On April 2, the United States is scheduled to unveil reciprocal tariffs on a wide array of trading partners, including Canada. Dubbed “Liberation Day” by U.S. President Donald Trump, the measures are meant to even things out with those who, in Trump’s eyes, have unfairly taken advantage of the U.S. with tariffs and other non-tariff barriers.

So far, there are conflicting reports of how the tariffs will unfold, with some administration officials publicly indicating they will be rolled out country by country and other reports pointing to the possibility of a flat levy of 20 per cent on products from virtually every country.

Aside from steel, aluminum and autos, which are already facing separate tariffs, here are the issues the U.S. has singled out as problematic in their trade with Canada that could factor in to the Liberation Day announcement, and what economists and trade officials have to say about them.

The trade imbalance

What Trump says: He has been widely disparaging of the trade relationship with Canada, repeatedly lamenting that the U.S. subsidizes Canada to the tune of US$200 billion.

Reality Check: There seems to be little explanation for the US$200 billion subsidy figure — firstly because a trade deficit isn’t a subsidy and secondly because the deficit is only US$100 billion. The imbalance in trade, with Canada exporting more to the United States than we import from them, is mostly due to Canada’s exports of oil, natural gas and electricity. According to Statistics Canada, energy products alone made up one third of Canada’s exports to the United States in 2022. The figures also fail to account for services, the flow of human capital and the myriad other ways our economies are intertwined, to mutual benefit.

Dairy

What Trump says: Canada imposes tariffs on U.S. dairy that are greater than 200 per cent, thereby “ripping off” American farmers. Canada “has been ripping us off for years,” he declared from the Oval Office on March 7.

Reality Check: While tariffs applied to U.S. dairy imports above a tariff-free quota are indeed 200-per-cent-plus — higher than the U.S. applies for its above-quota volumes — the U.S. does not even export the full amount of tariff-free dairy product to Canada. “To be clear, no U.S. entity pays these high tariffs currently, and it is difficult to see a situation in which one would — they still have existing quota room!” analysts at CIBC Capital Markets said in a March 26 note.

Moreover, they said, the US$1 billion of U.S. dairy exports to Canada annually are “extremely lucrative” for U.S. farmers because Canadian consumers pay much higher prices than those in the U.S. This is the result of Canada’s dairy supply management system, developed more than half a century ago. The system does not prioritize cost-cutting and efficiency since marketing boards pay farmers mainly based on their cost of production plus an inflation adjustment.

In addition, there has been less consolidation in Canadian farming, resulting in higher production costs in Canada. These higher costs are passed onto Canadian consumers of dairy products from both Canada and the U.S. “In a perverse way, Canadian consumers are indirectly subsidizing U.S. dairy farmers,” the CIBC analysts wrote.

Lumber

What Trump says: He has lumped his anger about dairy and lumber tariffs together, threatening to act immediately on unfair treatment by Canada. He also said the U.S. does not need any Canadian lumber.

Reality Check: There is far from enough lumber produced in the U.S. to meet building demand, according to industry groups, which have said about 30 per cent of softwood lumber used in the U.S. comes from Canada. They warned new tariffs would push up building costs and potentially make homes less affordable. What’s more, Canadian producers already pay duties when they export wood to the United States.

According to the National Association of Home Builders, a new tariff on softwood lumber products from Canada would come on top of an effective 14.5 per cent duty rate that is already in place. A 25 per cent tariff, if imposed by Trump, would push the effective Canadian lumber tariff to nearly 40 per cent.

“The lumber piece is particularly egregious given the already punitive and unjustified anti-dumping and anti-subsidy (countervailing) duties in place on Canadian lumber flowing into the United States,” William Pellerin, a partner in the international trade practice at law firm McMillan LLP and former deputy director at Global Affairs Canada, said after Trump’s March 7 threats.

The digital services tax

What Trump says: Tariffs must be levied on Canada in retaliation for digital sales taxes on technology companies whose services are available to Canadian consumers. The U.S. administration says these taxes penalize American companies and appropriate the American tax base. “Only America should be allowed to tax American firms,” Trump said in a White House statement.

Reality Check: Affected companies such as Google parent Alphabet Inc., Facebook owner Meta Platforms Inc., Apple Inc. and Amazon.com Inc. have lobbied against this type of tax for years, arguing that they should not pay taxes in countries where they don’t have a physical presence. But the list of countries imposing such taxes, which includes France, Britain and several European Union nations, has been growing.

Canada’s digital tax regime went into effect last June, retroactive to 2022. Digital companies that earn more than $1.1 billion worldwide are subject to a three per cent tax on Canadian revenues above $20 million. American companies will pay US$500-million a year in digital sales taxes in Canada, according to the White House. This is seen by some trade experts as a potential bargaining chip for Canada to show it is not unwilling to make some concessions.

The banking sector

What Trump says: Canada “doesn’t allow American Banks to do business in Canada,” which upsets him because Canadian banks have a large footprint in the United States.

Reality Check: U.S. banks don’t have a huge presence in Canada, particularly relative to Canada’s six large banks, which dominate most business lines. But they are allowed to set up in Canada and have, indeed, established toeholds here over the years, particularly in investment banking and advisory services. As of February, there were 16 U.S bank subsidiaries and branches operating in Canada, with about $113 billion in assets, representing about half of all foreign bank assets in the country, according to the Canadian Bankers Association.

That said, a combination of strict regulations and the concentration of large domestic players makes it cumbersome and expensive to expand into retail banking in Canada. In order to become a traditional deposit-taking retail bank that can accept deposits of less than $150,000, a U.S. bank has to set up a Canadian subsidiary, which is required to have its own capital and liquidity structure separate from the U.S parent.

By contrast, Canadian banks, such as Bank of Montreal, Toronto-Dominion Bank, and Royal Bank of Canada, can and have purchased billion-dollar U.S. retail banks with extensive branch networks across America. 

• Email: bshecter@nationalpost.com

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