Canada’s Open Economy Collides With Donald Trump’s Trade War Again

Canada might seem an unlikely target for a US 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 in 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. “One of the Worst Abusers is Canada,’’ the president declared on social media last month. “They’ve been ripping us off for decades, and it’s going to stop.’’

Since trade talks collapsed on August 21, relations between the longtime allies have deteriorated as Trump has goaded Canada’s leaders with personal attacks and portrayed the country as weak.

Trump has also enraged the Canadian public by repeatedly floating the idea of making Canada the 51st state and signed an executive order directing the federal government to change Lake Ontario’s name to “Lake America.” Last month, Trump slapped 50 percenttariffs on $20 billion worth of Canadian products to protest what he calls discrimination against US auto, dairy and alcoholic beverage exports.

When Ottawa retaliated Tuesday with tariffs of its own, Trump escalated, vowing to cut off Canadian companies from government contracts in the United States and even outright banning some Canadian products, including motorcycles, some dairy products and most alcoholic beverages.

It’s a jarring turn of events for Canada, a country that has built its economy around international commerce. Canada’s trade is equal to 64 percent of its economic output, the World Bank says, versus 25 percent 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 tariff blowup, Canada’s effective tariff rate on US imports was about 2.4 percent, less than half the 5 percent that the United States imposed on Canada, according to calculations by Oxford Economics. Most US exports enter Canada duty-free under the US-Mexico-Canada Agreement that Trump negotiated in his first term. 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 US has complained for decades, for instance, about what it calls unfair subsidies for Canadian softwood lumber producers though Canada disputes those allegations.

In his 2023 memoir, Robert Lighthizer, US trade representative in Trump’s first term, argued that Canada was only “outwardly supportive of free trade. ... Canada is in reality 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 been making headway: US dairy exports to Canada rose more than 11 percent last year on top of an 8 percent increase in 2024, according to the US Department of Agriculture.

“We gradually get more and more expansion of dairy product into Canada,’’ Polzin said. “It’s not always pretty. It’s not always easy, but over time it has been increasing.’’

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.