President Donald Trump has made no secret of his opinion that the United States has long been taken advantage of by its trading partners, and that the best way to fix that problem is with tariffs. That's come with a particular fixation on the country's northern neighbor, one that has ballooned into an ever-escalating trade war that threatens to push a once-reliable ally away for good.
"It's a zero sum game," says Pawan Joshi, chief strategy officer with supply chain software platform e2open/WiseTech.
No country has all the raw materials and infrastructure it needs to support its economy, which means all countries rely on trade in some way. Historically, that's what has made the close partnership between the U.S., Canada and Mexico so critical to each nation, given that all three have been able to cooperatively build supply chains that maximize the many economic advantages that come with trading across shared borders.
But as the Trump administration has lobbed tariffs at Canada — and Canada has responded in kind — the relationship between the two countries has reached an unprecedented level of animosity, with real economic consequences. In an August analysis, Oxford Economics predicted that the combination of U.S. tariffs and retaliatory levies, if they continue, will cut as much as 0.3% off of Canada's expected GDP growth in 2027, while pushing Canadian inflation up by 0.3 percentage points above the previous outlook.
Canada also supplies nearly two thirds of the United States' crude oil imports, and up to 80% of U.S. lumber imports, while the U.S. supplies Canada with more than half of its automotive imports. Any protracted trade war means that prices get higher for businesses and consumers on either side of the border, making it a war of attrition for both governments.
On paper, Canada appears to be at a marked disadvantage, given that its economy is a twelfth of America's, and that it sends more than 70% of its exports to the United States. Certainly, it will struggle to find another customer for its hydro-electric power, which accounts for $3.3 billion, or 0.4% of total exports to the U.S. However, so far, there's been no mention of the U.S. slapping tariffs on electricity exports from Canada. And Joshi notes that, regarding the other major exports, such as oil products, automobiles and wood, Canada could gradually reduce its dependence on the U.S. by finding new buyers.
Prime Minister Mark Carney has frequently spoken of a goal to chart an economic future away from reliance on the U.S., and has already started deepening ties with the European Union. Carney will be in attendance at European Commission President Ursula von der Leyen's State of the EU speech on September 16, and is scheduled to address the European Parliament the following day. Presumably, the longer term goal would be to set Canada up with trade carve outs that mirror those of other non-member allies like Ukraine and Norway, or perhaps even full membership at some point down the line.
"The timing could scarcely be better for Europe and Canada to make common cause," said Anand Sundar, special advisor with the European Council on Foreign Relations, in a September 9 analysis.
That could include deeper cooperation on defense projects, which Canada would be uniquely qualified to assist with, given that the 2% of its GDP that it spends on defense is already more than the 14 smallest EU defense budgets combined. Measured against the EU's largest defense spenders, Canada trails only Germany, France, Italy and Poland, and expects to double its spend to 4% by 2030.
As Sundar points out, much of Canada's planned new defense spending will be invested in foreign suppliers. In friendlier times, the vast majority of those funds might have gone to the U.S. But with the political climate being what it is, the U.S. stands to gain a far smaller piece of the pie than it otherwise might have, with Carney stating in an April speech that "the days of our military sending 70 cents of every dollar to the United States are over."
That's already started playing out too. In December, Carney put the brakes on a deal to buy up to 88 F-35 fighter jets from the U.S., when he placed the agreement under review. Instead, the Canadian government has been looking at the possibility of purchasing a much smaller number of F-35s, and supplementing that with a fleet of fighters made by Swedish manufacturer Saab, in a partnership with Montreal-based planemaker Bombardier. The New York Times reported in February that Canada is also in the market for 12 new submarines, and has been weighing bids from South Korea's Hanwha Ocean, and Germany's ThyssenKrupp Marine Systems.
The uncertainty surrounding the U.S.-Mexico-Canada Agreement throws another wrench into the spokes, with Trump declining to renew the deal for a 16-year term earlier this summer, opting instead for an annual review process that offers few guarantees for its long-term fate.
In the meantime, the odds of reconciliation between the U.S. and Canada grow slimmer by the day. A potential trade deal unraveled in the 11th hour after both sides reportedly came to the table with last-minute demands. U.S. tariffs were then met dollar-for-dollar by Canada with retaliatory levies that took effect on September 8. President Trump followed that by banning imports of Canadian dairy, alcoholic beverages and motorcycles.
All of that seems to portend a future where the U.S. and Canada might never return to their previous state of economic amity. Should that come to pass, it stands to reason that true costs of this trade war could linger long after any tariffs are lifted.
