By Paul Wiseman, The Associated Press
At first glance, Canada looks like an unlikely target for a U.S. trade war.
No country buys more from the United States than its northern neighbor. For American farmers, Canada ranks second only to Mexico as an export market.
The three-way trade agreement President Donald Trump negotiated with the leaders of Canada and Mexico in late 2018 means most U.S. goods enter Canada duty-free. Canada is routinely listed among the world’s most open economies.
Still, Mr. Trump portrays Canada as a predator out to take advantage of the United States and choke off its industries.
“America has been ‘ripped off for 50 years by Canada,’” the president declared Saturday when asked if he was considering pulling out of the agreement he signed with Canada and Mexico.
Relations have soured since the latest trade talks collapsed Aug. 21. Trump has publicly taunted Canada’s leaders and cast the longtime ally as weak. After suggesting last year that Canada could become the 51st state, he signed an executive order last month directing the federal government to change Lake Ontario’s name to “Lake America.”
Each side blamed the other for the failed negotiations. To protest what he described as discrimination against U.S. auto, dairy and alcoholic beverage exports, Trump imposed 50% tariffs on $20 billion worth of Canadian goods three weeks ago.
When Canada retaliated Tuesday with its own tariffs, the president moved to ban imports of whey, most alcoholic beverages, motorcycles and mopeds from Canada, though he said some items — including toilet paper, bedsheets and fishing rods — would be removed from the tariff list.
Being labeled among nations with allegedly unfair trade policies is a striking reversal for Canada, which built its economy around international commerce. The World Bank reports trade equals about 64% of Canada’s economic output, compared with roughly 25% for the United States.
Washington-based conservative Heritage Foundation ranked Canada No. 14 out of 184 economies on its Index of Economic Freedom, with the United States eight spots lower at No. 22. The Fraser Institute in Vancouver placed Canada No. 11 (out of 165 countries and territories) on its Economic Freedom of the World report.
Before the recent dispute, Canada’s effective tariff rate on U.S. imports was about 2.4%, less than half the roughly 5% the United States imposed on Canada, according to Oxford Economics calculations. Most U.S. exports enter Canada duty-free under the US-Mexico-Canada Agreement, which took effect July 1, 2020.
Canada protects its dairy industry from competition
Despite its overall openness, Canada shields several domestic industries. Barry Appleton, co-director of New York Law School’s Center for International Law, describes Canada as “a modestly protected economy with two or three genuinely closed sectors.”
The U.S. has long complained about alleged subsidies to Canadian softwood lumber producers; Canada disputes those claims.
Robert Lighthizer, who was U.S. trade representative in Trump’s first term, wrote in his 2023 memoir that Canada is “a quite parochial — and at times quite protectionist — country.” He added that Canada’s dairy protection “would make a Soviet commissar blush.”
Canada defends its dairy industry with a system that, once quotas are exceeded, imposes tariffs of more than 200% on most dairy products and nearly 300% on some items such as butter, Leonard Polzin, a dairy-market specialist at the University of Wisconsin, said.
Polzin said Canada has strong reasons to protect a politically sensitive dairy sector from U.S. competition. Wisconsin alone produces more milk than all of Canada, and American dairy producers are so efficient at making low-cost milk 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 reality, the United States agreed under USMCA to let Canada keep its supply-management system in exchange for expanded access for U.S. dairy producers. U.S. dairy exports to Canada rose more than 11% last year, following an 8% increase in 2024, the U.S. Department of Agriculture reported.
The United States already runs a large dairy surplus with Canada, exporting $1.3 billion in dairy products to Canada last year while importing $585 million.
U.S. runs a trade deficit with Canada because it needs Alberta’s oil
Overall, the United States ran a trade deficit with Canada of $27.3 billion last year — a figure that has drawn Trump’s ire.
That deficit is largely driven by one sector: oil. Canada shipped more than $85 billion worth of crude oil to the United States in 2025.
U.S. Midwest refineries are configured to process heavy, sour crude from Alberta’s oil sands. “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.”
Alberta’s oil also typically sells at a discount to the U.S. benchmark crude.
There’s time for a deal to end the standoff
The two neighbors remain economically interdependent: Canada sends about 70% of its exports to the United States; U.S. refineries rely on Alberta oil; American farmers need Canadian potash; and communities along the northern border depend on electricity generated in Canada.
Because of that interdependence, there is a strong incentive to reach a resolution. Inu Manak, a senior fellow at the Peterson Institute for International Economics, noted that the U.S. ban on some Canadian products is not due to take effect until Sept. 29, leaving time to resume 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 remained open to negotiations: “Canada is always ready to strike a fair deal.”
Trump said Saturday that if Canada treats American farmers better by lowering tariffs, “you’ll probably see a deal with Canada fairly soon.” Speaking in Dublin alongside Ireland’s prime minister, the president said Canada, like Iran, “wants to make a deal very badly” with his administration.
Trump and his trade team also are pressing Canada to move some manufacturing back to the United States — a demand Ottawa is unlikely to accept easily, Manak said.
Appleton warned the dispute threatens the USMCA, which helped create an integrated North American automotive industry. “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.”
This story was originally featured on Fortune.com.
Source: Fortune | FORTUNE. Author: Paul Wiseman, The Associated Press. Original URL: https://fortune.com/2026/09/12/trade-deficit-canada-tariffs-trump-alberta-oil-imports-discount-midwest-refineries/
Source: Fortune | FORTUNE
