The US-Canada tariff war is a double-edged sword

Border and pushback

To diffuse tensions with the US, the Canadian government announced its border plan on 17 December 2024, boosting security and immigration systems at a cost of $1.3bn. It aims to detect and disrupt fentanyl trafficking, give new tools for law enforcement, enhance operational coordination, increase information sharing, and limit the number of people entering and remaining in Canada. 

But is there really a problem to solve? According to US Customs and Border Protection data, only 0.2% of all fentanyl seizures at US borders come from Canada, and illegal crossings into the US at the Canadian border account for less than 1% of the total.

In his public comments, Trudeau addressed all Americans, reminding them that Canada had stood by their side in "their darkest times," from the Iran hostage crisis and the war in Afghanistan to deadly natural disasters such as Hurricane Katrina and the recent wildfires in California. He also said tariffs would hurt both Canadians and Americans.

Domestically, Trump's move was seen as a declaration of economic war against Canada, and Trudeau acted swiftly to defend the national economy, raising tariffs on US imports, cancelling trade contracts worth tens of millions of dollars, calling for a popular boycott of American goods, and cancelling tourism trips to the US.

Canadian response

On 1 February, in a speech to the nation, Trudeau said: "Tonight, I declare that Canada will respond to the US trade measure by imposing a 25% tariff on $155bn worth of American goods." This would include immediate tariffs on $30bn worth of goods, plus additional tariffs on $125bn worth of US products within 21 days, to "allow Canadian companies and supply chains time to seek alternatives".

Trudeau further clarified that Canada's response would be wide-ranging, targeting everyday items such as American beer, wine, bourbon, fruits, fruit juices (including orange juice), vegetables, perfumes, clothing, and footwear.

Quebec Premier François Legault seemed to speak for many when he said: "Our first choice has always been to avoid a trade conflict with our primary partner, but Mr. Trump has chosen to attack us, and we must fight to protect our economy and jobs. We don't seek this trade war, but we're capable of defending ourselves, overcoming this crisis, and emerging stronger."

Meanwhile, Ontario Premier Doug Ford cancelled a $100mn contract with Elon Musk's Starlink to provide satellite internet to rural areas. "Ontario won't do business with those determined to destroy our economy," he said of Musk, who is a staunc Trump ally. 

Ford also banned US companies from bidding on $30bn worth of annual Ontario government contracts until the US lifts its tariffs. "US companies will lose tens of billions of dollars in revenue, and only President Trump is to blame," he said.

Working together

In Washington, Canadian Foreign Minister Mélanie Joly met her US counterpart Marco Rubio, her fifth visit since Trump won in November, aiming to convince American lawmakers that Washington's tariffs on Canada harm both countries. Meanwhile, reports suggest that Canada and Mexico worked together to defend against US tariffs. 

Germany's Trade Minister Robert Habeck spoke to his Canadian counterpart, Mary Ng, emphasising shared positions and agreeing that Trump's tariff spiral would have no winners. Even the North Atlantic Treaty Organisation (NATO) felt forced to express "confidence" that tensions between the US and Canada could be managed.

After a call between Trump and Trudeau on 3 February, Trudeau announced that the proposed tariffs would be suspended for 30 days while Canada implemented its border plan in collaboration with the US. Trudeau promised "new helicopters, technology, and personnel", while enhancing coordination with the US, to stop fentanyl smuggling.

With around 10,000 security personnel now dedicated to border protection, Trudeau also appointed a 'fentanyl tzar', listed cartels as terrorist organisations, ensured 24/7 border surveillance, and launched a joint Canada-US initiative to combat organised crime, fentanyl trafficking, and money laundering.

Tied at the hip

Trump recognised the Canadian effort but also said the temporary suspension of tariffs would be "to see whether a final economic deal with Canada can be structured." A recent report by TD Bank predicts that the US will register a trade deficit of $45bn with Canada in 2024.

Yet the two countries are more than just trade partners; their economies are highly integrated. Canada is the largest customer for US goods and services exports. In 2023, the US imported Canadian goods worth $338bn—more than China, Japan, France, and the UK combined—and imported services worth $86bn. 

Canada is the largest export market for 36 US states and a top three export market for 46 states. Most US states export more than $1bn to Canada annually. In 50 US export categories, Canada was the top destination, while imports from Canada help US industries, particularly manufacturing. In 2023, Canada exported goods (including oil and minerals) worth $414bn and services worth $73bn to the US.

It supplies more crude oil to the US than Mexico, Saudi Arabia, and Iraq combined. Canadian oil accounts for nearly a quarter of US refinery consumption. Over 35 major power transmission lines and 70 oil and gas pipelines cross the US-Canada border, with energy flowing in both directions. Likewise, Canadian minerals are critical to US agriculture, defence, energy, and telecommunications. 

Millions of jobs on both sides of the border depend on this relationship, with over $2.5bn in goods and services crossing the border daily. Canadian-owned companies employ almost a million Americans, while eight million US jobs are tied to trade with Canada. 

Guessing the end-game

Candice Ling, president of the Canadian Chamber of Commerce, told Politico that she believes Trump is leveraging tariffs to increase revenue, to let him extend the tax cuts he signed into law in 2017 (which are set to expire this year).

Analysts wonder whether Trump's real aim is to boost US manufacturing, reshore businesses south of the Canadian border, or dismantle cross-border automotive supply chains, having repeatedly claimed that the US could make all the cars it needs in Detroit or elsewhere.

Hints come from his criticism of the US trade deficit with Canada. "We pay hundreds of billions of dollars to support Canada, and without this massive subsidy, Canada would cease to exist as a viable country," he said in a social media post. "Therefore, Canada should become our 51st state. Much lower taxes, much better military protection for the people of Canada – and no tariffs!"

Canadian entrepreneur Arlene Dickinson, a member of Trudeau's US-Canada Council, said Trump wants "money, power, and control," adding: "It's devious and utterly clear." The comments reflect a rising anger in Canada, with Trump having made unprecedented threats to their economic ties and close alliance. 

Whether Trump picked a fight with Canada for domestic political and economic reasons, or whether it is part of a broader strategy to restructure and reshape US trade relations with the rest of the world, remains unknown. Yet tariffs are a double-edged sword: they may benefit the US Treasury, but may also harm the US economy, so the threats are likely to be used to renegotiate the US-Mexico-Canada Agreement (USMCA) in 2026.

The implications of the tariff war that Trump has unleashed for the General Agreement on Tariffs and Trade (GATT) in the Arab region also remain unclear.

All the while, investors and observers watch and wait to see whether this trade confrontation between the US and everyone else escalates or leads to negotiations. Tariff suspensions suggest the latter, but every day brings surprises. The global economy is holding its breath.