The United States and Canada, historically close allies, are moving further into a full-blown trade war with no end in sight.
On Aug. 25, 2026, Canada imposed tariffs of up to 50% on hundreds of U.S. goods after the U.S. placed similar, long-threatened levies on Canadian products. It followed the collapse of trade talks that had been inching towards a deal.
The next day, U.S. President Donald Trump called Canada “one of the worst countries in the world to deal with.” Canadian Prime Minister Mark Carney claimed Trump was trying to “destroy” his country’s auto industry. Only a few days earlier a deal was reportedly very close.
One of the most notable aspects of the collapse in trade negotiations lies in Trump’s unprecedented use of an untested tool in the Tariff Act of 1930, otherwise known as the Smoot-Hawley tariffs. Economists generally agree that the act’s escalating retaliatory tariffs extended the Great Depression by sparking a global trade war. Amplified by foreign retaliation and falling global gross domestic product, U.S. trade fell by two-thirds from 1929-1932.
Smoot-Hawley contains a provision known as Section 338, which provides an additional feature: The president may, on his own authority, impose unilateral tariffs of 50% if a foreign country’s policies “discriminated” against the United States.
But the section was never invoked, as the damage from the other Smoot-Hawley tariffs was already done. That is, until July 2026, when Trump first threatened the 50% tariffs on Canada for its “discriminatory treatment” of U.S. products.
As an economist who has studied trade policy for 49 years, I can explain how the two countries got embroiled in a trade war and what it means for U.S. consumers, companies and the midterms.
Why did the trade deal collapse?
Both sides are finger-pointing at the other over what caused the proposed deal to fall apart during the final days of the trade negotiations.
The Canadians were interested primarily in reducing high U.S. tariffs on steel, aluminum and autos. They claimed they had a preliminary deal to lower steel and aluminum tariffs from 50% to 25%.
In the late stages of the negotiations, however, U.S. Commerce Secretary Howard Lutnick was apparently lobbied heavily by U.S. steel and aluminum producers to hold the line on these tariffs. Lutnick was also against reductions in the U.S. auto and truck tariffs and allegedly withdrew whatever reductions were on the table.
As a result, other parts of the deal started to unwind as well.
The Canadians had offered to reopen the Keystone oil pipeline deal that had been canceled by President Joe Biden in 2021. But once the deal on lower steel, aluminum and auto tariffs was nixed, Canada pulled the Keystone deal off the table as well.
The U.S. had also demanded that Canada reverse the Canadian provinces’ removal of U.S. liquor off their store shelves. Sales of U.S. booze in Canada have plunged as a result.
But the lack of progress on the major metal and auto tariffs, combined with a backlash from the Canadian provinces themselves, forced that concession off the table as well.
What tariffs did the US place on Canadian goods?
Canada is a major supplier of goods to the U.S., exporting about US$451 billion in 2025 – ranking second after Mexico.
As soon as talks broke off, the Trump administration followed through on earlier threats to impose a 50% tariff on $20 billion worth of Canadian exports, including auto parts, forestry products, furniture, textiles, whiskey and hockey equipment, under Section 338 of Smoot-Hawley.
That’s about 4% of Canada’s exports to the United States.
How did Canada retaliate?
Canada’s Carney responded with his own already prepared list of $20 billion in U.S. imports to face tariffs of up to 50%, targeting products that he surely bets will anger voters in swing states heading into the midterm elections.
Examples include Wisconsin cheese, Maine seafood and Kentucky washers and dryers – GE Appliances is headquartered in Louisville, Kentucky.
How did two very close allies get into a trade war?
Tensions between Canada and the U.S. and have been high ever since Trump returned to office.
He has continually complained about Canada “ripping us off” and being “among the worst countries” in the world to deal with.
And he has repeatedly threatened to make Canada the 51st state, an issue that has particularly angered Canadians and served to unite public opinion across the political spectrum against Trump.
For Carney, a critical sticking point was the late addition by U.S. negotiators requiring Canadian trade policy to align permanently with U.S. interests. Carney viewed this demand as a transfer of Canadian sovereignty to the U.S., a step toward making Canada “the 51st state.”
So all in all, perhaps it’s not so surprising that a near deal would collapse into a trade war.
In addition, Canada has been unusual in standing up to Trump in this way. The only other country to do that is China, and it’s risky for a smaller country like Canada to retaliate in this way. But Canadians are pretty united in their unfavorable views of Trump, so Carney has a strong domestic position to stand up to him.
The 50% tariffs Trump unilaterally imposed on Canada apply to goods that had previously been exempt from most other tariffs due to the United States-Mexico-Canada Agreement, which replaced NAFTA in 2020. Since tariffs are a tax on the purchaser, U.S. consumers and companies will have to pay 50% more to buy the products subject to the tariffs. Many of the Canadian imports are concentrated in U.S. border states such as Maine, New York, Pennsylvania, Ohio and Wisconsin. Another border state, Michigan, is closely tied to automobile production with the Canadian province of Ontario. In many cases, Canada’s retaliatory tariffs will be felt most strongly in states where Trump’s Republican Party stands to be affected by reductions in U.S. exports that will result from the levies. The political backlash against Trump’s tariffs in the U.S. doesn’t appear to be deterring him from imposing more of them, even as the impact of midterm elections hinges on results in several swing states along the Canadian border. While the total impact on overall U.S. prices may not be large, the combination of U.S. and Canadian tariffs together could be significant for products that are heavily traded between the two countries, such as Michigan auto parts and New England seafood, as well as in U.S. regions where Canadian market shares are large. U.S farmers and manufacturers may also lose sales to Canada. If Trump’s tariffs remain in place and U.S. importers can no longer absorb the tariff costs and remain profitable, U.S. prices are likely to continue to rise as importers require consumers to pay a larger share of the tariffs. It’s probably unwise to predict what Trump will do with tariffs between now and the midterms or now and the end of his term in 2028. A victorious Democratic Party in charge of the House and Senate could change the political landscape considerably. It’s worth noting that the global trading system that emerged in 1947, from the ashes of war, depression and tit-for-tat trade battles, was purposely designed to eliminate trade wars, since they typically make us all worse off. And the trade liberalization that followed worked, delivering enormous wealth to the U.S. and the world economy in the years since. I believe it would be a shame if we returned to those days, and the unfortunate economic consequences that came with them. Kent Jones, Professor Emeritus of Economics, Babson College This article is republished from The Conversation under a Creative Commons license. Read the original article.What does this mean for US consumers and businesses?
