Donald Trump continues to talk about Canada after beginning his second term as United States President on Monday.

Beyond threats to impose 25 per cent tariffs on Canadian goods, he has continually flogged the idea of making Canada a 51st state.

“Many people in Canada LOVE being the 51st state,” he said on his Truth Social platform earlier this month.

Invoking Canada’s trade deficit with the U.S. and calling it a subsidy, Trump has even threatened to use economic force to annex this country.

Many economists object to his narrative, and not just his description of a trade deficit as a subsidy, but the size of the trade imbalance between the two countries.

Still, certain facts are beyond dispute. The U.S. is Canada’s largest trading partner, and two-way trade between the countries reached $908 billion in 2022, accounting for 63.4 per cent of Canada’s global trade.

There has also been a persistent trade imbalance, with Canada sending more goods to the U.S. than it receives back. Kirsten Hillman, Canada’s ambassador to Washington, has said it ran to $75 billion last year and has pledged to buy more from the U.S. — for example, through military procurements — to mitigate the imbalance in coming years.

At best, Trump’s idea for Canada to join the U.S. faces long odds of becoming a reality. Everyone from Prime Minister Justin Trudeau and his cabinet to Ontario’s Conservative Premier Doug Ford — not to mention much of the wider electorate — has rejected his overtures in no uncertain terms.

Nonetheless, Canada depends on the U.S. as a trading partner far more than the U.S. depends on Canada — after all, at 40.1 million people, it only has 12 per cent of the population of the U.S.

As such, Trump can use the power of his office to great effect, or at least keep the idea of Canada as a 51st state in the headlines and under discussion.

But who would actually benefit from such an arrangement and what would the likely impacts to the economy be? Economists say the winners and losers may be surprising.

The effect on trade

Canada and the U.S. share an 8,891-kilometre border, the world’s largest international land border. Although the countries have long maintained robust trade ties and free trade agreements — with a new one signed in July 2020 during Trump’s first term in office — economists say there are still points of friction.

“There are still significant barriers to international trade even though we have a broad, comprehensive free trade agreement with them,” Trevor Tombe, a professor at the University of Calgary’s Department of Economics, said. ”Things would be able to seamlessly move across the border — no permits, no hassle, no nothing. So I think there would be a very large increase in trade volumes.”

Neither he nor other economists contacted have constructed an economic model to quantify the impacts of completely removing the border by making Canada part of the U.S. But there have long been discussions about whether Canada should form a customs border with the U.S., which would move it one step beyond a free trade agreement — without becoming a state — by allowing goods to freely flow between the two countries without inspection.

“That’s a completely legitimate type of economic policy that we could and probably should take seriously,” Tombe said.

Is a bigger economy better?

Tombe is a proponent of the idea that more economic integration with the U.S. and certain other countries will inherently benefit Canadians.

“My kind of default (reasoning) is … the bigger the market, the more competitive the market, the better the outcome for the economy overall for consumers, for productivity, for growth,” he said.

The U.S. government has great powers to regulate interstate commerce, Tombe said, and that’s led to a uniform set of rules applied throughout the country.

Canada’s federal government, by contrast, holds less power to regulate interstate commerce, he said, and each province has erected its own regulatory structure, leading to a patchwork of rules that Tombe estimates reduce trade inside Canada and, as a result, gross domestic product by tens of billions of dollars every year.

In the past, he has cited the different provincial rules around everything from which tires are needed on trucks to when trucks are allowed to drive to where the sign on a commercial truck needs to be located as examples of interprovincial trade barriers.

In 2016, he used a multisector economic model of Canada to project that interprovincial trade barriers reduce the economy by three per cent to seven per cent every year.

Tombe does not call the idea of making Canada a 51st state harebrained, but he does say it’s unrealistic. Each province would need to approve a constitutional amendment for it to happen legally, he said, and that’s difficult to do even for “trivial” amendments.

Nonetheless, some form of closer integration with the U.S. would carry benefits for Canada.

“I’ve been thinking about whether this (51st state idea) does revive conversation around a customs union or some deeper economic integration beyond just a free trade agreement,” he said. “It’s a really interesting and completely feasible thing that can be done. It’d be a big, heavy lift … but I think it would be a massive net benefit to the Canadian economy.”

The new integrated economy would allow companies to serve a larger market, which could be a boon for some companies, particularly large ones that are well-positioned to make the investments and capture efficiencies needed to succeed.

But Tombe said there would be “adjustment costs” for them to deal with, too.

A dollar is a dollar

Some say that having closer economic integration with the U.S. is overrated and will carry all sorts of costs, from the loss of sovereignty on some issues to a likely erosion of the number of existing Canadian companies.

Tombe said Canada has a greater percentage of small-to-medium-sized businesses, many of which would be unable to compete with larger U.S. companies if all trade barriers were suddenly dropped. Such corporate failures would leave many Canadians unemployed.

Other forms of proposed integration include a currency union akin to what exists in the European Union, where Canada and the U.S. would share a dollar.

“That has been talked about over the years,” Werner Antweiler, a professor of international trade at the University of British Columbia’s Sauder School of Business, said. “But the U.S. is much larger than us. We would always have a senior partner who would determine everything.”

The Bank of Canada can currently use interest rates and other tools to create buffers against price shocks in the economy. Under a currency union, Canadian provinces would have fewer seats on a combined central bank than existing U.S. states and therefore less ability to set a strategy that benefits Canadians.

Then, there’s a debate about how closer integration would affect living standards.

The median after-tax economic income in Canada in 2022 was $70,500 compared to US$74,580 in the U.S.

Those numbers are deceiving, however, said Jim Stanford, an economist and director at the Centre for Future Work in Vancouver, who said the U.S. has more billionaires — including the likes of Jeff Bezos, Mark Zuckerberg and Elon Musk — who skew the numbers.

The median Canadian is better off, he said, adding that Canada’s larger social safety net — health care, child care and other services — means that people earning below the median income are also better off.

“Some people would say, ‘Oh, we’ll get lower taxes,’” he said. “But we’ll get lower services for the taxes.”

Stanford said the border serves an important role by concentrating economic investment in a region. In other words, if there were no trade barriers, much of the investment in companies on the Canadian side would move to the U.S. side, where larger companies exist.

“The border actually grounds economic investment in a place,” he said.

Is there really a trade imbalance?

Stanford said the trade deficit with the U.S. is far smaller than many people think, in part because many services provided by U.S. companies are not counted.

“When you see ads on Google or on Meta, that is a form of export,” he said, “and it does not show up on the services trade.”

Another example is that some of the fee for every Uber ride goes toward the driver, but some flows back to the parent company in the U.S.

“The U.S. has a huge trade surplus in services that Trump just ignores,” Stanford said.

Trump’s claim Canada is subsidized by the U.S. is laughable

Jim Stanford

On the merchandise side, he said that much of what Canada sells the U.S. is some type of raw material that U.S. companies then upgrade and then sell back to Canada.

“Trump’s claim Canada is subsidized by the U.S. is laughable, and Trump’s economic team certainly knows it,” Stanford wrote in a recent report.

He is not alone in his views. A TD Economic report, Setting the Record Straight on Canada-U.S. Trade, on Jan. 21 said Canada is the largest export market for the U.S. and the trade deficit is the second lowest among its trading partners.

It pegs the overall trade deficit at $65 billion for some of the same reasons as Stanford, including the services trade factor.

The energy equation

Much of the existing trade imbalance is because Canada sends so much energy to the U.S. In discussing the trade imbalance in public, Hillman has said energy accounts for more than a third of what Canada sells to the U.S.

The TD report said the U.S. would enjoy a trade surplus of $60 billion if energy is excluded from the equation.

Looked at another way, Canada’s trade advantage with the U.S. has been growing as a result of the Trans Mountain pipeline expansion, which lifted Canadian oil exports to the U.S. But the TD report points out that many U.S. refineries are built to process Canadian crude, and the only other alternative sources of such heavy oil come from Venezuela or Mexico.

Importing from Venezuela would require lifting U.S. sanctions, whereas importing more from Mexico would only increase the U.S. trade imbalance between those two countries.

“Given Mexico already enjoys the second-largest trade surplus with the U.S., this shift in demand would further widen that chasm, potentially allowing it to overtake China in the pole position,” TD said.

The bank’s economists conclude the U.S. trade deficit with Canada is not as large as Trump suggests, nor is it a subsidy. Rather, it reflects U.S. outperformance, which has enabled its citizens to purchase more energy from Canada.

TD said Canada’s status “as a reliable supplier of energy and other goods” is often overlooked, which is perhaps why Trump decided to float the idea of making the country a 51st state.

But perhaps it’s a negotiating tactic because the U.S., Canada and Mexico are preparing to meet in mid-2026 to review their free trade agreement.

“Most people, myself included, think this is a tried-and-true tactic to try and scare his opponent,” Stanford said, “and then in the process extract some bargaining leverage.”

• Email: gfriedman@postmedia.com

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