The Start of the Canada - U.S. Trade War

Canada Strikes Back

‍Today, the Canada-US trade war officially began with Donald Trump imposing 25% across-the-board tariffs on all Canadian imports except energy which is subject to a 10% tariff. Canada retaliated starting with tariffs on $30 billion worth of goods immediately (see list here), and tariffs on the remaining $125 billion on American products in 21 days’ time (see list here – the govt is seeking views until March 25). The Prime Minister’s statement said, “Our tariffs will remain in place until the U.S. trade action is withdrawn, and should U.S. tariffs not cease, we are in active and ongoing discussions with provinces and territories to pursue several non-tariff measures.”

The official US justification for tariffs was to address border security and threats from fentanyl. Canada had already taken action with $1.3 billion of drones and surveillance, the appointment of a fentanyl czar, a joint operations partnership and listing drug cartels as terrorist organizations. But Donald Trump announced there was “no room left for Mexico or Canada” to negotiate out of the tariffs and he made clear that “what they’ll have to do frankly is build car plants and other things in the United States in which case they have no tariffs.” It is now clear that the tariffs are not about fentanyl or other border issues. It is simply economic coercion to force manufacturing jobs to the USA.

Emotions are running hot. The Prime Minister said that “the US has launched a trade war with its closest ally and is working to appease Valdimir Putin, a murderous dictator. Let that make sense.” The premier of Ontario threatened to impose a 25% export tax on electricity sent to 1.5 million homes in Minnesota, Michigan and New York, in retaliation for US tariffs and that he could direct the province’s energy producers to shut down the exports entirely if Trump moves ahead with even more tariffs on April 2.  Premier Ford also threatened “legislation that would require retailers to place signage on shelves indicating whether a product is Canadian” and said Ontario’s liquor stores already began removing US beer, wine and spirits from shelves.

Duration of Tariffs

‍Recent Sussex meetings with Republican officials in the U.S. made clear to us that Donald Trump and his senior advisors genuinely believe in tariffs. When they claim that "foreign countries pay for U.S. tariffs" or insist there will be "no inflation," they are not just posturing—they truly believe it. No amount of reasoning or economic data will convince them otherwise. The only thing that might is real-world consequences: market crashes, rising inflation, job losses, or other tangible fallout.

Compounding the issue, the Trump administration is operating without a structured policy process. Nor do they seem to be weighing alternatives before making decisions. In the end, there is only one decision-maker: Donald J. Trump. With his unpredictable nature and shifting positions, forecasting how long these tariffs will remain in place is nearly impossible – in part because Canada does not know what it must achieve to have tariffs removed.

Impact

‍The market reaction to Trump’s tariffs was swift and crushing with the S&P 500 plummeting 4.8% from its all-time high in February as US stocks erased $3.4 trillion of value.

Depending on how long the tariffs last, most economists are expecting recessions in Canada and Mexico. The Bank of Canada modelled the impact of 25% tariffs and they expect a mild recession in Canada with a 2.5% contraction of GDP.

A study by the Brookings Institute expects that 25% US tariffs (with retaliation by Canada and Mexico) will result in the USA experiencing 400,000 job losses and inflation increasing by 1.3%. Canada will be hit with 510,000 job losses with inflation rising 4.2%. Mexico could be hit with 2.2 million job losses and experience deflation of 6%. This means that while the pain will be felt more severely by Canada and Mexico, the US will feel it as well.

‍Government Response

‍The PM emphasized that the priority is not to figure out how to manage through tariffs, but to put an end to an unjustified trade war. However, changes to employment insurance are coming right away to support Canadians who lose their jobs.

The PM said that Trump’s intention is a total collapse of the Canadian economy so that he can “annex” Canada. Trudeau added that this will never happen. This will put enormous pressure on Liberal leadership candidates and Conservatives to ratchet up the rhetoric on Trump and trade.  Expect the coming election to be a contest for who can be most aggressive in standing up to the US.As the US-Canada trade war escalates, the economic and political stakes continue to rise.

With markets reacting sharply, job losses looming, and inflationary pressures mounting, the ripple effects of these tariffs will be felt across North America. The Canadian government remains steadfast in its commitment to retaliation. Meanwhile, Trump’s unwavering belief in tariffs, coupled with his unpredictable decision-making, makes it difficult to predict an endgame. In Canada, the fallout from these tariffs is set to dominate the upcoming federal election, forcing political leaders to take an aggressive stance against the U.S. and making trade policy the defining issue of the campaign. With public anger rising, candidates will be measured by their ability to stand up to Trump, turning the election into a referendum on Canada’s economic sovereignty and resilience in the face of American pressure.