U.S. Trade Deficit with Canada Predominantly Driven by Energy, New Report Reveals

U.S. Trade Deficit with Canada Predominantly Driven by Energy, New Report Reveals
Published on: Jan 21, 2025

As U.S. President Donald Trump considers imposing tariffs on Canada as early as next week, the TD Economics released a new report on Tuesday stating that Canada is one of the largest export markets for the U.S. and one of the countries with the smallest trade deficit with the U.S. This deficit is primarily driven by the U.S. demand for energy.

According to Canadian media reports, Trump suggested that the U.S. government could levy a 25% across-the-board tariff on Canadian imports starting February 1, claiming that the U.S. subsidizes Canada by approximately $200 billion annually. However, the report notes that it is “unclear” where Trump derived this figure.

Economists at TD Economics pointed out that in 2024, the trade deficit between the U.S. and Canada was only $45 billion, second only to France, accounting for just 4% of the overall U.S. trade deficit. Therefore, reducing imports from Canada would have a minimal impact on the total trade deficit. Furthermore, trade between the U.S. and Canada is highly integrated, with the majority of Canadian exports being raw materials used in the production processes of American businesses, a figure higher than that with other trading partners.

Thus, imposing tariffs on Canada would have negative impacts that propagate through supply chains and production channels, ultimately leading to increased inflationary pressures at both production and retail levels. In the first three quarters of last year, the value of cross-border goods trade between the U.S. and Canada was approximately $800 billion, equating to about $3.6 billion in total import and export flows daily.

Importantly, the U.S.-Canada trade deficit is mainly due to energy. If energy exports are excluded, the U.S. actually has a trade surplus with Canada of around $60 billion.

In U.S.-Canada trade, energy plays a significant role. Last year, Canada exported nearly $170 billion worth of energy products (oil, natural gas, and electricity) to the U.S., accounting for almost one-third of total Canadian exports. According to data from the U.S. Energy Information Administration, the U.S. consumes approximately 20 million barrels of oil daily, with about a quarter of this coming from Canada, comprising 60% of total U.S. oil imports. Data from the Observatory of Economic Complexity shows that in 2022, Canada exported goods worth $438 billion to the U.S., including $117 billion in crude oil alone.

In summary, Canada’s energy supply is crucial to U.S. energy security.

If tariffs were imposed on Canadian crude oil, U.S. gasoline prices could immediately rise by $0.3 to $0.7 per gallon. Gasoline prices are one of the most transparent and inflation-sensitive consumer prices, and such price movements could bring about significant inflationary pressures.

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