What’s Trump’s problem with Canada?

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We're the program that provides a numerical oasis in the desert of of data disinformation, so come and relax under the statistical shade with me, Tim Harford.

The 2nd of April is Liberation Day.

Excellent.

What's Liberation Day?

Liberation Day in America.

And what we're going to be doing is a 25% tariff on all cars that are not made in the United States.

Oh, so not as fun as it sounds.

Liberation Day, a day which, by the way, has already changed data at least once, also includes tariffs on imports from countries including one of the nastiest countries to deal with.

Ooh, I wonder which country this could be.

North Korea?

Russia?

Mordor?

Canada.

Canada, eh?

That's President Trump talking to Fox News about his decision to implement 25% tariffs on many goods crossing the US-Canada border.

A 25% tariff is a highly unusual move, especially on one of your closest neighbours and allies.

So what are his motives?

Well, according to Trump, it is definitely not about pressuring Mexico and Canada to make amendments to the USMCA free trade agreement with the US, which, by the way, Trump negotiated in his first term.

It has nothing to do with that.

They've allowed both of them, Canada very much so.

They've allowed millions and millions of people to come into our country that shouldn't be here.

They could have stopped them, and they didn't.

And they've killed 300,000 people last year, my opinion,

have been destroyed by drugs, by fentanyl.

The fentanyl through Canada is massive.

Now, fentanyl, which is a powerful synthetic opioid, is a big problem for the US.

Although only 0.2% of the total amount of fentanyl seized by US customs was from Canada, which is not such a massive number.

So, Mr.

President, tell us how you really feel.

We subsidize them $200 billion a year.

And it costs us $200 billion a year in subsidy to keep Canada afloat.

Right?

Why are we supporting a country $200 billion plus a year?

Why indeed?

But does the US actually subsidise Canada to the tune of $200 billion?

No, they do not.

What President Trump is referring to is a trade deficit, and a deficit is what happens when you spend more on imported goods than other people spend on the goods you export.

Now to economists like me, trade deficits aren't such a big deal.

But the big man in the White House sees it differently.

President Trump says that whenever you run a trade deficit, you're basically giving countries money.

So he treats the trade deficit as like a subsidy for Canada.

I'm Brad Setzer.

I'm a senior fellow at the Council on Foreign Relations.

Brad was also a staff economist at the United States Department of the Treasury, so he has long been witness to the US's trade deals.

Not only is the $200 billion not a subsidy, it's also not the right number, at least not according to the most recent data from the US Census Bureau and Statistics Canada.

The goods deficit is about $70 billion now, not $200 billion.

These are just traded goods, things such as lumber, maple syrup, and energy.

Energy actually makes up the largest part of this trade deficit, specifically crude oil.

We deliver about 25% of all the crude that gets refined in their refineries.

My name is Armine Yalnisian.

I'm an economist and the Atkinson Fellow on the future of workers here in Canada.

Now I know what you're thinking.

What about Texas?

Yes, the US does produce a lot of its own crude oil, around 13 million barrels a day, but it consumes around 20 million barrels a day canadian oil is actually uh connected by a pipeline to the industrial parts of the midwest and it's easier to get oil in from canada than to bring oil up from the u.s uh from texas and the u.s gulf coast so we don't need their oil and gas we have our we have more than anybody sure the trump administration revised their 25 tariffs on canadian crude oil to 10 percent which suggests that maybe they do need it a bit so back to the 70 billion $200 billion or $250 billion deficit.

No, the $70 billion deficit also doesn't take services into account.

Services are an increasing part of trade.

They include things such as banking, air transport, streaming channels like Netflix.

And the US actually has a surplus in service trade.

If you add in services trade, that deficit falls to 30 to 40 billion.

That is $160 billion lower than the figure Trump Trump most commonly states.

The reason the US has a trade deficit isn't a particularly bad thing either.

The fact that they are spending more than us means simply that they have more purchasing power at this moment.

One US dollar now buys $1.43 in assets denominated in Canadian terms.

They can afford to buy more.

The dollar's strength has made it cheaper for Americans to buy foreign goods.

It's part of the reason why we run a trade deficit.

This higher purchasing power often means that it's cheaper to import goods from countries than to make them in your own country.

And that's been the story with U.S.

trading since the end of the Second World War.

The U.S.

is the trading partner for about two-thirds of everything Canada trades.

We were effectively developed as a branch plant economy to the manufacturing capacity of the United States and as a source for raw materials and inputs for their production.

More than a third of all wood products and over a third of all raw materials that the U.S.

imports come from Canada.

We have the critical minerals, he says, that he needs from everywhere in the world.

Now, Trump also says he doesn't need their lumber.

We don't need their lumber.

And that's what I just said.

We don't need their cars.

Ah, yes, the most recent announcement.

The main reason for implementing this tariff is that Trump wants to bring American-owned companies operating in Canada back to the U.S.

as part of his America First policy.

Free trade has pushed production of American cars to go to where the cheapest labor is or where the most efficient labor is.

And that means different things at different times for different inputs.

A car might go over the border seven or eight times as it becomes closer to being assembled and put on a car lot.

If you have to add a 25% tariff every time one of those parts or cars crosses the border, it is all going to add up.

But not just for Canadians.

Somewhere between $3,000 and $10,000 per car.

Americans will be buying less and they will be be paying more.

So if they want to make everything in the United States, they have to actually increase production by about 75%

and something like $50 billion of new investments.

That's going to take years.

Even if they do make the investment, Brad says the U.S.

will still need to trade with Canada.

If you want to reindustrialize the U.S., if you care about manufacturing, you don't want to cut off trade with Canada.

Part of the reason why our general manufacturing industry is competitive in some sectors is because it has access to resources from Canada.

One such resource is the metal aluminium.

Due to Canada's use of hydroelectric energy, they can produce aluminium at a price three times lower than smelters in the United States, which makes it a lot cheaper for U.S.

companies to import Canadian aluminium.

So if you take away the cheap aluminum, you're hindering...

all the other products that are made with aluminum.

And I think in general, U.S.

trade with Canada is characterized by bringing in inputs, often industrial supplies like aluminum, and then transforming them and exporting them out.

So, if there isn't actually a $200 billion deficit, why is Trump raising tariffs?

Is that Trump argues that Canada really doesn't quote-unquote work as a country, that it really should reconsider its sovereignty, and it should consider joining the U.S.

as a 51st state.

That is not in any way a a conventional use of tariffs.

The world is watching.

And that is all we have time for this week.

Thanks to Brad Setzer and to Armin Yalnizian.

If you have any questions or comments, please email more or less at bbc.co.uk.

We will be back next week.

And until then, goodbye.

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