Canada-US Trade War: A Reality Check
In the very first month of his second term, US President-elect, Donald Trump unleashed American imperialism by openly expressing his desire to bring Canada, Greenland, the Panama Canal, and the Gaza Strip under the direct control of the US. Some see it simply as rhetoric to send a signal to the world about America’s economic and military strength. Others see it as a sign of the beginning of the decline of the global hegemony of American imperialism, arguing that such aggressive assertions of dominance often emerge when a great power perceives its global influence to be waning. Regardless of these interpretations, one thing is certain: Trump’s aggressive stance betrays an underlying desire of the American capitalist class and statecraft (which Bernie Sanders recently labelled an oligarchy) to sustain its rule over global capitalism by expanding its control over more territories and markets. This pursuit of greater control has put America’s Western allies, especially Canada, in a peculiar and precarious position.
Trump branded this new imperial strategy “Make America Great Again” (MAGA). At its core, this strategy posits a causal link between the deindustrialization of the rest of the world – triggered by Trump’s economic warfare tactics, particularly tariffs – and the reindustrialization of the US driven by an inflow of industrial capital. Trump proposed the imposition of 25 percent tariffs on nearly all goods and services imported from Canada and Mexico, which could also extend to China and the European Union. These tariffs, I argue, are part of a broader economic statecraft that US imperialism has long employed to advance its political and economic interests for quite some time now. Since the post-World War II era, US leaders have used various forms of economic statecraft, ranging from sanctions to tariffs to export subsidies, to assert their dominance, particularly against countries seen as adversarial or non-compliant with American imperial objectives. In the 21st century, economic sanctions emerged as the primary tool of US statecraft, with nearly one in ten countries facing some form of sanction. Trump popularized tariffs as an equally powerful tool during his first term (2017–2020), attempting to use them to reshape the global political economy and reinforce US imperial power, including to remake the trade flows in some sectors such as steel and aluminum with Canada. However, the recent tariffs announced by the Trump administration are notable for two reasons: they represent the highest tariff levels imposed by the US since the 1930s and they target America’s own allies – Canada, Mexico, and potentially the European Union – marking a shift in US economic diplomacy.
Unsurprisingly, these tariffs have created significant tensions between the US and Canada. In response to Trump’s tariff threats and actual imposition, particularly on steel and aluminum imports, Canada announced retaliatory tariffs on a range of US goods, sparking concerns about a potential trade war between the two countries. These tariffs are already presenting immediate challenges for Canada, including slower economic growth, rising unemployment, and higher inflation. More importantly, they expose the structural vulnerability of Canada’s economy, which remains heavily dependent on the US market.
This essay addresses issues related to a potential Canada-US trade war. The first part examines the actual potential of the US tariff policy to rejuvenate the American global power equivalent to the level desired by Trump’s slogan, MAGA. The second part examines the implications of the tariff war on the Canadian economy. The final section proposes potential answers to the question: What is to be done?
Can Tariffs Reduce the Trade Deficit in a Globalized World?
In February 2025, the White House issued a Fact Sheet justifying President Trump’s decision to impose tariffs on Canada, Mexico, and China by citing the “extraordinary threat” posed by illegal immigration and drug trafficking, particularly fentanyl. However, this justification lacks substantial evidence and fails to explain how tariffs could directly address these issues. For instance, the movement of both drugs and undocumented people across the northern border is minimal, making the rationale for these tariffs appear questionable.
The White House also pointed to the US trade deficit in goods, which in 2023 reached over $1-trillion, as another justification for the tariffs. However, this raises a critical question: Can tariffs reduce the trade deficit of the leading imperial power? Addressing this requires a thorough and critical scrutiny of the underlying economics of tariffs, especially given the structural characteristics of the US economy and its status as the global imperial power.
The US is one of the world’s richest economies, yet it also runs one of the largest trade deficits – a paradox that was similarly evident during the declining phase of British imperialism. The persistent US trade deficit is tied to two key developments in the post-World War II order which made this period and the US deficit quite distinct. First, in its effort to consolidate capitalism on a global scale, the US absorbed surplus production from Western Europe and Japan, helping to stabilize their economies while reinforcing its own economic hegemony. Second, to secure the dominance of the dollar as the world’s primary reserve currency, the US came to function as the global consumer of last resort – continuously importing goods and allowing dollars to circulate worldwide, thereby ensuring their availability for international trade. This structural role made trade deficits an integral part of American imperialism rather than a problem to be solved by protectionist measures like tariffs.
This historical context highlights the paradox at the heart of Trump’s tariff strategy: while the US trade deficit has long been a structural feature of its global dominance. Trump portrayed it not only as an economic weakness that needed urgent correction but also as a burden the nation has shouldered for the benefit of global economic stability. His administration framed the tariffs as a means of rectifying this imbalance to prioritize domestic prosperity. And so, during his first political campaign, Trump introduced the slogan MAGA and positioned tariffs as a central tool for addressing the trade deficit. His professed goal was to reduce the deficit, spur reindustrialization, and create jobs by shifting the economic burden from American taxpayers to foreign countries while generating ‘massive revenues’ for the US government.
However, the Trump argument oversimplifies the economics of tariffs and contradicts historical evidence that tariffs is ineffective for reducing trade deficit (Irwin, 2017). A simple scrutiny of trade between the US and its key trading partners – Canada, Mexico, and China – reveals the limitations of this approach. In 2024, US imports from these countries totaled around $1.5-trillion, while US exports were approximately $1-trillion. If the US were to impose a 25 percent tariff on all imported goods from these nations, and these countries retaliated with similar tariffs, the US would generate roughly $175-billion in net tariff revenue, accounting for both tariff revenue and losses due to retaliatory measures. While this represents a fiscal gain, it amounts to just 3.5 percent of total US government revenue, which is insufficient to address the structural causes of the US trade deficit. Moreover, Trump’s strategy includes pressuring these countries not to retaliate, threatening even higher tariffs if they do. This simply means that Trump openly appealed to the ‘beggar-thy-neighbour’ trade policy to export its unemployment to Canada, Mexico, and China.
It is true that a tariff war would disproportionately hurt smaller economies like Canada heavily dependent on trade for production and consumption requirements. Yet, Trump’s economic advisory team seems to ignore, purposefully, that a tariff war hurts all the participant countries regardless of their economic and military strength. If the US persists with the policy of high tariffs on its neighbouring and other countries, the high value of the US dollar, combined with tariff-induced cost increases, could make US goods less competitive in international markets. Countries looking to maintain their competitiveness may devalue their currencies, further eroding the price competitiveness of US exports. Ironically, instead of boosting US export revenues, an aggressive tariff policy could have the opposite effect – leading to a reduction in export earnings and potentially harming the very industries it aims to protect.
Imposing tariffs on Canada and Mexico, as well as facing retaliatory tariffs from these trading partners, would significantly increase the cost of intermediate goods used in US manufacturing. Since many US firms rely on foreign-sourced inputs, higher import costs would translate into higher production costs for final goods manufactured domestically. Given the highly interconnected nature of supply chains, these increased costs would be passed along the production network, leading to higher consumer prices for industrial goods. The automotive industry, for example, is highly integrated across North America, and tariffs on intermediate goods would drive up the cost of automobiles in the US, Canada and Mexico. These price increases would have direct consequences for workers, as firms in these sectors may respond by cutting labour costs through layoffs, wage suppression, or automation. Additionally, as inflation erodes purchasing power, the real wages of workers decline, meaning that even if nominal wages remain unchanged, the higher cost of goods and services results in a lower standard of living for the working class.
Another theoretical justification Trump’s administration could use to defend tariffs as a means of addressing the trade deficit is by arguing that they would attract increased capital inflows into the US However, this is complicated by two contradictions. First, Trump’s restrictive immigration policies, including large-scale deportations and tighter migration controls, could hinder the demographic growth needed for sustained economic expansion and foreign investment. Skilled workers and talent from emerging economies may choose other destinations, weakening the US labour market and its attractiveness to foreign capital. Second, tariffs disrupt global trade flows, which could reduce both imports and exports, making the US less appealing to foreign investors and diminishing capital inflows.
Thus, in a highly integrated global market and without a robust industrial policy that actively manages trade, relying on tariffs to curb imports, stimulate reindustrialization, and boost US production and exports as a means to reduce the trade deficit is ultimately self-defeating. Such an approach would slow down the production and employment growth not only in trade partners but also within the US. Moreover, the expectation that capital inflows would help offset the trade deficit, an assumption central to the Trump administration’s strategy, would become increasingly unrealistic under these conditions.
Consequences of Tariff War on the Canadian Economy
The economic statecraft of the US has long been characterized by its ability to exert pressure on even its closest allies, particularly those with structural dependencies on the US for market access and military security. The sheer size of the US economy allows it to dictate economic terms to its North American partners, Canada and Mexico, whose economies are deeply intertwined with the US. According to the White House Fact Sheet, trade accounts for 73 percent of Canada’s GDP (however, according to Global Affairs Canada in 2023, Canadian trade accounted for 67.2 percent of Canada’s GDP) and 67 percent of Mexico’s GDP, with the majority of their exports and imports directed toward the US In contrast, international trade comprises only 24 percent of the US GDP, and while Canada and Mexico are key trading partners, their leverage over the US remains limited. This structural asymmetry enables the US to impose economic directives on these nations with little fear of equivalent economic retaliation.
Many policymakers, politicians, and scholars argue that Canada should respond to US tariffs by imposing equivalent retaliatory tariffs and diversifying its trade relationships to reduce its dependence on the US While both ideas have some theoretical merits, they are ultimately romantic ideas that tend to overlook practical challenges involved. If Canada were to impose equivalent tariffs on US imports, the overall economic impact on the US would be marginal. Given the size of the US economy, the share of international trade in its total GDP, and the fact that Canadian imports make up only 13 percent of total US imports, such countermeasures would not inflict substantial economic damage on the US In contrast, Canada’s dependency on the US means that the economic fallout from a US tariff increase would be far more severe. According to the Bank of Canada (2025), a 25 percent tariff imposed by the US on Canadian goods would lead to a 2.5 percentage point contraction in Canada’s GDP in the first year, followed by a 1.5 percentage point contraction in the second year. While Canada might eventually regain economic growth, the overall level of output would be permanently lower due to long-term distortions in investment and production patterns.
The economic dislocation caused by a US-Canada trade conflict would also have severe labour market implications for Canada. The export sector plays a crucial role in maintaining the aggregate level of employment in the Canadian economy, supporting over 3.6 million jobs in 2022 (Statistics Canada, 2024). Of these, 2.4 million jobs are directly linked to exports to the US (Global Affairs Canada, 2023). The disruption of trade flows due to tariffs would inevitably result in job losses, particularly in export-dependent industries such as manufacturing, automotive production, and natural resource extraction. Additionally, the backward linkages of these sectors – such as transportation, logistics, and business services – would further amplify the employment crisis. In the short term, these job losses would place downward pressure on wages and consumer spending, exacerbating the economic downturn.
Beyond its impact on production and employment, a trade war with the US would have immediate and tangible effects on Canadian consumers. The composition of Canada’s Consumer Price Index (CPI) basket reveals that 13 percent of household expenditures go to American imported goods. This means that an average Canadian consumer relies on US imports for a significant portion of their monthly purchases. Retaliatory tariffs would raise the prices of these goods and increase the cost of living. Essentials such as fresh fruits, vegetables, juices, meat, etc., many of which are imported from the US, would become more expensive, as would household appliances, clothing, footwear, furniture, and recreational goods such as sports equipment. The inflationary impact of counter-tariffs would disproportionately burden lower- and middle-income households.
To offset the competitive disadvantage imposed by US tariffs, Canada would likely pursue currency devaluation as a policy response, allowing the Canadian dollar to weaken against the US dollar. A devalued Canadian dollar would make Canadian exports more competitive in the US market, partially mitigating the impact of tariffs. However, this strategy comes with significant trade-offs. A weaker Canadian dollar would simultaneously make US imports more expensive for Canadian consumers, intensifying inflationary pressures. Additionally, devaluation could lead to capital outflows and higher borrowing costs.
Thus, this partial equilibrium approach to imposing retaliatory tariffs overlooks the structural economic constraints that limit Canada’s ability to effectively counter US economic coercion. In the short run, it is quite possible that these tariffs could be rolled back by the US, creating the impression that Canada’s counter-tariffs were effective. However, they serve as an important warning for Canada to reconsider its economic dependence on the US for this may not be the last time it is subjected to America’s economic statecraft. In fact, given the possibilities of a further deepening of the crisis of American imperialism, the economic coercion imposed on Canada could become more brutal than this. Canada’s response must go beyond symbolic retaliation and focus on long-term strategies that would have the potential to enhance the economic resilience of the Canadian economy.
What is to be Done?
Canadian capitalist organizations and political elites have long assumed that liberalized trade and continental economic integration with the US would serve its best interests. This assumption is rooted in a broader political and institutional architecture with a long history, evolving through different phases. The US has pursued various forms of economic and geopolitical dominance since the 19th century – taking form in projects like a hemispheric ‘Manifest Destiny’ of US control, post-war foreign policy and military alliances, capital market integration, and resource control.
In response, Canada’s economic elites have often positioned trade liberalization as a means of securing economic stability and growth within this framework. This was particularly evident in policy discussions led by institutions like the C.D. Howe Institute and figures such as Wendy Dobson in the early 2000s, which advocated for deeper integration, not just in trade but also in currency and capital flows. The historical trajectory of US-Canada relations, from early resource extraction to the post-war auto and defence industry integration, reflects how Canadian elites have repeatedly aligned their economic strategies with the broader US project, often assuming that liberalized trade would ensure long-term economic benefits for Canada.
Trump’s trade policies have, however, exposed the fragility of this assumption, revealing the limits of a strategy premised on alignment with US imperial objectives, and more importantly, this issue extends beyond tariffs. The US has been time to time leveraging its economic dominance to extract ‘voluntary’ concessions from Canada on issues of critical natural resources access, immigration, border security, and military spending – demonstrating a broader pattern in its foreign policy. As it appears that the crisis of American imperialism would deepen in the coming years, the pressure on close allies of the past would likely become more intense.
If Canada is to consolidate its economic autonomy and sovereignty, ‘delinking’ from the American economy and the unequally shared institutional architecture is no longer just an option but a necessity. However, this shift cannot be framed as a retreat into nationalist economic sovereignty. As Sam Gindin argues, it requires a democratically driven restructuring process that prioritizes collective economic control. This necessitates a critical reassessment of the foundations of Canadian economic and foreign policy: Should Canada continue embracing neoliberalism? Should it maintain its heavy reliance on international trade that is overwhelmingly centered on the US? Must Canada ever remain the ‘empire’s ally’ and follow the US’s imperialist politics including NATO commitments, lead in international economic policy, and broader ambitions?
Exiting Neoliberal Policies
and Addressing Social and Infrastructure Needs
These questions require serious consideration as the answers will shape the immediate “beggar-thy-neighbour” threats from the US but also Canada’s broader socio-economic trajectory. I open space for further discussion on the first two questions, while leaving the third for reflection as it warrants a much deeper and ongoing strategic dialogue.
The tariff war between Canada and the US, combined with the ongoing weakness in the Canadian dollar, will significantly erode the purchasing power of Canadian consumers and exacerbate unemployment. If Canada responds to rising inflation with anti-inflationary austerity measures, it risks falling into a low-equilibrium trap – a self-reinforcing cycle of stagnation and declining economic activity. To avoid this outcome, Canada must pursue an expansionary fiscal policy aimed at boosting aggregate demand through supporting working-class incomes and repaying the decline in social provisioning and public infrastructure. Such a policy would necessitate an increase in the fiscal deficit, financed by heavier taxation on the wealthy, whose marginal propensity to consume (MPC) is relatively low. Taxing the working class whose MPC is high would be counterproductive in this situation, as it would further suppress demand rather than stimulate it. As of 2024, Canada’s fiscal deficit stood at approximately 1.5 percent of GDP, with projections indicating a decline to 1.3 percent in 2025-26 and below 1 percent in 2026-27 (Department of Finance, Canada). This trend underscores the government’s commitment to so-called fiscal consolidation rather than expansion.
In the neoliberal regime, the feasibility of an expansionary fiscal approach is constrained by structural and ideological barriers. The dominance of neoclassical economic ideology in policymaking, both in Canada and globally, has led to a persistent aversion to higher taxation on the wealthy, limiting the state’s capacity to finance employment and demand-driven economic growth. Moreover, Canada’s deep integration into international finance capital networks further restricts its ability to expand the role of the state in employment generation and income redistribution. Any move toward fiscal expansion, particularly one involving capital controls or wealth redistribution, would likely be perceived by international finance capital as a deviation from the principles of neoliberal capitalism. In a neoliberal regime, the constraints imposed by financial globalization make it exceedingly difficult to implement policies that would both regulate cross-border capital flows and strengthen labour’s bargaining power – two essential components of a genuine expansionary fiscal response. A pro-employment growth strategy, therefore, requires strong resistance against the austerity economics of the contemporary neoliberal regime of Canada from the unions and progressive political organizations.
Rethinking Overreliance on International Trade
Canada needs to revisit its overreliance on foreign trade as the primary engine of growth vis-à-vis reliance on the internal and structural balance of the economy. The imposition of tariffs on Canada seems to have pushed political and economic elites, as well as many progressives, to defend the status – quo ante in terms of the current free trade agreements.
However, the pro-free trade argument espoused by many economists, including the classic defences of international trade theories, from David Ricardo to Paul Krugman, is based on very strong postulates. The overall argument goes as follows as presented by (Ricardo, 1817):
“Under a system of perfectly free commerce, each country naturally devotes its capital and labour to such employments as are most beneficial to each. This pursuit of individual advantage is admirably connected with the universal good of the whole. By stimulating industry, by rewarding ingenuity, and by using most efficaciously the peculiar powers bestowed by nature, it distributes labour most effectively and most economically: while, by increasing the general mass of productions, it diffuses general benefit, and binds together by one common tie of interest and intercourse, the universal society of nations throughout the civilized world.”
This argument rests on a strong assumption: that all factors of production in countries engaged in international trade are “fully employed” both before and after trade. This means trade does not lead to the employment of additional resources but merely alters the composition of production within each country. In other words, international trade does not shift the production possibility frontier outward but instead results in movement along it, allowing countries to reallocate resources in a way that increases the post-trade availability of goods in both countries. Building on this, the additional assumption of the pro-free trade argument is that trade is fundamentally cooperative and serves to enhance material well-being. However, in reality, capitalist free trade operates under a “beggar-thy-neighbour” logic, where competition between nations mirrors the way capitalism compels workers to compete for jobs and wages which unions often resist. Likewise, rather than fostering mutual benefit, free trade often reinforces economic asymmetries, privileging dominant economies at the expense of weaker ones (Patnaik, 2025).
This does not imply that any state should disengage from international trade. Rather, trade should not constrain the country’s ability to diversify its domestic production to meet domestic needs through a strategy of actively managing trade and steadily moving to control and plan the international sector of the economy. A genuinely cooperative trade regime would prioritize economic complementarity, where countries exchange goods in a manner that meets each other’s demand rather than viewing trade as a means to extract surpluses at the expense of trading partners (Patnaik, 2024). To achieve this, Canada must prioritize full resource utilization, including full employment of labour, as a central objective of economic policy, with trade serving as a means to realize this goal. Additionally, Canada should prefer bilateral trade agreements based on stable exchange rates, ensuring that trade is not pursued as a zero-sum game but as a mutually beneficial exchange.
All this necessitates a fundamental restructuring of the economy, economic policy, and social attitudes. Some critical questions are: What should be the ultimate objective of economic policy? Should it aim for self-sufficiency or perpetuate dependency? Should it prioritize meeting the needs of the domestic population through sustainable resource use and international cooperation, or should it extend imperial reach to appropriate the resources of other countries for corporate gain? Should the state passively follow neoliberal mandate, or actively shape trade and industrial policy to serve larger social interests? And ultimately, should economic policy be dictated by short-term profitability, or by the long-term goal of creating a more just, equitable, and ecologically sustainable society? Answering these questions requires steadily pursuing international solidarity, an egalitarian international economic policy regime, and maximizing the capacity for a diversity of ecologically-responsible, economic development paths. •
