Why Canada? America’s northern neighbour appears an unlikely trade-war target

WASHINGTON (AP) — Canada might appear an unlikely target for a U.S. trade war. No country buys more from the United States than its northern neighbour, and Canada is second only to Mexico as an export market for American farmers. A North American trade agreement negotiated during President Donald Trump’s first term allows most U.S. products to enter Canada duty-free.

Trump, however, has portrayed Canada as exploiting the United States and harming its industries. Since trade talks collapsed Aug. 21, relations between the longtime allies have deteriorated. Trump has made personal attacks on Canadian leaders, described the country as weak, repeatedly raised the possibility of making Canada the 51st state and signed an executive order directing the federal government to rename Lake Ontario “Lake America.”

Last month, Trump imposed 50 per cent tariffs on $20 billion worth of Canadian products, citing what he calls discrimination against U.S. auto, dairy and alcoholic-beverage exports. After Ottawa imposed tariffs of its own Tuesday, Trump said Canadian companies would be cut off from U.S. government contracts and that some Canadian products, including motorcycles, some dairy products and most alcoholic beverages, would be banned.

Canada’s economy is heavily tied to international commerce. The World Bank says trade equals 64 per cent of Canadian economic output, compared with 25 per cent in the United States. The Heritage Foundation ranked Canada 14th among 184 economies in its Index of Economic Freedom, with the United States 22nd; Vancouver’s Fraser Institute ranked Canada 11th among 165 countries and territories in its Economic Freedom of the World report.

Before the latest tariff dispute, Canada’s effective tariff rate on U.S. imports was about 2.4 per cent, less than half the 5 per cent rate imposed by the United States on Canada, according to Oxford Economics. Most U.S. exports enter Canada duty-free under the Canada-United States-Mexico Agreement.

Canada nevertheless protects several domestic industries. Barry Appleton, co-director of New York Law School’s Center for International Law, described it as a modestly protected economy with two or three genuinely closed sectors. The United States has long alleged unfair Canadian subsidies for softwood lumber producers, an allegation Canada disputes.

Canada’s dairy supply-management system imposes tariffs exceeding 200 per cent on most dairy products once quotas are exceeded, and nearly 300 per cent on some items such as butter, according to University of Wisconsin dairy-market specialist Leonard Polzin. He said Canada has a strong incentive to protect its politically sensitive dairy sector from U.S. competition, noting that Wisconsin alone produces more milk than all of Canada.

Trump falsely claimed Tuesday that Canada does not allow U.S. dairy farmers to sell into its market. Under the Canada-United States-Mexico Agreement, the United States agreed Canada could retain supply management in exchange for greater access for American dairy farmers. U.S. dairy exports to Canada rose more than 11 per cent last year, following an 8 per cent increase in 2024, according to the U.S. Department of Agriculture. The United States exported $1.3 billion in dairy products to Canada last year and imported $585 million.

The United States ran a $27.3-billion overall trade deficit with Canada last year, largely because of oil. Canada exported more than $85 billion in crude oil to the United States in 2025. Midwest U.S. refineries require heavy sour crude from Alberta’s oil sands, Appleton said, and would need years and billions of dollars to shift to other crude supplies. Canadian oil also sells at a discount to benchmark U.S. crude.

The countries remain deeply interdependent: Canada sends about 70 per cent of its exports to the United States; U.S. refineries need Alberta oil; American farmers need Canadian potash fertilizer; and northern U.S. border communities rely on Canadian-generated electricity. Inu Manak, a senior fellow at the Peterson Institute for International Economics, said the U.S. ban on some Canadian products is not due to take effect until Sept. 29, leaving time for talks.

Prime Minister Mark Carney said Canada remains ready to make a fair deal. U.S. negotiators are also pressing Canada to surrender some manufacturing to the United States, a prospect Manak described as difficult to sell in Ottawa. Appleton said the standoff threatens the integrated automotive industry created across the United States, Canada and Mexico under the Canada-United States-Mexico Agreement.