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

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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 during 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.

America has been “ripped off for 50 years by Canada,” the president declared Saturday when asked if he was considering pulling out of the three-way agreement he signed with the leaders of Canada and Mexico in late 2018.

Relations between the U.S. and Canada have deteriorated since their latest trade talks collapsed Aug. 21. Trump has goaded Canada's leaders with personal attacks and portrayed the longtime U.S. ally as weak. After alienating the Canadian public last year by repeatedly floating the idea of making Canada 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. Trump slapped 50% tariffs on $20 billion worth of Canadian products three weeks ago to protest what he described as discrimination against U.S. auto, dairy and alcoholic beverage exports.

When Canada's government retaliated Tuesday with tariffs of its own, the president moved to ban imports of the dairy byproduct whey, most alcoholic beverages and motorcycles and mopeds from Canada, though he said several products, including toilet paper, bedsheets and fishing rods, would be removed as tariff targets.

Landing on the list of nations with allegedly unfair trade policies is a jarring turn of events for Canada, a country that 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 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 took effect on July 1, 2020.

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. Canada disputes those allegations.

In his 2023 memoir, Robert Lighthizer, U.S. trade representative in Trump’s first term, described Canada as “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 made 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.

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.

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.

The neighboring countries need each other economically. Canada sends about 70% of its exports to the United States. U.S. refineries need Alberta’s oil. American 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 sides to come to an agreement. Inu Manak, senior fellow at the Peterson Institute for International Economics, said that since the U.S. ban on some Canadian products is not set to take effect until Sept. 29, they have time to resume negotiations.

“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 an agreement: “Canada is always ready to strike a fair deal.”

Trump said Saturday that once 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 that Canada, just like Iran, “wants to make a deal very badly” with his administration.

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

Appleton noted that the trade dispute jeopardizes the USMCA, which helped create a thriving automotive industry that straddles 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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Associated Press writers Rob Gillies in Toronto and Darlene Superville in Dublin contributed to this story.