Essential or Expendable? A Deep Dive into Canada-US Economic Ties Amid Tariffs

THE THREAT OF U.S. TARIFFS ON CANADA
U.S. President Donald Trump has taken aim at Canada, threatening a 25% tariff on all goods from the world's 9th largest economy. Trump’s rationale includes:

• Fentanyl Accusations: Trump argues the tariffs are meant to pressure Canada on fentanyl trafficking, despite U.S. Customs seizing under 20 kg at the northern border in 2024 compared to over 9,000 kg at the Mexican border.

• Subsidy Claims: Trump alleges the U.S. "subsidizes" Canada by $200B per year, but has not elaborated as to how.

• Defense Spending: He criticizes Canada for falling short of NATO’s 2% GDP military budget target, pointing out they rely heavily on U.S. defense.

Trump and his team are planning to impose sweeping tariffs on Canada and Mexico starting on February 1st. The President has declared, “We don’t need Canadian oil, lumber, or steel.” 

CRITICAL CONTEXT: THE SMOOT-HAWLEY TARIFF ACT

In 1930, amid pressure to shield American farmers, U.S. President Herbert Hoover signed the Smoot-Hawley Tariff Act, a decision with far-reaching consequences:

• Massive Tariff Hikes: Duties on over 20,000 goods were raised by an average of 40% to nearly 60%.

• Global Retaliation: Canada and Europe hit back with counter-tariffs and developed new trade partnerships to circumnavigate the U.S.

• Trade Collapse: Between 1929 and 1933, U.S. imports fell by 66% and exports by 61%.

Decades later, Republican President Ronald Reagan stated "The Smoot-Hawley tariff ignited an international trade war and helped sink our country into the Great Depression,” further calling it "the most destructive trade bill in history".

NORTH AMERICAN ECONOMIC INTEGRATION

For over 30 years, the U.S., Canada, and Mexico have shared the world’s largest free trade area—first under NAFTA (1994–2020) and now USMCA (2020–present). The result has been deep economic integration across industries, supply chains, and infrastructure:

• Mexico: The U.S.’s top trade partner in 2023, with nearly $798 billion USD in goods and services exchanged.

• Canada: A close second, accounting for $773 billion USD in trade.

CANADIAN GOODS IN THE U.S. ECONOMY

A tariff functions as a tax on imports, meaning the financial burden falls on U.S. consumers, not Canadian producers. By increasing the price of Canadian goods, tariffs are designed to steer buyers toward domestic alternatives. While higher prices may prompt a shift toward domestic products, if U.S. industries are unable to scale production quickly enough it will lead to higher costs for consumers.

Crucially, the U.S. is likely to exempt key industries where achieving economic independence is particularly challenging. However, Canada could leverage these industries strategically, implementing targeted countermeasures in retaliation.

Energy

In 2023, Canada registered a surplus in trade in energy of approximately $98 billion USD, representing 27% of all Canadian merchandise exports to the U.S. 

Oil and Natural Gas: 

• Demand: Canada is the largest source of United States crude oil, petroleum products, and natural gas imports. Canada made up 60% of U.S. crude oil imports and accounted for 24% of U.S. refinery throughput. Canada also supplies 9% of U.S. natural gas demand. 

• Cooperation Advantage: Canadian crude oil, particularly Western Canadian Select (WCS), trades at a lower price due to its high density and sulfur content that require specialized refining processes. Furthermore, Canada's export infrastructure for oil outside North America is limited, resulting in an oversupply of oil in the North American market.

• Decoupling Dynamics: While the U.S. has abundant oil and gas reserves, there could be decoupling friction due to U.S. infrastructure: 

  • Specialized Refineries: The U.S. has more than 100 refineries that have been specially designed for heavy oil. Many of these refineries would require changes adapt to non-Canadian supply and likely see their profit margin fall.

  • Mid-continental U.S. Gap: U.S. mid-continent refiners have limited connectivity to U.S. crude and refined products pipelines and rely on 65% of all crude from Canada. Therefore, they would likely need to continue the purchase of Canadian oil.

  • U.S. Oil and Aging Pipelines: The U.S. is already producing oil at all-time highs while maxing out aging pipeline infrastructure – 45% of U.S. crude oil pipelines are more than 50 years old. 

Electricity

Every Canadian province bordering the U.S. is electrically connected to at least one state, making the two systems highly interdependent.

• Demand: Canadian electricity powers over 5,600,000 homes, representing 1.6% of total U.S. electricity demand. The U.S.’s demand for electricity continues to grow, in part due to data center demands.

• Cooperation Advantage: Cross-border electricity trade helps balance supply shortages. During the 2021 Southern U.S. winter storm, Canadian suppliers ramped up exports to meet surging U.S. demand. Over time, this reduces the need for costly overcapacity on both sides of the border.

• Decoupling Dynamics: Decoupling a century-long integration of electricity between the two systems would be difficult for both countries.

  • Long-Term Agreements: Many supply contracts extend decades, such as Hydro-Québec’s deal with New York, set to run until 2050.

  • Trend Toward Electricity Surplus: By late 2023, U.S. electricity exports to Canada rose 70%, while imports from Canada fell 36%, signaling a shift toward U.S. self-reliance. 

Uranium

The U.S. imports 27% of its uranium from Canada, making it the largest foreign supplier for nuclear energy’s fuel.

• Steady Demand: In 2023, nuclear power accounted for 19% of U.S. electricity, ensuring a consistent need for nuclear-grade uranium. Check out our analysis Why Did Big Tech Go Nuclear? .

• Decoupling Dynamics: Uranium is a global commodity and therefore alternative sources are available. Alternative suppliers include Australia, Russia, and Kazakhstan, though Russia has worked to place export controls on their Uranium. So, while uranium is a global commodity, alternative sources would likely be politically complicated and suffer from higher shipping costs.

Minerals

Canada is a major supplier of many minerals and materials used extensively in U.S. supply chains. Specifically, Canada is a significant supplier of 13 of the 35 minerals deemed as critical to the U.S. 

Potash

Potash is a group of minerals that contain potassium and are essential in the production of fertilizer.

• Demand: In 2023, the US accounted for 20% of global potash consumption equaling 35 pounds per person. The U.S. imports 90% of their potash from Canada - the world’s largest potash producer.

• Decoupling Dynamics: Reducing dependence on Canadian potash would be challenging. The next largest suppliers—Russia, Belarus, and China—pose geopolitical and trade risks, making alternative sourcing difficult. A tariff on Canadian potash would lead to U.S. farmers facing higher costs, which would impact food prices and agricultural output. 

Aluminum

Aluminum is a metal widely used in transportation, construction, packaging, electrical applications, consumer products, and industrial equipment.

• Demand: Today, the U.S. does not produce enough aluminum to satisfy domestic consumption. The Aluminum Association highlighted that two-thirds of U.S. primary aluminum comes from Canada and states that they must remain except from tariffs since it is ‘vitally important’ for the U.S. industry.

• Decoupling Dynamics: Aluminum is unique in its lack of diversified production – only 11 countries produce more than 1 million metric tonnes of primary aluminum. The big four producers include China (dominant at 59% of global production), India, Russia and Canada. Due to Canada’s globally relevant production and politically contentious alternatives, imposing a tariff on aluminum would be consequential for U.S. buyers.

Steel

Steel is an alloy primarily composed of iron and carbon, known for its exceptional strength, durability, and versatility with uses in construction, manufacturing, infrastructure, and countless industrial applications worldwide.

• Demand: The U.S. consumed 91 million tons of steel in 2023 and imported $8.36 billion USD worth of iron and steel from Canada.

• Decoupling Dynamics: In 2018, Trump imposed a 25% tariff on Canadian steel. Ford Motors faced more than $1 billion in additional costs of steel.

Others Critical Minerals:

• Indium: Canada is the largest U.S. supplier of indium, essential for semiconductors, electronics, and solar cells. China dominates global production, controlling over 50% of supply.

• Tellurium: Another key Canadian export, tellurium is used in solar panels and semiconductors. Demand is rising due to the growth of cadmium telluride (CdTe) solar panels and Canada is the U.S.’s largest supplier.

• Copper: Canada is the U.S.'s second-largest copper supplier, after Chile, providing 18% of refined imports. Crucial for construction, electronics, and renewable energy, copper faces a global supply crunch due to rising demand from electrification, EVs, and renewables.

• Nickel: Canada supplies half of U.S. nickel, vital for stainless steel and batteries. The U.S. has just one operating nickel mine, while China controls over 60% of global refining capacity.

The Automotive Industry

The automotive industry is a cornerstone of Canada's trade relationship with the U.S.

• Demand: In 2023, Canada exported $58.21 billion USD worth of vehicles to the United States (excluding railway and tramway). This figure includes both finished vehicles and $11.43 billion USD in parts and accessories used in U.S. vehicle production. The U.S. represents 75% of Canadian automotive exports, making it the industry’s primary market.

• Cooperation Advantage: By allowing tariff-free access to Canadian auto parts, U.S. manufacturers benefit from a more cost-effective supply chain. This advantage is increasingly critical as American automakers face rising competition from lower-cost markets like China.

• Decoupling Dynamics: General Motors, Ford, and Stellantis all rely on Canadian-made parts but could shift production domestically at a higher cost. If tariffs were applied to the sector, TD Bank estimates that the Canadian automotive industry would cease to exist by late 2025.

• China as a Trade Lever: Canada has mirrored U.S. tariffs by imposing a 100% duty on Chinese EVs and a 25% tariff on Chinese steel and aluminum. However, if trade tensions escalate, Canada could reconsider its stance—potentially lowering tariffs on Chinese goods to lower its reliance on American trade.
  

Lumber

Lumber is a critical material in construction and manufacturing, derived from processed wood.

• Demand: Canadian softwood lumber accounted for 24% of U.S. lumber consumption in 2024, despite Canadian mills facing a 14.4% import duty on shipments to the U.S. With recent wildfires in California, demand for lumber is expected to surge in the coming months, further tightening supply. 

• Cooperation Advantage: As of January 2025, Canadian softwood lumber is 27% cheaper than its U.S. counterpart, meaning continued trade cooperation would help keep prices lower for American consumers. However, the U.S. has long disputed Canada’s lumber policies, arguing that provincial stumpage fees provide Canadian producers with an unfair cost advantage.

• Decoupling Dynamics: Currently, the U.S. does not produce enough lumber to meet domestic demand. While increasing domestic supply is possible, scaling up production would take time, leading to short-term price spikes if tariffs were levied.

Food: Agriculture and Seafood

Canada is a major food supplier to the United States, with certain products where Canada holds a dominant position, leading to potential price increases if disrupted.

• Canola: As the world’s largest producer, Canada represents 23% of global canola production. In 2023, the U.S. imported $8.4B CAD (or ~$6.37 billion USD) in canola. The new U.S. Health Secretary Robert F Kennedy has raised concerns about canola oil, potentially looking to curb its consumption.

• Pulses: Canada produces 36.4% of the world’s lentils and 25.5% of the world’s peas (2024).

• Wheat: Canada is a leading wheat producer, dominating durum production, which is used in semolina flour for pasta, pizza, couscous, and bulgur. Canada accounts for over 50% of global durum exports in most years.

• High-Value Seafood:

  • Snow Crab: Canada produces 55-60% of global snow crab, with 83% of Newfoundland’s exports going to the U.S.

  • Lobster: Nova Scotia, the world’s largest lobster producer, exported 51,000 tonnes to the U.S. in 2023, valued at over $1 billion CAD (approximately $750M USD).

  • Atlantic Salmon: In 2023, Canada produced 64,469 tonnes of Atlantic salmon, with 98.6% exported to the U.S.

HOW RESILIENT IS CANADA TO DECREASED U.S. DEMAND

Due to the difference in economic size, Canada is highly dependent on the U.S., with roughly 20% of its GDP tied to exports heading south. As a result, tariffs would asymmetrically hurt the Canadian economy, inflicting greater damage compared to their impact on the U.S. However, several dynamics could influence Canada’s ability to adapt:

Expanding Trade Infrastructure

• Trans Mountain Pipeline Expansion: Operational since May 2024, this expansion has nearly tripled the pipeline’s capacity from Alberta to the West Coast, allowing Canada to diversify its oil exports. The first shipments are reaching markets in China and India, reducing dependence on U.S. refineries.

• LNG Canada: Set to begin operations by mid-2025, this will be Canada’s first major Liquified Natural Gas (LNG) export terminal. With a potential expansion to 28 MTPA in a second phase, it strengthens Canada's role as a global LNG supplier and opens new trade avenues, particularly in Asia.

While these infrastructure investments offer long-term alternatives, they do not come close to replacing the volume of oil and gas exports currently flowing to the U.S.

The true impact of this shift remains uncertain, but what is undeniable is the profound effect it could have on future global alliances and trade dynamics. As the U.S. distances itself from a long-standing partner, the stage is set for a potentially large reordering of international relations. Whether it's the beginning of a new geopolitical landscape or just another tactical move in the complex dance of diplomacy, the consequences will reverberate for years to come.

Subscribe now to ensure you don’t miss future analyses!