In a December 8 interview on NBC’s Meet the Press, President-elect Donald Trump stated:
I think tariffs are the most beautiful word. I think they’re beautiful. It’s going to make us rich. We’re subsidizing Canada to the tune over $100 billion a year.
Based on that claim, Trump is planning early in his time in office to impose a 25 percent tariff on all goods from Canada.
In mentioning a $100 billion “subsidy,” Trump was referring to the US merchandise trade deficit with Canada. He was off by almost 60 percent. In 2023, the latest year for which we have data, Americans spent $40.6 billion more on imports from Canada than Canadians spent on US exports to Canada. We spent $481.6 billion, and Canadians spent $440.9 billion.
But there’s a bigger problem than just mistaken data. Trump doesn’t understand what a subsidy is and if he acts on that misunderstanding, he will hurt two main groups: Americans and Canadians. (I’m both. I moved here from Canada in 1972 to go to graduate school and became a US citizen in 1986.) This would be especially bad for Canadians.
Whatever the split of the burden of Trump’s tariffs between the two countries, Canada’s population is only about 12 percent of America’s. So, if the tariff’s burdens are borne equally, the hit on the average Canadian will be about eight times as hard as the hit on the average American. Why do I care that much? Well, as a dual citizen, I’m still a Canadian, eh? Seriously, though, I would care even if a huge cost were borne by Mexicans and not Canadians. Mexicans, for that matter, also will be hurt if Trump follows through on his tariff plans for Mexico. I don’t want to see innocent people hurt unnecessarily, whether they be Americans, Canadians, or Mexicans.
The political turmoil in Canada shows that some key politicians are taking Trump’s proposed tariffs very seriously. Christya Freeland, who had been both Canada’s finance minister and deputy prime minister, resigned from both positions December 16. In an unusually blunt resignation letter to Prime Minister Justin Trudeau, Freeland stated: “We need to take that threat extremely seriously. That means keeping our fiscal powder dry today, so we have the reserves we may need for a coming tariff war. That means eschewing costly political gimmicks, which we can ill afford and which make Canadians doubt that we recognize the gravity of the moment.” The latest polling data show that Pierre Poilievre’s Conservative Party leads Trudeau’s Liberal Party by 43 percent to 22 percent. Not surprisingly, Poilievre is calling for an election in early 2025.
What about the idea that Trump is using the threat of a tariff to stem the flow of illegal aliens and fentanyl from Canada? On its surface, that’s plausible. But, as we’ll see, those two reasons don’t stand up to scrutiny. Moreover, on the alien front, Trump is pressuring the Canadian government to act like a totalitarian government.
What is a subsidy?
Am I subsidizing Safeway? Why would I ask? Here’s why. My wife and I spend at least $400 a month at Safeway. Safeway doesn’t buy anything from us. So, our monthly trade deficit with Safeway is at least $400. And, in Trump’s view of the world, a trade deficit equals a subsidy. By Trump’s reasoning, yes, I am subsidizing Safeway.
This sounds ridiculous. It is. But it’s no more ridiculous than Trump’s claim that Americans are subsidizing Canadians. When you spend more on someone’s goods than that someone spends on your goods, there’s no subsidy involved. The fact that the spending occurs across borders doesn’t change that fact.
And that fact makes Trump’s proposed tariffs on Canadian goods and services all the more tragic.
The burden of a tariff
Imagine that someone who thinks I’m subsidizing Safeway intervenes to reduce the “subsidy” by limiting my purchases at Safeway. That would make me worse off. It would also make Safeway worse off.
Similarly, a tariff imposed by the US government on goods and services imported from Canada would hurt US consumers and Canadian producers. There’s no magic in the fact that there’s a border. Trade across borders is very similar to trade between me and Safeway.
Many people who have, like me, been critical of tariffs, have claimed that US consumers bear the whole cost of the tariff. Writing in August 2019, for example, Rachel Layne of CBS News stated, “The fact is, companies here pay tariffs to US Customs and Border Protection when Chinese goods reach America’s shores.” It’s true that Americans write the checks. But one of the first things about taxes that we economists teach undergrads is that knowing who writes the check tells you exactly nothing about who bears the burden of a tax. What determines the split of the burden between producer (exporter) and consumer (importer) is their relative elasticities of supply and demand.
Consider Canadian oil. On the one hand, many Americans in the Midwestern states depend upon oil from Canada. In response to the tariff, though, they will probably have oil shipped by train from other parts of the United States. That’s expensive, but it is a way to adjust. But Canadian oil producers have few alternative customers to sell to besides Americans. This lack of good options makes their elasticity of supply low. They’ll likely absorb most of the cost of the tariff by not raising prices very much. The result? Canadian oil producers would bear more than half of the burden of the tariff on oil. The outcome will depend on the goods in question. The fact that so many Canadians are sweating the tariffs that Trump is threatening suggests that they think they will bear a substantial part of the burden.
Some plausible estimates
Let’s do a back-of-the-envelope estimate of the magnitude of losses to Americans and Canadians from a 25 percent tariff on Canadian goods. As noted, US imports from Canada were $481.6 billion in 2023. For simplicity, assume that they would have been $500 billion in 2025.
A 25 percent tariff will obviously discourage imports. That’s the point, and it’s one on which Trump, Canadians, and economists agree. But start by assuming that imports remain constant. Then if the whole burden is borne by Americans, we would pay $125 billion more for Canadian goods. More realistically, the burden will be borne by people in both countries. Past evidence suggests that a large percent of the burden of US tariffs is borne by Americans. Let’s assume that Canadians bear 20 percent of the burden and Americans bear 80 percent. Then, assuming that imports are constant, Canadians would bear $25 billion annually and Americans would bear $100 billion. (All dollar figures are in US currency.)
Of course, as noted above, imports wouldn’t be constant; they would fall. The fall would lead to what economists call a deadweight loss: a loss to producers and consumers from the reduction in units of output that were valuable but, due to the tax, are no longer worthwhile to produce and sell. Assume a $50 billion reduction in imports and assume that the loss per unit from this reduction is half of the tax per unit on the imports that remain. So, where are we? Instead of a loss of $125 billion, the loss would be 25 percent of $450 billion (which is $112.5 billion) plus half of 25 percent of $50 billion (which is $6.25 billion), for a total of $118.75 billion. Canadians would bear 20 percent of this loss, or $23.75 billion. Americans would bear 80 percent of the loss, or $95 billion.
Those are the losses to traders on both sides of the border. Of course, the US government would gain $112.5 billion in tax revenue. So, there would be a net gain to Americans, if we include the US government, of $17.5 billion. This seems counterintuitive. Why would there be a gain to the United States as a whole? Because the US tariffs would drive down prices of imports.
The $95 billion loss to US consumers would be spread over approximately 340 million people, for a per capita loss of $279. That’s not a large number, but the cost to the average household (which has 2.5 people) would be $699.
The $23.75 billion loss to Canada would be spread over approximately 41 million Canadians, for a per capita loss of $579 and a per household loss (the average household size in Canada is also 2.5) of $1,448. That’s a sizable number for Canadians, especially given that average household income, in US dollars, is only about $75,000. Therefore, the 25 percent Trump tariff on imports from Canada would reduce Canadians’ household income by 1.9 percent. That’s not large, but it’s not small either. You can understand why many Canadians are worried about the Trump tariffs and why Ontario’s government, which represents 38 percent of Canadians, advertises multiple times a day on the Fox News Channel about the benefits of trade between Ontario and the United States. Moreover, while the tariff revenue would offset the losses to US consumers, they would not offset the losses to Canadians.
Saving money by filling the swamp
All the above estimates of losses are probably overstatements. Why? Because if the tariffs are imposed, it will be by executive order and the executive order will almost certainly include a provision for exemptions. The more exemptions there are, the less will be the loss to Canadians and Americans. It’s also true that Trump’s power to give exemptions will lead to more lobbying by various businesses, not less. Trump has often said that he wants to “drain the swamp.” But his power to grant exemptions will cause many businesses and trade associations to lobby for special treatment. This will fill the swamp even further.
Canada is on the mat, partly because of culture
The loss to Canada would come at a particularly bad time. Canada’s economy is on the mat. Its per capita gross domestic product has actually fallen in recent years. I hasten to add that that statistic is less bad than it sounds. The reason is that Canada’s rate of legal immigration in recent years has been a multiple of ours. As I wrote in October, the number of non-permanent residents [NPRs] in Canada rose from 3.5 percent of the population in 2022 to 6.5 percent by January 2024. Because many of these NPRs were students who weren’t working or who were working part time, and because many of them were in low-productivity jobs, per capita income was falling while Canada experienced low, but positive, economic growth.
The low growth can’t be attributed to immigration because immigration was a net positive for growth. What did cause low economic growth in Canada? It’s difficult to say, but certainly one culprit must be the policies of Canada’s prime minister, Justin Trudeau. When he took office in the fall of 2015, he inherited a relatively healthy economy. But he quickly raised the top marginal income tax rate for people with incomes over $200,000 (in Canadian dollars) from 29 percent to 33 percent. The higher tax rate now kicks in at $246,752. This was a 14 percent tax increase on Canada’s most productive people. That increase reduced the incentive to produce.
Something else, though, besides government policy, could have easily had more of a negative impact over the past few years: the growing antipathy by Canadians to businesses and entrepreneurs. In his 2023 Fraser Institute monograph titled What Is Behind Canada’s Growth Crisis?, Canadian economist Philip Cross notes a troubling fact:
There are several manifestations of Canada’s lack of support for business innovation. A recent Nanos poll on the “institutions that contribute to make Canada a better country” reflects a fixation on the public sector to the exclusion of the private sector. All the institutions listed were from the public or non-profit sector, including universities, health care, the Supreme Court, the armed forces, the RCMP, the prime minister, the House of Commons and the Senate, arts and cultural organizations, and even the governor general (Nanos, 2023). No private sector institution was regarded as making an important enough contribution to life in Canada to be included in the survey. This is not a criticism of Nanos, which is simply reflecting Canada’s stunted public discourse about the determinants of economic growth.
Whatever the ranking of causes of Canada’s slow economic growth, the fact remains that Trump’s tariffs would hit it at a particularly bad time.
Illegal immigrants and fentanyl smuggling
As I noted in the introduction, the reason Trump gives for his proposed 25 percent tariff rate on imports from Canada and Mexico is that he wants the governments of those two countries to crack down on fentanyl smuggled into the United States and on illegal immigrants crossing the borders.
That rationale, though, makes zero sense for Canada. As Washington Post reporter David Lynch wrote in a November 26 news story, “During the recently ended fiscal year, CPB [US Customs and Border Protection] confiscated 43 pounds of fentanyl along the northern border, 0.2 percent of the volume seized along the US-Mexico boundary.” Illegal immigration from Canada is also a small problem. In October, noted Lynch, “US agents made 1,283 arrests along the northern border, or about 41 per day on average.” Even if one strongly opposes fentanyl smuggling and illegal immigration, it doesn’t make sense to impose billions of dollars on costs and Canadians and Americans to address such a small problem. That’s on the heroic assumption that the Canadian government could effectively address both issues. Another cost to Canadians is the cost of law enforcement to deal with these small problems.
Blocking the exit
It’s one thing for a government to prevent people from coming across a border. It’s quite another for a government to prevent people from leaving. In 1994, President Clinton persuaded Fidel Castro to forcibly prevent people from leaving Cuba. As I wrote at the time, in the St. Louis Post-Dispatch, September 30, 1994,
Note the irony. Clinton leads one of the freest countries in the world, a country built on the idea that each person has inalienable rights that no government can violate. He persuades the leader of a totalitarian government to re-adopt a policy that most clearly distinguishes free states from slave ones. The judges in the Dred Scott decision would have been proud of their willing student.
Canada is clearly much freer than Cuba, so Trump is not trying to persuade Trudeau to keep people in a totalitarian society. But he is trying to persuade Trudeau to adopt one of the policies of a totalitarian society, namely, forcible prevention of exit.
Conclusion
Given the tiny expected benefits of Trump’s proposed tariffs on Canadian imports and the large losses to Canadians and Americans from such tariffs, I’ve got a better idea: let’s stick with relatively free trade.
