Trade deficits are not subsidies. The 47th US president, who maintains the opposite, does not seem to understand basic economic principles. His economic ignorance (or malevolence) will cost Americans as the tariffs he has promised to place on Canadian imports will ultimately drive up prices and inflation in the United States. It will hurt American and Canadian businesses, and create job losses across integrated supply chains. The price for the president's economic ignorance is economic hardship on both sides of the border. A trade war amounts to economic adventurism and an abrogation of the existing Canada US Mexico Agreement (CUSMA). Now, the US president has declared that the one-month pause on imposing tariffs will end, and tariffs will be forthcoming in March.

The chart below shows the evolving trade surplus and trade deficit that Canada has with other countries, across all its major industrial sectors. Trade is netted out in each sector, so the diagram shows the trade surplus or trade deficit for each individual sector, stacked upwards for a surplus and stacked downwards for a deficit. As is easily seen, Canada's overall trade balance is tiny. The bars balance out at around $250 billion on both sides. Canada has a trade deficit in consumer goods, electronics, and automobiles, and has a trade surplus in energy, forestry, agricultural goods, and metals and minerals. This is exactly what the theory of comparative advantage would suggest. Canada specializes in industries in which it has abundant resources.

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Canada's overall balanced trade does not imply balanced trade with all trading partners. As the next two diagrams show, trade can be highly unbalanced bilaterally. First, look at our trade balance with the United States. On an industry-by-industry basis, we do not have much of a trade deficit with the United States, and instead we have a huge trade surplus in energy (oil and gas, some coal, and electricity). Additionally, we have smaller surpluses in metal products and ores, some agrifood, and forestry. Our auto industry is actually relatively balanced at the moment. The small overall balance belittles the overall magnitude of cross-border trade in this industry, which is characterized by a high level of cross-border integration and intra-industry trade.

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Canada does run a sizable trade surplus with the United States, which has grown in recent years. Energy exports have been the main driver. Of course, a trade surplus simply means that a country exports more than it imports, and the other side is happy to buy these goods. There is no subsidy here. There is merely the free exchange of goods at market prices. Any suggestion that a trade surplus amounts to some form of subsidization is utter humbug. That doesn't mean that persistent trade imbalances are not without problems. But the only relevant statistic here is a country's overall trade surplus or deficit, and not any particular bilateral trade balance.

The fact that the United States runs a big and persistent trade deficit has multiple reasons. The main reason is the fact that the US dollar is the world's reserve currency. This means that the United States is in the enviable position of being able to print money that other countries want to hold, and ship goods in return. In other words, the United States gets something (lots of goods) in return for pretty much nothing (dollar bills). A second reason is the strong US dollar, in purchasing-power parity terms. And a third reason takes a bit more economic insight to appreciate.

There is a mirror side to a trade deficit. The Balance of Payments principle means that a current account deficit is offset by a capital account surplus (and a smaller extent accumulation of foreign reserves). A negative current account and a positive capital account sum up to zero. If you import more goods than you export, the foreign exporters earn your currency, which they in turn will want to invest in your bonds and stocks and firms. A trade deficit equals capital imports. And foreign ownership of stocks, bonds, and firms can indeed become a problem. There is an old adage I learned in my trade classes: "the capital account governs the current account". There are two ways how trade imbalances can be balanced. First is through a flexible exchange rate. A persistent trade deficit would ultimately lead to a currency depreciation, making exports cheaper and imports dearer. Second is the capital account. When investments in a country are superbly attractive, other countries will want to pursue them, and this means they first need to earn the country's currency by selling more goods to them than they buy. That's the logic of the Balance of Payments. This logic also suggests that the US trade deficit, which equals capital imports, is actually a sign of economic strength and attractiveness. The US stock market is doing rather well, after all. A recent article by Raskolnikov and Steil (2025) explains how an approach focused on the capital account can be used to counter unfair trade practices.

There is one notable trade imbalance that Canada shares with the United States. Both Canada and the United States have a large and growing trade deficit with China. The chart below shows that Canada's trade deficit with China has exploded ever since China has joined the World Trade Organization (WTO). The trade deficit went from a few billion dollars to over $60 billion dollars. While Canada has small export surpluses for agrifood products, metal ores, and energy products (coal and oil), there are hefty trade deficits for consumer goods, electronics, machinery, and metal products.

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China's global trade surplus has underlying reasons that are indeed somewhat problematic. It has been well documented that China's industrial policy comes along with an abnormally high savings rate, and in turn over-investment and overcapacity. This overcapacity is forcing Chinese firms to dump excess output in international markets. Domestic Chinese demand is sluggish, and China's leadership has been focusing more on economic growth than on satisfying domestic demand, or growing prosperity. Misaligned incentives have pitted local governments against each other in a quest for pursuing the central government's industrial ambition, fueled by lax borrowing standards and an astounding high debt load for China. China's debt-to-GDP ratio (consolidated across levels of government) is approaching 300%, with the bulk of liabilities held by local government financial vehicles (LGFVs). Accusations of unfair subsidies have already led to various trade measures against China, including most recently Chinese electric vehicles.

Now let me move from economics to politics, and from analysis to opinion. And let me be very frank here.

Arguably, Western countries have a problem with trade distortions involving China's industrial policy. There are WTO-compatible remedies for that, and that includes forceful trade negotiations with China. For this to succeed, the United States needs the support from other Western countries, including Canada and the European Union. Yet, the 47th US president is doing his very best to alienate traditional allies, friends, and neighbours. Russian and Chinese leaders are celebrating as the US president is doing a better job at weakening America than they could have ever done from abroad. The Kremlin would be only too happy to see NATO break up, too. Fracturing the Western world will make America weaker, not stronger. Strangely, saner Republican voices in the US Senate have been remarkably silent on selling out America's interests to Russia.

The 47th US president has turned things upside down: actual enemies (such as Russia) are treated like best buddies, while old friends (Europe, Canada) are treated like foes. What could the United States possibly gain from a trade war? The notion that tariffs could fix a trade deficit ignores that there will be retaliation from the other side(s). There is no free lunch here for the United States. And ultimately, most of the higher cost is passed through to consumers. And when some foreign manufacturers stop selling completely, domestic alternatives tend to be more expensive. Tariffs generate two types of "deadweight losses": by driving up prices they shrink consumer surplus, and by displacing cheaper foreign producers with more expensive domestic producers they drive up domestic production costs. These two deadweight losses cannot be recovered, and redistribution of tariffs to consumers will not compensate for these losses. If redistribution of tariffs is made to pay for income tax cuts that preferentially favour high-income households, than it is clear that US tariffs will amount to a massive redistribution of wealth from the poor to the rich. There is a simple economic lesson here. Tariffs will backfire. There is no escaping the laws of economic gravity.

So what on Earth is the 47th US president up to? Tariff revenue? Extraction concessions from foreign countries on other matters? Re-shoring manufacturing industries that have all but disappeared? Enlarging the United States? Or creating economic mayhem to distract from other, more nefarious, agendas such as dismantling US democracy? Perhaps the 47th US president doesn't truly know himself, as he meanders from one justification to another, including talk of using economic coercion to make Canada another US state. No thank you, Mister President. Canada is quite happy as an independent country, and no matter what you throw at us, The True North will stand strong and free!

In all of that, Canadians won't forget that ordinary Americans will remain their friends and neighbours. Our friendship will endure, even if the current US administration has gone wonky (and that is putting it kindly). I appeal to the members of the US Congress to help find a way back to a mutually beneficial trade relationship. Don't let the White House run roughshod over the interests of your constituents! There is always scope to improve CUSMA, as in any case negotiations were due to start for the 2026 review. North America needs free trade.