The real import the US needs from Canada is its healthcare system
Tariffs won't be that inflationary, but reshoring requires fixing the US Healthcare system
Imports from Canada - Autos and raw materials
Total Imports to the US from Canada were around $420bn in 2024, so as a rough approximation the 25% tariff will generate around $90bn of revenue for the External Revenue Service, which importantly goes straight to the Treasury. (Energy is only tariffed at 10%).
Within that $420bn, raw materials such as Oil and Gas, Iron and Steel, Wood and Aluminium account for around 40% of the total.
This is the basis of the ‘you need us more than we need you’ argument all over social media as well as the ‘tariffs will cause inflation and destroy the economy’ arguments being advanced as much for political as economic reasons. To the extent that markets are worrying about ‘the economic impact of tariffs on inflation, we would say this is very overdone.
Raw materials are a relatively small component of total costs
The key point of raw materials is that they are usually a relatively small component of the total cost of most consumer goods. For example a 25% increase in the price of steel and Aluminium might raise the cost of a $30,000 car by $1500. Not insignificant perhaps, but then as Ford point out, only 10% of their steel and aluminium is imported from Canada, so that’s $150. Similarly, Timber is a major component of US housebuilding, but a timber frame kit will cost around 20% of a turnkey timber frame house. And that is before the cost of the interiors. Or the land.
Similarly with fuels. The US needs heavy crude to blend with the light sweet crude to suit its refining set up. On average, the input price of crude is around 60% of the total price of a gallon of gasoline and if we look at Canada’s 1.5bn barrels of exports against the US production of 4.7bn barrels, we could argue that Canadian crude is around 25% of the supply. Further simplifying assumptions, such as ignoring the fact that the heavier crude from Canada trades at a discount, and we can se that putting up the price of 25% of your feedstock by 10%, that is of itself 60% of the product cost is equivalent to raising prices by 1.5%.
Moreover, from an inflationary point of view, it is worth noting that Gasoline prices in the US are regional – being below $3 in Texas and Mississippi but around $4.40 in California. Thus all else being equal, tariffs on Canadian oil would raise US gasoline prices by between 5c and 6c a gallon. The fact that the overall price of Crude is almost 15% lower than it was a year ago is obviously more significant.
The bigger costs are labour – which is why the US manufacturers outsourced production overseas in the first place. Effectively the three big Michigan based manufacturers Ford, GM and Stellantis (Fiat Chrysler etc) moved production and assembly over the border to Ontario, where, together with Honda and Toyota, they export almost all of their production back into the United States under NAFTA.
The Achilles heel of US manufacturing is the egregious healthcare system
Trump talks about destroying the Canadian auto industry, which is suitably hyperbolic, along with his constant wind up of Canada being the 51st State, but the reality is that Canada’s advantage is that employers don’t have to pay the extortionate cost of Healthcare.
Canadian autoworkers get paid very similar rates to their US equivalent, but don’t come with the massive healthcare costs. The real import that the US needs from Canada is its healthcare system
The bottom line: MAGA means MFA
If Team Trump is serious about re-shoring manufacturing it has to get the total cost of employment down in the US and the most obvious way is being demonstrated by this trade dispute with Canada - fixing the cost of healthcare. As with everything in the US, there are many vested interests, but ultimately Medicare for All is the way to MAGA.