U.S.–Canada Trade Relations

Economic and trade relations between the United States and Canada are among the most integrated bilateral relationships in the world. The two countries are linked through an extensive network of trade and investment exchanges that encompass strategic sectors such as energy, automotive manufacturing, and services. Since the late twentieth century, these relations have been governed by several institutional frameworks, beginning with the U.S.–Canada Free Trade Agreement (1989), followed by the North American Free Trade Agreement (NAFTA) in 1994, and most recently the United States–Mexico–Canada Agreement (USMCA), which entered into force in 2020.

Nevertheless, since 2025, trade relations between the two countries have experienced a noticeable escalation in tensions, largely as a result of tariff measures imposed by the United States on certain Canadian exports. These developments occur at a time when the three parties—the United States, Canada, and Mexico—are preparing for the scheduled review of the USMCA in July 2026. This review could potentially lead to substantial modifications in the structure of the agreement and in the regulatory framework governing trade relations in North America. Within this context, the U.S. Congress continues to play a central role, both through oversight of trade policy and through its authority to approve any potential amendments to the agreement.

I. Key Features of Bilateral Trade

According to data from the U.S. Bureau of Economic Analysis, Canada ranked as the second-largest trading partner of the United States in goods and services in 2025. Bilateral economic relations are characterized by a high degree of integration in the services sector, where the United States typically maintains a notable surplus in services trade with Canada, particularly in financial services, tourism, and professional services.

From the Canadian perspective, the U.S. market represents the primary destination for Canadian exports. Approximately 73% of Canada’s total merchandise exports are directed to the United States, while Canada imports roughly 46% of its goods from the U.S. market. In addition, foreign direct investment flows between the two countries illustrate the depth of their economic interdependence. The United States is the largest source of foreign direct investment in Canada, while Canada ranks as the second-largest source of investment in the United States.

Energy trade further underscores the importance of the bilateral relationship. Canada is the largest supplier of energy imports to the United States, including crude oil, natural gas, and electricity. Over the past decade, Canada’s share of U.S. crude oil imports has increased significantly, reflecting the growing level of mutual dependence in the North American energy sector.

II. Escalation of Tariff Disputes

The year 2025 marked a turning point in U.S.–Canada trade relations when the U.S. administration imposed tariffs on a range of Canadian goods under the International Emergency Economic Powers Act (IEEPA) and Section 232 of the Trade Expansion Act of 1962. These measures, however, faced legal challenges. In February 2026, the U.S. Supreme Court ruled that the president did not possess the authority to impose tariffs under the emergency economic powers framework.

Following the ruling, the administration replaced these tariffs with a temporary 10% import surcharge under Section 122 of the Trade Act of 1974, while exempting goods that comply with the rules of origin established under the USMCA. Despite these developments, the United States imposed tariffs on only a limited share of its imports from Canada, while the majority of Canadian goods continued to enter the U.S. market duty-free due to compliance with USMCA provisions.

III. Sectoral Tariffs and Industrial Disputes

In addition to the broader tariff measures, the United States introduced a series of sector-specific trade actions, including tariffs on steel and aluminum imports as well as on other products such as lumber, certain metals, vehicles, and auto parts. These measures triggered strong reactions in Canada, given the strategic importance of these sectors to the Canadian economy.

In response, Canada implemented retaliatory tariffs on a range of U.S. imports. Several Canadian provinces also adopted economic countermeasures, including restrictions on the sale of U.S. alcoholic beverages and adjustments to government procurement policies. Furthermore, the Canadian government challenged certain U.S. tariff measures before the World Trade Organization (WTO).

IV. Additional Areas of Trade Disputes

Trade tensions between the two countries extend beyond tariffs and encompass several economic and regulatory issues, including the following:

Digital Services Tax

Canada introduced a 3% tax on the revenues of large digital services companies. However, under pressure from the United States, the Canadian government subsequently decided to repeal the tax through budget legislation enacted in 2026.

Regulation of Online Streaming Platforms

Canada’s Online Streaming Act requires digital streaming platforms to contribute financially to the production of Canadian cultural content. This measure has generated concerns in the United States, where policymakers argue that it may adversely affect American companies operating in the digital media sector.

Automotive Industry

The automotive sector has witnessed disagreements regarding the interpretation of local content requirements under the USMCA. The United States has adopted a stricter interpretation of regional content rules, while Canada and Mexico have advocated a more flexible approach. Although a dispute panel ruled partly in favor of Canada and Mexico in 2022, the issue remains unresolved.

Critical Minerals

Canada represents a key supplier of critical minerals that are essential for advanced U.S. industries. Consequently, the United States has sought to strengthen cooperation with Canada in this sector as part of broader strategies aimed at securing strategic supply chains.

Dairy Sector and Supply Management

Canada’s supply management system for dairy products remains a major source of bilateral tension. The United States has long argued that Canadian restrictions on imports limit access for U.S. dairy products to the Canadian market.

Softwood Lumber Dispute

The long-standing dispute over softwood lumber trade represents one of the most persistent trade conflicts between the two countries. Disagreements over government subsidies and tariffs on lumber products have continued for decades and remain unresolved.

V. Future Prospects and the Role of the U.S. Congress

The U.S. Congress plays a critical role in shaping American trade policy, both through oversight of tariff authorities and through participation in the review of the USMCA. Congress may consider several policy options, including revising executive authority over tariff measures and assessing the economic impacts of bilateral trade actions undertaken by both countries.

In light of current tensions, the 2026 USMCA review is likely to represent a pivotal moment in redefining the rules governing trade in North America. The outcome of this process will likely reflect an effort to balance competing priorities, including economic security, protection of domestic industries, and the continued promotion of regional economic integration.