gas at Henry Hub was projected to be $2.20 per million British thermal units (Btu) in 2024. 
• The Canadian oil and natural gas industry is expected to see $40.6 billion in capital investment in 2024. 

• Refined Products: Cross-border pipelines facilitate the movement of refined petroleum products. Canadian refineries in Alberta, Ontario, and Quebec send gasoline, diesel, and other products to U.S. markets, especially in border states like Michigan and New York.

6.3 Potential Restrictions and Their Implications

• Leverage in Negotiations:
  • If Canada restricted exports, particularly of heavy crude oil, which some U.S. refineries are specifically configured to process. It could cause supply disruptions and price increases in certain U.S. regions.
  • However, such a move would also reduce Canadian revenues, as roughly 90% of Canadian oil exports head south.
• Diversification of Export Routes:
  • Pipeline projects like the Trans Mountain Expansion (TMX) aim to provide tidewater access for Canadian oil, enabling shipments to Asia and other global markets.
  • A successful diversification strategy could enhance Canada’s bargaining position in future trade disputes.

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7. Rare Earth Elements: Canada’s Strategic Resource

7.1 Importance of Rare Earths

Rare earth elements (REEs) are 17 metals vital for numerous high-tech and defense applications:

• Consumer Electronics: Smartphones, laptops, and advanced medical devices.
• Defense Systems: Guidance systems, radar, and missile technologies rely heavily on rare earth-based components.
• Green Energy: Neodymium and other rare earths are critical for wind turbine magnets and electric vehicle motors.
• Aerospace: Jet engines and satellite communications systems require REEs for performance and durability.

7.2 Canada’s Rare Earth Reserves and Production Potential

• Resource Estimates:
  • Geological surveys suggest Canada could hold over 800,000–850,000 tonnes of rare earth oxides, placing it among the top non-Chinese resource holders.
  • The Nechalacho deposit in the Northwest Territories and Strange Lake in Quebec are among the most promising sites.
• Ongoing Projects:
  • Several Canadian mining companies are working to scale up extraction and processing.
  • Government funding and partnerships with private entities aim to develop a fully integrated rare earth supply chain, from extraction to separation and refining.
• Production Levels:
  • Actual rare earth production in Canada remains relatively small compared to China, which accounts for over 60–70% of global supply. However, Canada has great potential outside China to extract more.
  • As global demand for REEs grows, particularly for electric vehicles. Canada’s potential becomes increasingly important.

7.3 The US’s Dependence on Rare Earths and Canada’s Leverage

1. High Dependence on Imports:
   • The U.S. relies on foreign sources for over 80% of its rare earth needs, with China dominating the market.
   • This dependence creates vulnerabilities in supply chains critical for national security and advanced manufacturing.
2. Canada as an Alternative:
   • Canada offers a stable, friendly source of REEs, reducing the U.S.’s reliance on China.
   • With proper investments in refining capacity, Canada could become a major supplier of these critical minerals to the U.S. and other allies.
3. Strategic Negotiation Tool:
   • In extreme scenarios, Canada could limit exports of rare earths to the U.S., although this would be a last-resort measure given the broader economic and political ties.
   • More realistically, Canada’s potential in REEs bolsters its standing in trade talks, as the U.S. increasingly seeks secure and diversified supply chains for high-tech industries.

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8. What Are the Risks for the US in a Trade War with Canada, in Case Canada Retaliates Tit for Tat?

Despite the close alliance between the United States and Canada, the possibility of a deeper trade conflict carries significant risks for the US, especially if Canada opts for a more aggressive retaliation strategy:

1. Energy Disruptions:
   • The US imports over 4 million bpd of crude oil from Canada, representing more than 60% of total US crude imports.
   • A reduction in Canadian oil exports could force the US to source heavier crude elsewhere at higher cost, potentially driving up domestic fuel prices.
   • According to some industry estimates, a supply cut from Canada could lead to a 5–10% price spike in regions heavily dependent on Canadian crude, such as the Midwest.
2. Raw Materials and Intermediate Goods:
   • The integrated North American manufacturing sector relies on smooth cross-border flows of steel, aluminium, and parts.
   • If Canada imposed high tariffs or quotas on these materials, US manufacturers, especially in automotive and aerospace, these sectors could face production delays and cost increases.
   • Prolonged supply chain disruptions might reduce US competitiveness in global markets.
3. Rare Earth Element Supply:
   • As the US seeks to diversify from Chinese rare earths, a cooperative Canadian supply becomes increasingly important.
   • If Canada restricted exports or leveraged these minerals in trade negotiations, US industries producing electronics, defence systems, and green technologies could experience shortages or higher input costs.
   • Given the growing demand for electric vehicles and renewable energy systems, any disruption in rare earth supply could hamper US climate and industrial goals.
4. Economic Fallout and Job Losses:
   • According to the US Chamber of Commerce, over 9 million US jobs depend on trade and investment with Canada.
   • A tit-for-tat escalation could threaten thousands of jobs in sectors like automotive, agriculture, and services, especially in states near the Canadian border.
5. Political Backlash:
   • Many US states that benefit from Canadian trade could pressure Washington to de-escalate.
   • Farmers, manufacturers, and small businesses reliant on cross-border commerce might oppose prolonged trade tensions, influencing federal policy decisions.

In essence, while the US is larger in overall economic size, Canada’s specific leverage points, particularly in energy and strategic minerals, mean that a full-blown trade war could harm US industries and consumers more than some policymakers might anticipate. Both countries ultimately risk self-inflicted economic damage, but the US stands to lose significant strategic advantages if Canada withholds critical resources or imposes targeted retaliatory measures.

9. Conclusion

The tariffs introduced by the Trump administration, particularly on steel and aluminium, remain a defining episode in recent U.S.-Canada trade relations. While some of these measures have been eased or revised, their impact lingers, underscoring the need for robust and adaptable trade policies.

1. Retaliatory Tariffs and Negotiations:
   • Canada imposed countermeasures on about CAD $16.6 billion worth of U.S. goods, demonstrating a readiness to protect its industries.
   • Bilateral discussions led to partial rollbacks, but the broader push for more balanced trade continues.
2. Trade Diversification:
   • With total goods trade between the two nations nearing $800 billions. Canada recognises the risk of over-reliance on a single market.
   • Agreements like CETA and CPTPP, along with infrastructure upgrades, are expanding Canada’s global reach.
3. Energy Interdependence:
   • Canada supplies over 60% of U.S. crude oil imports and significant volumes of natural gas, making energy a key pillar of bilateral ties.
   • While restricting energy exports could pressure U.S. refineries, such a move would also hit Canada’s export revenues.
4. Rare Earth Elements:
   • Canada’s potential as a major rare earths producer offers an avenue to reduce U.S. dependence on China for these critical materials.
   • This resource could become increasingly strategic as demand for high-tech and green energy solutions grows.
5. Potential Trade War Risks: Should a tit-for-tat escalation occur, the United States faces substantial risks in energy security, manufacturing competitiveness, and critical mineral supply.

Looking ahead, the U.S.-Canada relationship remains anchored by mutual economic benefits and shared values. Nonetheless, the experience of the Trump tariffs highlights the importance of having diversified markets, flexible supply chains, and robust domestic industries. For Canada, the lesson is clear, to continue expanding global trade partnerships, invest in infrastructure and technology, and leverage its position as a key supplier of energy and critical minerals to give a befitting reply to Trump.