5 minEconomy
US-Canada tariff dispute remains a skirmish, for now
New US tariffs on Canadian goods and Ottawa's planned retaliation affect about $40 billion in trade, a small share of the nearly $900 billion exchanged annually. The real risk of a full trade war arrives in January when broader auto tariffs take effect.
The recent tariff measures between the United States and Canada, while drawing dramatic headlines, currently affect only a modest slice of the nearly $900 billion in annual cross-border trade. The administration's Section 338 tariffs, which took effect on Aug. 22, impose a 50% rate on roughly $20 billion of Canadian goods, representing about 5% of what Canada sells to the U.S. Ottawa's response, scheduled for Sept. 8, applies varying tariffs on approximately $20 billion of American exports, or about 6% of what Canada purchases from the U.S.
While $40 billion in affected goods is not trivial, it leaves roughly 95% of transactions between the two neighbors proceeding exactly as they did in July. The more consequential moment arrives in January, when 50% tariffs are set to expand to a much larger set of Canadian exports, including cars, trucks, and auto parts. Should Canada retaliate in kind, the combined tariffs could cover well over $100 billion in bilateral trade, a scale that would genuinely qualify as a trade war.
The current situation differs from past disputes because of the United States-Mexico-Canada Agreement (USMCA). Earlier tariff actions included carveouts for USMCA-compliant products, a provision that mattered greatly to businesses that invested billions of dollars to build integrated North American supply chains. The new Section 338 tariffs apply regardless of USMCA qualification and stack on top of ordinary rates, effectively punishing firms that followed the rules of an agreement once heralded as the new gold standard for trade.
The share of imports from Canada and Mexico claiming USMCA preference climbed from roughly 45% in late 2024 to 86% by February, according to trade data. Federal Reserve economists have priced the cost of regulatory compliance under the agreement at $39 billion to $71 billion per year in manufacturing. The current tariff structure creates paradoxical outcomes: some firms that relocated production to Ontario now face higher effective tariff rates than competitors that remained in Shenzhen, China.
One concrete example involves an American appliance manufacturer buying Canadian steel. That input carries a 50% tariff, while a foreign competitor building finished washing machines overseas typically ships them in at a lower rate. As a result, a USMCA-compliant appliance can face a higher tariff than one made entirely in China. The same dynamic threatens the automotive sector: an American assembly plant would pay 50% on Canadian components while a finished Korean car enters at a lower rate.
President Donald Trump has threatened to raise auto parts tariffs from zero to 50%, impose higher duties on medium- and heavy-duty trucks and their components, and effectively double the tariff rate on finished cars and light-duty trucks. If those measures take effect and Canada follows through on its retaliation threats, the two countries would enter a full-fledged trade war.
Averting that outcome would require both sides to reduce trade barriers and open consumer markets to each other's producers, which would lower manufacturing costs and consumer prices through increased efficiency and competition. That path faces obstacles, including protectionist lobbies in both countries, particularly Canada's dairy sector, which holds outsized influence over Ottawa's trade policy. Canadian cooperation with China and alleged abuses of country-of-origin provisions also complicate negotiations.
No one wins in a trade war, though the losses are not evenly distributed. Canada has more to lose than the U.S. and may ultimately back down before both sides incur further damage. Even if a deal is reached, the U.S. needs to rationalize its remaining tariff schedule so that American-made products do not face higher effective rates than foreign-made competition.
