With Trudeau in DC, Canada could be Trump's next tax target

Protectionist trade policies that could damage Canada's economy were undoubtedly on the agenda when Canadian Prime Minister Justin Trudeau met with President Donald Trump on Monday.

Trump has suggested that the U.S. should renegotiate the North American Free Trade Agreement, the 24-year-old deal that allows for easy passage of goods between the United States, Canada and Mexico. Any change in border tariffs with Canada could be a disaster for a country that depends on its southern neighbor for 75 percent of its exports. The U.S.-Canadian border sees nearly $660 billion in total trade every year, including goods like car parts, petroleum, wood and aluminum.

Oil and vehicles are by far the two most important exports from Canada to the United States, accounting for more than 40 percent of movement across the border.

Companies like GM, Fiat Chrysler, Ford, Honda and Toyota all have assembly plants in Canada. About $58 billion in cars and car parts came from Canada last year, compared with $74 billion from Mexico. While Mexican light vehicle production has exceeded Canadian production since 2008, both grew at a higher rate last year than production in the United States.

"While it is a well-publicized fact that Mexico's domestic consumption is less than 20 percent of the vehicles it manufactures, Mexico is not North America's only export powerhouse," according to a recent report by the Michigan-based Center for Automotive Research. "Canada is even more dependent on exporting outside its own borders, with domestic consumption of just 12 percent of the vehicles it manufactures within its borders."

Changes to the fee-free exports could hit companies hard. About 80 percent of Toyotas produced in Canada are exported to the U.S., executives said in a recent earnings call.

But the United States is still by far the biggest vehicle manufacturer of the three, according to data from the international car manufacturing organizations OICA. And U.S. producers have become reliant on a trade system that allows parts to pass over the border multiple times during assembly. That's why a list of exports from the U.S. to Canada doesn't look very different from the import list.

Canada is also a major importer and exporter of crude oil. While Canada produces nearly 5 million barrels of crude a day, that oil is coming from western Canada and is difficult to transport to eastern Canadian markets, according to government reports. Still, Canada exports to the U.S. about three times as much fuels and oil as it imports. Both measures have taken a hit in the last year as oil prices have remained relatively low.

Any import tax would likely increase gas prices in the U.S., but it could also move more investment into U.S. oil fields. Prices on other commodities, like natural gas, lumber and beef would also be expected to rise, at least in the short term.

Changes to the trade agreement would likely affect smaller industries, too: Top import categories include breads, pastries and empty medicine capsules; chemical and mineral fertilizers; and tires. Canadian chocolatiers have been growing of late, increasing exports to the U.S. by more than 25 percent in the past two years.

Knotted economies

NAFTA has also provided the U.S. and Canada access to a larger pool of employees, including Canadians working in the U.S. on NAFTA visas.

Overall, Canada is the third-largest exporter of goods to the United States, but it's America's largest export market. It depends on the U.S. for expensive manufactured items like those in the export chart above, and also for billions in agricultural goods like fresh fruit and vegetables, according to the Office of the United States Trade Representative.

Canadians invested about $261 billion in the United States in 2014 — up 11 percent from 2013. Foreign direct investment could suffer if new policies make the border more restrictive. U.S. companies that sell services in Canada could be affected as well, as American companies export far more services than Canadian firms sell in the U.S.

Canada's proximity to the U.S. could help its economy in other ways, if the U.S. enacts other isolationist policies proposed by the Trump administration. Canadian cities are already lining up to be the next destination for tech firms looking to hire international workers who are no longer able to work in the U.S., for example.