The United States’ relationship with Canada, its second-largest trading partner, surged back into the spotlight this week.
Canada vowed to respond “dollar for dollar” after the United States imposed tariffs of up to 50 percent on $20 billion of Canadian goods last month. Ottawa’s retaliatory tariffs, which affect roughly $20 billion of U.S. goods, took effect yesterday. Caught in the crosshairs of these measures are goods like steel and aluminum, which both countries have targeted. Washington then announced additional restrictions on certain Canadian goods—including import bans on some alcohol and dairy products and tariffs on others, like all-terrain vehicles.
The latest retaliatory cycle is adding to concerns there could be lasting effects on the historically close alliance.
The Daily Brief reached out to CFR’s Brad Setser, one of our trade experts, to get a better sense of the stakes and why they matter. He told us the current dispute did have the potential to cause lasting damage to the U.S.-Canada relationship. “Both U.S. and Canadian firms will have to factor into their investment decisions the risk of a future breakdown,” he said.
But Canada’s economic gamble in the trade war is greater. As the smaller economy, it stands to be “hurt more” than the United States, Setser said. It’s a reality that Canadian Prime Minister Mark Carney acknowledged yesterday. Canada’s pivot away from the United States will “come at a cost,” Carney said. “But it doesn’t come close to the cost of standing still.”
The United States will feel the pinch, too. The tariffs will effectively “tax Americans buying Canadian goods,” Setser said.
There could be workarounds to dull the tariffs’ impact and cost on some goods, for example by “rerouting Canadian inputs through Mexico, with Mexico doing enough final assembly to [qualify] the good as Mexican rather than as Canadian,” Setser said. “It will be hard to have effective tariffs on Canada, and no tariffs on Mexico, when Canada has free trade with Mexico,” he continued.
The Daily Brief will continue bringing you the latest on U.S.-Canada trade relations as news develops. We hope you’re enjoying the new newsletter’s new format, and don’t forget to send us your thoughts. We read every email.
