Why Canada? America’s northern neighbor seems an unlikely target for a trade war

WASHINGTON (AP) — Canada might seem an unlikely target for a U.S. trade war.

No country on Earth buys as much from the United States as its northern neighbor. For American farmers, Canada is second only to Mexico as an export market.

A North American trade pact — negotiated by President Donald Trump in his first term — means that most American products enter Canada duty-free. Rankings of the world’s most open economies usually put Canada near the top.

But when Trump looks at Canada, he says, he sees a predator out to cheat the United States and strangle its industries.

“One of the Worst Abusers is Canada,’’ the president declared on social media last month. “They’ve been ripping us off for decades, and it’s going to stop.’’

Since trade talks collapsed Aug. 21, relations between the longtime allies have deteriorated as Trump has goaded Canada’s leaders with personal attacks and portrayed the country as weak. Trump has also enraged the Canadian public by repeatedly floating the idea of making Canada the 51st state and signed an executive order directing the federal government to change Lake Ontario’s name to “Lake America.”

Last month, Trump slapped 50% tariffs on $20 billion worth of Canadian products to protest what he calls discrimination against U.S. auto, dairy and alcoholic beverage exports.

When Ottawa retaliated Tuesday with tariffs of its own, Trump escalated, vowing to cut off Canadian companies from government contracts in the United States and even outright banning some Canadian products, including motorcycles, some dairy products and most alcoholic beverages.

It’s a jarring turn of events for Canada, a country that has built its economy around international commerce. Canada’s trade is equal to 64% of its economic output, the World Bank says, versus 25% for America.

The conservative Heritage Foundation in Washington ranked Canada No. 14 (out of 184 economies) on its Index of Economic Freedom; the United States landed eight spots lower at No. 22. The libertarian Fraser Institute in Vancouver likewise ranked Canada No. 11 (out of 165 countries and territories) on its Economic Freedom of the World report.

Before the latest tariff blowup, Canada’s effective tariff rate on U.S. imports was about 2.4%, less than half the 5% that the United States imposed on Canada, according to calculations by Oxford Economics. Most U.S. exports enter Canada duty-free under the US-Mexico-Canada Agreement that Trump negotiated in his first term.

Canada protects its dairy industry from competition

Despite keeping its economy open to trade overall, Canada does protect several domestic industries. Barry Appleton, co-director of New York Law School’s Center for International Law, calls Canada “a modestly protected economy with two or three genuinely closed sectors.’’

The U.S. has complained for decades, for instance, about what it calls unfair subsidies for Canadian softwood lumber producers — though Canada disputes those allegations.

In his 2023 memoir, Robert Lighthizer, U.S. trade representative in Trump’s first term, argued that Canada was only “outwardly supportive of free trade. … Canada is in reality a quite parochial — and at times quite protectionist — country.’’ The system Canada set up to protect its dairy industry, Lighthizer wrote, “would make a Soviet commissar blush.’’

Canada shields its dairy producers through a convoluted system that imposes tariffs of more than 200% on most dairy products — nearly 300% on some items, such as butter — once they’ve exceeded a quota, according to Leonard Polzin, a specialist in dairy markets at the University of Wisconsin.

Polzin said the Canadians have a strong incentive to protect their politically sensitive dairy industry from competition with America. Wisconsin alone produces more milk than all of Canada. American dairy producers are so adept at producing large quantities of low-cost milk, Polzin said, that if Canada opened its market completely “we would dump so much product there’s no way they could remain as a viable industry.’’

Trump claimed falsely on social media Tuesday that “Canada doesn’t let our Great Dairy Farmers sell into the Canadian Market.’’

In fact, the United States agreed in the USMCA to allow Canada to continue the supply management system in return for giving American dairy farmers more access to the Canadian market. And American dairy producers have been making headway: U.S. dairy exports to Canada rose more than 11% last year on top of an 8% increase in 2024, according to the U.S. Department of Agriculture.

“We gradually get more and more expansion of dairy product into Canada,’’ Polzin said. “It’s not always pretty. It’s not always easy, but over time it has been increasing.’’

The United States already runs a hefty trade surplus in dairy with its northern neighbor, exporting $1.3 billion worth of dairy products to Canada last year while importing just $585 million, according to the USDA.

US runs a trade deficit with Canada – because it needs Alberta’s oil

Overall, the United States runs a trade deficit with Canada — $27.3 billion last year — and Trump isn’t happy about it.

But the gap between what the U.S. sells to Canada and what it buys can be explained by one industry: oil. Canada exported more than $85 billion worth of crude oil to the United States in 2025.

Refineries in the U.S. Midwest need heavy sour crude oil from Alberta’s oil sands deposits.

“It’s the only oil they can use,” Appleton said. “They can’t use Texas crude. They can’t use Venezuelan crude. They’re not set up for it. It would take years and billions of dollars to shift over.’’

What’s more, the Canadian oil sells at a discount to the benchmark U.S. crude oil.

There’s time for a deal to end the standoff

The two countries need each other economically. Canada sends about 70% of its exports south to the United States. U.S. refineries need Alberta’s oil. U.S. farmers need Canadian potash fertilizer. Communities on the northern U.S. border rely on electricity generated in Canada.

So there’s a strong incentive for the two countries to come to an agreement. And Inu Manak, senior fellow at the Peterson Institute for International Economics, noted hopefully that the U.S. ban on some Canadian products doesn’t take effect until Sept. 29, buying time for talks.

“This is not going to happen for three weeks,” she said. “So it’s like, ‘We’re going to retaliate, but not yet.’ … There could be a way out of this.’’

Canadian Prime Minister Mark Carney said his country remains open to an agreement: “Canada is always ready to strike a fair deal.”

Trump and his trade negotiators are also pushing to get Canada to surrender some of its manufacturing to the United States — a tough sell in Ottawa.

“If you want to take all our jobs and industry away, then why would I cooperate with you?’’ Manak said.

Appleton noted that the standoff jeopardizes the USMCA, which has created a thriving automotive industry straddling the U.S., Canada and Mexico.

“We had the best integrated North American economy going,’’ he said. “And now we don’t. … This is like having a very bad standoff with your 14-year-old. Nobody’s happy in this game.’’

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AP Writer Rob Gillies in Toronto contributed to this story.