The latest tariff exchange between the US and Canada covers only a fraction of their commercial relationship, but it could impose concentrated costs on automobile producers, raise Canadian inflation and weaken North American economic integration.
Canada announced tariffs of 15%, 25% and 50% on 27.6 billion Canadian dollars ($20 billion) of US imports, effective Sept. 8, matching recent American measures “dollar for dollar.”
The countermeasures target steel, dairy products, appliances, agricultural equipment, pulp and paper, electronics, furniture, and clothing.
Ottawa later removed fish and seafood from the list following industry feedback, saying the change was intended “to protect against broader economic harms.”
Canada’s action follows Washington’s imposition of a 50% tariff on nearly $20 billion of Canadian imports, which took effect on Aug. 22.
Washington’s measures focus on Canadian motor vehicles, alcoholic beverages and dairy policies.
Gary Clyde Hufbauer, a nonresident senior fellow at US-based think tank Peterson Institute for International Economics, said the direct macroeconomic impact should remain limited unless the dispute expands.
“Two-way trade between the US and Canada is about $1 trillion annually,” Hufbauer told Anadolu. “At this juncture, the tariffs and counter-tariffs cover about $40 billion of two-way trade, a small percentage.”
The latest measures therefore directly cover around 4% of annual bilateral trade.
The figure, however, understates the risks for industries whose production networks cross the border several times before finished products reach consumers.
“Most seriously affected are autos and trucks, and parts for those products, plus a range of consumer goods such as alcoholic beverages, cheeses, toys, et cetera,” Hufbauer said.
Canada’s motor vehicle and parts exports were already under pressure, falling 3%, or $2 billion, in 2025 after declining 7%, or $5.1 billion, in 2024, according to Global Affairs Canada.
The sector is concentrated in Ontario, whose assembly plants and suppliers are closely linked to factories in Michigan, Ohio, Indiana and other Midwestern states.
Automobile components can cross the border several times during production. Tariffs applied at multiple stages may therefore raise cumulative costs and encourage manufacturers to relocate future investment.
“The impact on Canada is much heavier than on the US,” Hufbauer said, identifying Ontario and the US Midwest as the regions facing the greatest exposure.
More than 70% of Canadian goods exports go to the US, while just over half of its services exports are US-bound.
Hufbauer estimated that the dispute would add less than one-tenth of a percentage point to US inflation, compared with approximately three-tenths of a point in Canada.
The larger economic consequence could come through weaker investment rather than the immediate decline in trade.
“The trade war will discourage investment in Canada, especially for items destined for the US market,” Hufbauer said.
Companies considering new assembly plants, battery facilities or processing operations must now account for the possibility that preferential access to the US could be narrowed further.
Canada has announced $5.4 billion in additional assistance for affected workers and businesses, on top of nearly $18 billion in previously introduced support.
The Canadian economy grew 1.9% in 2025, its weakest performance since the pandemic. Goods and services exports increased 0.7%, while imports rose 3%, widening the trade deficit to $20.9 billion.
Although Canada is the smaller economy, it supplies energy and industrial inputs that some US regions cannot replace quickly.
“Canada can limit oil and electricity exports to the US, triggering higher prices and shortages in the Midwest, New York and New England,” Hufbauer said.
US-Canada energy trade was valued at an estimated $137 billion in 2025, according to the US Energy Information Administration. The US imported $111 billion in energy products from Canada while exporting $26 billion.
Canada has historically supplied about 60% of US crude oil imports. Many Midwestern refineries are configured to process Canadian heavy crude, making rapid substitution expensive.
Bilateral electricity trade totaled $3.2 billion in 2025, with US imports from Canada accounting for 67% of the total.
Canada could also use critical minerals as leverage. The US remained its largest critical-minerals trading partner in 2025, with bilateral trade valued at $26.7 billion.
Hufbauer said Ottawa could delay the development of mineral deposits for the US market or attempt to reduce its reliance on American automotive supply chains. Such measures would also hurt Canadian producers, however, making them more useful as negotiating leverage than permanent restrictions.
The confrontation follows the unsuccessful July 1 review of the US-Mexico-Canada Agreement (USMCA), when Washington declined to renew the pact in its current form.
The decision did not immediately terminate the agreement, which remains in force, while the three governments seek to resolve their differences.
Failure to secure an extension triggers annual reviews. The parties can still extend the agreement, but without an extension, it is scheduled to expire in 2036.
“The USMCA future is doubtful, and closer economic integration is no longer a US objective,” Hufbauer said.
The agreement continues to protect much of Canadian trade. Ottawa estimates that approximately 85% of its goods trade remains tariff-free and that Canadian exports face an average US tariff of 5.2%, compared with a global average of 11.4%.
Hufbauer expects the dispute to continue through the remainder of 2026 before producing a negotiated adjustment.
“My guess is a negotiated outcome in January 2027, leading to higher US tariffs on imports from Canada,” he said.
Even after a settlement, Canadian goods would probably retain more favorable access than products from other major US trading partners, he added, though some sectoral disputes would persist.
Canada has accelerated its diversification efforts. Its exports to the US fell 3.7%, or $19 billion, in 2025, while exports elsewhere rose 11.1%, or $24 billion. The non-US share of Canadian exports reached 32.8%, its highest level since 1981.
However, geography, energy infrastructure and integrated manufacturing mean other markets cannot rapidly replace the US.
“Canada will remain dependent on the US market, even though it tries to diversify,” Hufbauer said.
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