The US Canada trade war tariffs escalated sharply on Monday after President Donald Trump threatened a fresh round of 50% duties on Canadian-made cars, trucks, auto parts and steel, set to begin on 1 January, a move that would, according to CNBC, double the top-line US tariff rate on Canadian auto imports, which currently stand at 25%.
The announcement followed the collapse of US-Canada trade negotiations on Friday, which triggered a separate set of 50% tariffs on roughly $20 billion in Canadian goods. Canadian Prime Minister Mark Carney vowed to retaliate ‘dollar-for-dollar,’ with that counter-measure scheduled to begin on 8 September.
Trump framed the dispute in blunt terms on Truth Social. ‘Canada has been ripping off the United States of America for years,’ he wrote. ‘Canada will be treated like a State no longer!’
Why negotiations broke down
The talks had been running against the backdrop of the scheduled review of the USMCA (the United States-Mexico-Canada Agreement, the North American trade pact that replaced NAFTA). That agreement underpins $1.6tn in North American trade, according to the BBC, making the stakes for any breakdown considerable.
According to The Guardian, the agreement was derailed after Howard Lutnick, the US commerce secretary, objected to the scale of proposed tariff reductions on imports of Canadian steel, aluminium and cars, sectors falling under his responsibility after Trump declared them areas of national security under the 1962 Trade Expansion Act. That internal objection helps explain why the gap between the two sides widened rather than narrowed in the final stages of talks.
Michael Froman, the president of the Council on Foreign Relations and a former US Trade Representative, told CNBC that the 50% tariff package that took effect over the weekend affects only about 5% of Canadian exports to the US. ‘It’s significant in terms of what it says about the state of the relationship right now,’ he said. ‘But, economically, it is not terribly meaningful.’ He added that the average tariff applied to Canadian goods has climbed to about 6%, from roughly 1% at the start of Trump’s second term, and said the bigger risk lies with the USMCA itself. ‘The US is engaged with Mexico in a series of negotiations, but is not yet really engaged with Canada,’ he said.
Automakers in the crosshairs of US Canada trade war tariffs
The auto sector faces the most acute near-term exposure. Supply chains between the two countries are deeply integrated, with vehicle parts typically crossing the border multiple times before a finished vehicle reaches American dealerships. David Whiston, an auto analyst at Morningstar, said the biggest assembly exposure for Ford and GM lies in pickup trucks. GM builds some Chevrolet Silverados in Canada, while Ford is set to bring 100,000 units of annual Super Duty pickup capacity online at its Oakville plant in the fourth quarter. ‘The math on that just got a lot worse for them,’ Whiston told Business Insider.
Jennifer Safavian, who leads Autos Drive America, said in a statement that Trump’s tariff policy is already hurting the US auto industry, and that US vehicle exports to Canada have fallen 23% over the past year. ‘The US auto industry’s continued success relies upon strong and stable partnerships across North America. We urge all parties to continue negotiations to finalize an interim deal,’ she wrote.
Economic pain, skewed toward Canada, but not evenly distributed
Trevor Tombe, an economist at the University of Calgary, estimated that the new tariff plan would raise the average tariff rate on Canadian exports by about 2.5 percentage points and shave a couple of tenths of a point off GDP growth. More pressingly, he wrote that the tariffs could put roughly 87,000 Canadian jobs at risk if they remain in place and affected sales fall in line with the 50% duties. Alberta alone could lose about 9,000 jobs, he estimated, even though relatively little of the province’s exports are directly targeted.
Frances Donald, the chief economist at Royal Bank of Canada, wrote in a Saturday note that the latest tariff covers around 5% of Canadian trade with the US, with more than 80% of exports still duty-free. ‘Plastic products, electrical machinery, furniture and wood product sectors are among the most significantly impacted by the new measures,’ she wrote. She added that renewed trade uncertainty increases the chance the Bank of Canada will not raise rates this year.
Paul Krugman, the Nobel laureate economist and former New York Times columnist, wrote on Substack that despite Canada’s disadvantage (the US economy is roughly 12 times larger and buys about three-quarters of Canadian exports), disrupting cross-border auto and auto-parts trade would be ‘immensely disruptive’ to the industry on both sides of the border.
Kelly Ann Shaw, a partner at Akin and former deputy assistant to the president for international economics in Trump’s first term, told CNBC she sees no near-term resolution. Carney’s Saturday address, she said, came across as a ‘victory lap’ to people in the Trump administration. ‘There’s a lot of frustration and bitter feelings on the US side,’ she said. ‘I don’t really see an off-ramp anytime soon.’
Canada’s planned dollar-for-dollar retaliation on 8 September now functions as the next hard deadline for both sides, and, as David Doyle of Macquarie Group wrote on Sunday, if Canada follows through, it risks prompting ‘a subsequent escalation from the US.’