The quickly evolving trade dispute between the United States and Canada demands a closer look at the composition of trade between the countries.
While the U.S. last year ran a $63 billion trade deficit with Canada, that gap is because the U.S. imports significant amounts of oil from Canada. Once one adjusts for those oil imports, the U.S. ran a $50.9 billion surplus, mostly because of services.
The reason why the U.S. imports oil from Canada is that many U.S. refineries are set up to process the heavy crude that Canada produces and sells at a discount compared to West Texas Intermediate, the North American benchmark that is the predominant output of U.S. producers.
In addition, the Canadian pipeline networks more efficiently supply the upper Midwest and, to a certain extent, the Northeast.
Even though the U.S. produces more oil than it consumes and exports a significant amount, it still imports oil from Canada because it is cost-effective and efficient.
The logic of the current trade dispute—the U.S. has threatened to impose a 10% tariff on Canada’s oil, in addition to other levies, on April 2—should be placed in its proper context.
The oil trade between the two countries is a function of geographical proximity, efficiency, cost and infrastructure concerns. Canada sends virtually all of its oil exports to the U.S.
Outside of that, the U.S. runs a modest surplus in trade with Canada. Under such conditions, additional taxes on trade between the U.S. and Canada are akin to Washington shooting itself in the foot.
