US-Canada Trade War: Tariffs and Their Impact on the Economy

The trade war between the United States and Canada has been escalating in recent days, with the US threatening to double its planned tariffs on steel and aluminum from 25% to 50%. This move has led to a suspension of planned surcharges on electricity sold to the United States by the provincial government of Ontario.

As a result, the White House trade adviser Peter Navarro said the US president pulled back on his doubling of steel and aluminum tariffs, even as the federal government still plans to place a 25% tariff on all steel and aluminum imports starting Wednesday. The drama on Tuesday delivered a win for Trump but also amplified concerns about tariffs that have roiled the stock market and stirred recession risks.

Background of the Trade War

Trump shocked markets Tuesday morning by saying that the increase of the tariffs set to take effect on Wednesday had been a response to the 25% price hike that Ontario put on electricity sold to the United States. The US president has given several explanations for the various tariffs on Canada, including separate 25% tariffs that are about fentanyl smuggling and high taxes on dairy imports that he claims penalize US farmers.

Incoming Canadian Prime Minister Mark Carney said his government will keep tariffs in place until Americans show respect and commit to free trade after Trump threatened historic financial devastation for his country. Carney, who will be sworn in as Justin Trudeau’s replacement in coming days, said Trump’s latest tariffs are an attack on Canadian workers, families, and businesses.

Impact on the Stock Market

The back-and-forth on tariffs led to a brutal selloff on Monday and further jitters Tuesday in the stock market. Trump suggested Tuesday that tariffs were critical for changing the US economy, regardless of stock market gyrations. The S&P 500 index fell roughly 0.8% on Tuesday, and the market lost the gains that came after his victory in November 2024.

Related: Wall Street tumbles as recession, tariff fears loom. Reuters polls of economists last week showed risks to the Mexican, Canadian, and US economies are piling up amid a chaotic implementation of US tariffs that has created deep uncertainties for businesses and decision-makers.

Retaliatory Tariffs

Canadian officials are planning retaliatory tariffs in response to Trump’s specific steel and aluminum tariffs. Those are expected to be announced Wednesday. Carney was referring to an initial $30 billion Canadian (US$21 billion) worth of retaliatory tariffs that have been applied on items like American orange juice, peanut butter, coffee, appliances, footwear, cosmetics, motorcycles, and certain pulp and paper products.

Trump also has targeted Mexico with 25% tariffs because of his dissatisfaction over drug trafficking and illegal immigration, though he suspended the taxes on imports that are compliant with the 2020 USMCA trade pact for one month. Asked if Mexico feared it could face the same 50% tariffs on steel and aluminum as Canada, President Claudia Sheinbaum said, “No, we are respectful.”

Economic Uncertainty

Harvard University economist Larry Summers, a former treasury secretary for the Clinton administration, on Monday put the odds of a recession at 50-50. “All the emphasis on tariffs and all the ambiguity and uncertainty has both chilled demand and caused prices to go up,” Summers posted on X. “We are getting the worst of both worlds — concerns about inflation and an economic downturn and more uncertainty about the future and that slows everything.”

The investment bank Goldman Sachs revised down its growth forecast for this year to 1.7% from 2.2% previously. It modestly increased its recession probability to 20% “because the White House has the option to pull back policy changes if downside risks begin to look more serious.” Trump has said the tariffs would cause a bit of a “transition” to the economy, with the taxes prodding more companies to begin the years-long process of relocating factories to the United States to avoid the tariffs.

Conclusion

In conclusion, the trade war between the US and Canada is escalating, with both countries imposing tariffs on each other’s goods. The impact of these tariffs on the economy is still uncertain, but it has already led to a decline in the stock market and an increase in the risk of recession. It remains to be seen how this trade war will play out and what the long-term effects will be on the economies of both countries.

FAQs

Q: What are tariffs, and how do they work?

A: Tariffs are taxes imposed by a country on imported goods or services. They are used to protect domestic industries and raise revenue for the government.

Q: Why did the US impose tariffs on Canada?

A: The US imposed tariffs on Canada in response to Canada’s tariffs on US goods, as well as to address issues such as fentanyl smuggling and high taxes on dairy imports.

Q: How will the tariffs affect the economy?

A: The impact of the tariffs on the economy is still uncertain, but it has already led to a decline in the stock market and an increase in the risk of recession. The tariffs may also lead to higher prices for consumers and reduced economic growth.

Q: What is the current state of the trade war between the US and Canada?

A: The trade war between the US and Canada is ongoing, with both countries imposing tariffs on each other’s goods. The situation is fluid, and it remains to be seen how the trade war will play out and what the long-term effects will be on the economies of both countries.