Just days after U.S. President Donald Trump said a trade deal with Canada was close at hand, negotiations collapsed on Aug. 21, leading the United States’ new 50-percent tariffs on $20 billion worth of Canadian goods to take effect, Canada retaliating with its own tariffs on U.S. products and both sides blaming the other for the escalating trade war. What are the economic and political effects of the conflict on both sides of the border, particularly ahead of the U.S. midterm elections in November? Which industries in the two countries are being hit hardest? How likely are the countries to soon find a solution, and what factors will be key? What does the situation mean for the current review of the USMCA trade accord?
Kellie Meiman Hock, co-chair of the Inter-American Dialogue’s Board of Directors: “Intensified tensions upon the backdrop of the USMCA review are troubling, given deep integration between our economies. The Trump administration is fixated on trade deficits. However, absent oil and gas, where Canada is by far our top supplier, the United States has a trade surplus with Canada, the number one export destination for 36 states and a top three export destination for 45 of 50 states. The stakes are high for both, with 70 percent of Canadian exports destined for the United States. As such, Canada’s retaliation against 50 percent Section 338 Smoot-Hawley tariffs was carefully calibrated to be of equivalent value ($27.6 billion) and to match sectors targeted by the 338 action, going into effect on Sept. 8 to leave space for further negotiation. President Trump’s threatened counter-tariffs of 50 percent on autos/parts would not hit until Jan. 1, 2027, a nuclear-level move that would put the auto sector in both countries at risk but also leaving time for further talks. While negotiations now seem stalled, key disputes have been characterized as misunderstandings, leaving room to maneuver. However, Prime Minister Carney has domestic support for standing tough, stating Sept. 1 that Canada would return to the negotiating table when ‘the Americans … start being serious.’ Meanwhile, companies and consumers await the impact of tariff increases; investment decisions in North America remain frozen. While some Canadian stakeholders seek escalation, like export taxes on energy or potash, Canada is likely to exhibit patience. With U.S. midterms looming and Carney growing stronger, this trade war might hurt Washington more than Ottawa.”
Kristen Hopewell, professor and Canada research chair in Global Policy in the School of Public Policy and Global Affairs at the University of British Columbia: “There is no question that the growing trade war is highly damaging to both the United States and Canada, threatening decades of economic integration that has been immensely valuable to both countries. Canada is a major export market for the United States and a crucial supplier of energy and manufacturing inputs—including supplying more than 60 percent of American oil imports and more than 50 percent of the aluminum used in U.S. manufacturing. But Trump has sought to weaponize economic interdependence and use it as a source of coercion. For the United States, Trump’s tariffs on Canada (like those on other countries) raise costs for businesses and consumers, fuel inflation and ultimately harm rather than help American manufacturing, acting as a significant drag on economic growth and employment—all in advance of the coming midterms. In Canada, the Trump administration’s tariffs, in clear violation of the USMCA, and extraordinary 11th-hour demands—including exclusive access to Canada’s critical minerals, restricting Canada’s right to sign trade agreements with other countries and abolishing French language and cultural protections—are seen as economic warfare and an attack on Canadian sovereignty. Trump’s trade aggression is widely viewed as an attempt to destroy core pillars of the Canadian economy and turn Canada into a vassal state of the United States, leaving Canada no choice but to retaliate. The counter measures imposed by the Canadian government have widespread public support, and Canadian consumers are also actively boycotting U.S. goods and travel. This is an extraordinary shift: Canada’s closest ally—the United States—is now seen as the chief threat to its economic and security interests.”
Nick Iacovella, executive vice president of the Coalition for a Prosperous America: “The collapse of the talks was the right outcome. The deal on the table would have cut Section 232 tariffs on Canadian aluminum to a flat 25 percent, fabricated products included. That is precisely where the jobs are. Downstream fabrication accounts for 97 percent of U.S. aluminum employment, and the two downstream categories together employ six times as many Americans as alumina refining and primary production. At 50 percent, American extruders can compete. At 25 percent, many would be underwater. The math makes this more than a talking point. Alcoa reports the Midwest premium rose 211 percent last year, largely reflecting the tariffs on primary aluminum. Discount the finished extrusion to 25 percent while the American extruder’s billet still carries the full cost, and the imported product wins before either plant runs a press. That is tariff inversion, and it turns a metals tariff into an offshoring incentive. Canada is the largest foreign supplier of extruded aluminum to the United States, so the discount would have landed squarely on American extruders’ biggest competitor. Washington already ran this experiment. Between 2019 and 2024, 72 percent of imported steel entered duty-free under exemptions and quotas, and mill utilization stayed below the 80 percent Commerce identifies as the floor for reinvestment. Full coverage reversed it. For the USMCA, the best path forward is to split the agreement into two bilateral deals. The top priority for the U.S. government should not be a deal for its own sake. Any agreement must put American producers first. We have the largest market in the world, and no country should access it in a way that harms U.S. manufacturers and workers. More than any deal, the administration should focus on growing domestic production. In aluminum especially, downstream producers are the customers that make new primary capacity bankable. Protect the extruders, and the smelters follow.”
Dan Ciuriak, senior fellow at the C.D. Howe Institute in Toronto: “In the normal course, trade negotiations are about how to divide the economic surplus that is generated by the deepening of trade. The economically more powerful party pushes the terms to the point where its leverage maxes out. In a Canada-U.S. context, the United States would capture 90 percent of the benefits and Canada 10 percent. But we are not in a normal trade negotiation. The United States is demanding 110 percent and requiring that Canada accept -10 percent, with the ‘escalation dominance’ threat being a much larger negative—U.S. Trade Representative Jamieson Greer has already floated the idea of absolute bans on Canadian products. That dynamic, however, is limited by the harm that U.S. trade restrictions impose on U.S. interests. This turns into ‘bluff’ and ‘call bluff’ (retaliation). That’s bad but not existential. Things get much worse when the United States introduces the word ‘alignment.’ There are two forms of alignment: on the digital economy and on geopolitics. Both lead to insuperable problems for Canada. Digital alignment prevents Canada from capturing benefits from the digital economy—which is where Canada has been ‘bleeding out.’ Geopolitical alignment locks Canada into following suit on U.S. geopolitical decisions, such as the economic war on China, which removes Canadian agency and exposes Canada to asymmetric harm from China’s retaliation—as vividly demonstrated with China’s retaliation on canola exports for Canada’s (illegal) 100 percent tariffs on Chinese electric vehicles. Both alignments overtly compromise Canada’s sovereignty. That is not normal and not something the prime minister of a middle power can accept.”
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