Invest1 publisher3 min readPublished
Fortune traces the Canada trade deficit to crude the Midwest buys at a discount
Fortune attributes the US goods deficit with Canada to oil bought cheap for Midwest refineries. Washington's answer so far is a 50% tariff on $20 billion of Canadian products and an import ban on whey, alcohol and mopeds.
The Investor · Invest desk
What happened
- Trump imposed 50% tariffs on $20 billion of Canadian products three weeks ago, protesting what he described as discrimination against American auto, dairy and alcoholic beverage exports.
- Oxford Economics puts Canada's effective tariff on US imports at about 2.4% before the blowup, less than half the 5% the United States was applying to Canadian goods.
- Canada's over-quota dairy tariffs top 200% on most products and approach 300% on butter, according to Leonard Polzin, a dairy markets specialist at the University of Wisconsin.
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Why it matters
- constraint Duties on whey, alcohol and mopeds do not change which barrels a Midwest refinery can process, so the measures named leave the component Fortune identifies as the source of the gap untouched.
- cost A 50% rate on $20 billion of goods tops out near $10 billion a year in collected duties, and only if the trade continues at the same volume.
- contradiction The case that Canada is the closed economy sits badly with the Heritage Foundation ranking it eight places above the United States on economic freedom.
- exposure Ottawa is about 2.6 times as trade-dependent as Washington measured against output, so escalation hurts Canada more per point of GDP whatever the deficit is made of.
The grievances Washington named are autos, dairy and alcoholic beverages [3]. The products it moved to block after Canada retaliated on Tuesday are whey, most alcoholic beverages, motorcycles and mopeds, with toilet paper, bedsheets and fishing rods pulled back off the target list [4]. Oil is not among the goods named in either round [4]. Fortune gives the $20 billion figure for the 50% rate without a product breakdown [3]. Fortune traces the deficit behind the fight to crude the United States buys at a discount for the Midwest, and quotes a source in its headline saying "It's the only oil they can use" [17]. A duty on whey does not change which barrels a Midwest refinery can run.
Fifty percent on $20 billion is about $10 billion a year if the volumes hold [1], and volumes rarely hold at that rate, so treat $10 billion as a ceiling. Before this round the United States was already the higher-tariff party: Oxford Economics puts Canada's effective rate on American goods at about 2.4% against the 5% the US was applying to Canada [5], roughly a factor of two [2]. Most US exports still enter Canada duty-free under the USMCA, which took effect on July 1, 2020 [6]. Canada buys more from the United States than any other country does [18].
Dairy is the sector that is genuinely closed, and it is closed by design. 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" [15]. Wisconsin alone produces more milk than all of Canada [11], and 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" [12]. Robert Lighthizer, trade representative in Trump's first term, wrote in his 2023 memoir that the Canadian dairy system "would make a Soviet commissar blush" [16].
That system is also an American concession. In the USMCA, the United States agreed to let Canada keep supply management in return for more access for American dairy farmers [14]. Trump wrote on social media Tuesday that "Canada doesn't let our Great Dairy Farmers sell into the Canadian Market," which Fortune reports is false [13].
Two other readings survive the evidence. The tariffs may be leverage to reopen the dairy and auto terms, in which case the deficit is the argument made to the public and the target list is coherent on its own terms. Or the pressure may work through exposure instead of composition, since Canada's trade equals 64% of its output against 25% for the United States [7], about 2.6 times as dependent [3]. What would undercut the first paragraph here is a tariff schedule that puts a duty on Canadian crude, or a barrel figure showing the discounted flow is a minority of the goods gap.
What to watch
- Whether any future tariff schedule puts a duty on Canadian crude or refined product. That would test the composition argument directly.
- Whether Trump follows through on pulling out of the USMCA he signed in late 2018, or reopens the dairy access terms instead.
- Whether Canada's next retaliation list moves beyond whey, alcohol and vehicles into goods that matter to US exporters at scale.