U.S. vs. Canada: The Trade War Explained

The trade war between Canada and the United States arrived at a moment when many Canadians were already feeling economically exhausted.

Housing is unaffordable. Productivity has weakened. Young people are struggling to find stable work and build a future. Businesses are facing higher costs, uncertain investment conditions, and slower economic growth.

Then came another threat: American tariffs on Canadian steel, aluminum, automobiles, and other goods.

The political language surrounding the dispute makes it sound like a contest with a clear winner and loser. The United States imposes tariffs. Canada retaliates. Each side attempts to inflict enough economic pain to force the other to surrender.

Joseph Steinberg, a professor of economics at the University of Toronto who specializes in international trade and macroeconomics, argues that this framing misses the most important point.

Trade is normally positive-sum. Both countries benefit when businesses and consumers can exchange goods across the border efficiently. A trade war does not simply transfer prosperity from one country to the other. It destroys part of the value both sides previously enjoyed.

“There are mostly just losers all the way around,” Steinberg explained.

Canada, however, has more to lose.

Why Did the United States Start the Trade War?

The Trump administration has advanced several different reasons for imposing tariffs.

The first is revenue.

The United States has run large government deficits for decades. Tariffs allow the federal government to collect money on imported products. But while foreign companies may absorb some of the cost, tariffs are generally paid by American importers and often passed on to businesses and consumers through higher prices.

The second justification is national security.

The pandemic exposed how dependent many countries had become on fragile international supply chains. Shortages of medical equipment, semiconductors, consumer products, and industrial inputs caused governments to reconsider whether they could reliably access essential goods during a crisis.

The United States now wants to produce more steel, aluminum, vehicles, semiconductors, critical minerals, and military-related goods within its own borders or through trusted North American partners.

China is at the centre of that concern.

American policymakers increasingly view Chinese industrial capacity as an economic and strategic threat. They want to reduce Chinese influence over essential supply chains and prevent Chinese products and components from entering the American market indirectly through Canada or Mexico.

The third justification is the American trade deficit.

Donald Trump has long argued that countries running trade surpluses with the United States are taking advantage of it. Steinberg believes that analysis is particularly misleading when applied to Canada.

Canada’s trade surplus with the United States is driven largely by energy. Canada exports enormous quantities of oil south of the border, frequently at a discount because Canadian producers have historically lacked sufficient access to alternative markets.

When energy is removed from the calculation, Steinberg says the United States has often sold more goods to Canada than Canada has sold to the United States.

America purchases discounted Canadian oil while exporting manufactured products and other goods north. That is not a simple story of Canada winning and the United States losing. It is a deeply integrated relationship from which both countries have benefited.

Why Canada Is More Vulnerable

Canada and the United States exchange roughly similar total values of goods and services, but the importance of that trade is not equal.

The American economy is more than ten times larger than Canada’s.

Canadian trade therefore represents a relatively small share of the American economy, while access to the United States is essential to Canada. A large portion of Canadian production depends on American customers, suppliers, investment, and transportation networks.

This severely limits Canada’s ability to retaliate.

Canada can impose tariffs on American goods, but it cannot inflict the same level of economy-wide damage that the United States can impose on Canada. Broad retaliation may also increase costs for Canadian households and businesses without creating enough pressure to alter American policy.

That does not mean Canada should never respond. Targeted retaliation can carry political or negotiating value. But Steinberg argues that Canadians should not confuse retaliation with economic strength.

A policy that hurts Canadian consumers more than it changes American behaviour is not necessarily a successful policy.

Why the Old Trading Relationship May Not Return

One of the most difficult realities is that tariffs may not disappear when the immediate political conflict ends.

During Donald Trump’s first administration, the United States imposed sweeping tariffs on Chinese goods. Many businesses and investors initially assumed those tariffs would be temporary.

They were not.

Joe Biden kept most of them in place, and the second Trump administration added further restrictions. Protectionism has become increasingly bipartisan in the United States, driven by concerns about China, national security, manufacturing employment, and economic nationalism.

Steinberg sees little evidence that the United States will soon return to the free-trade consensus that shaped the previous several decades.

For Canada, that means success may not look like restoring every tariff to zero.

A future agreement may instead include reduced tariff rates, limited exemptions, industry-specific quotas, or stronger North American content requirements.

The question is no longer simply whether Canada can reverse the latest American measures. It is how Canada adapts to a permanently more protectionist United States.

What the United States Wants From Canada

Several specific disputes have become part of the negotiations.

The United States has objected to Canada’s digital services tax, restrictions affecting American alcohol in provincial liquor stores, and the administration of dairy import quotas.

But the larger issue is China.

The United States is worried that Chinese electric vehicles and components could enter the North American market through Canada. It wants stronger rules of origin under the Canada–United States–Mexico Agreement, requiring a larger percentage of vehicles and parts to be produced within North America.

This creates a genuine economic trade-off.

Chinese electric vehicles could offer Canadian consumers more affordable and technologically advanced options. Greater competition might also force North American automakers to innovate more quickly.

But allowing extensive Chinese participation in the Canadian auto market could threaten Canada’s access to the much larger American market.

Steinberg says that, if Canada were offered long-term certainty under CUSMA in exchange for restricting Chinese electric vehicles, accepting that deal might be economically rational.

Canada may want to trade freely with both superpowers. Geography and security may ultimately force the country to choose.

Can Canada Diversify Away From the United States?

Canadian leaders often respond to American protectionism by promising to expand trade elsewhere.

That is sensible, but it has limits.

Canada should pursue new markets in Europe, Asia, and the developing world. Greater diversification can create new opportunities and reduce some exposure to American political decisions.

But it cannot replace the United States.

Canadian and American cities, factories, energy systems, rail lines, pipelines, and highways have been integrated for generations. Ontario and Quebec are geographically closer to major American markets than to many parts of Western Canada. British Columbia is naturally connected to the American Pacific Northwest.

This proximity lowers transportation costs and allows production to cross the border repeatedly before a finished good reaches the consumer.

A vehicle part may be manufactured in Canada, assembled with other components in the United States, returned to Canada for additional work, and then sold in either country.

Those relationships cannot simply be redirected to distant markets.

Canada can diversify at the margins, but its economic future will remain closely tied to the United States.

The Impact on Jobs

The clearest employment damage has appeared in manufacturing and automobile production.

Businesses facing tariffs may delay investment, reduce production, cut shifts, or relocate activity to the United States. Firms considering a new North American facility have a stronger incentive to place it inside the American market rather than risk future border costs.

But Steinberg cautions against attributing every manufacturing job loss directly to Canadian tariffs.

American manufacturers are also being hurt.

Tariffs increase the price of imported steel, aluminum, components, machinery, and other inputs used by American factories. Higher costs can make those businesses less competitive and reduce their demand for Canadian products.

A Canadian supplier might lose business because its product faces a tariff. It might also lose business because its American customer is producing less.

Tariffs therefore move through integrated supply chains in complicated ways. They do not neatly protect one country’s workers while harming the other country’s workers.

Can Canada Save Its Auto Industry?

The Canadian auto industry faces one of the greatest risks.

Canada cannot sustain a large automobile assembly sector based solely on domestic demand. Vehicle manufacturing requires enormous capital investment and depends on economies of scale. Plants need access to millions of consumers across North America.

If tariff-free access to the United States becomes unreliable, locating a new assembly plant in Canada becomes harder to justify.

However, the industry’s problems did not begin with the current trade war.

Canadian vehicle production had already declined substantially over the previous two decades. At the same time, automobile investment shifted away from the Great Lakes and toward southern American states, where Japanese, Korean, German, and other manufacturers built new facilities.

Trump’s tariffs may accelerate that movement, but they did not create it.

Steinberg believes Canada can continue producing automobile parts and remain involved in North American supply chains. The future of large-scale vehicle assembly is less certain.

Canada may retain an auto industry, but it may employ fewer people, assemble fewer finished vehicles, and become more specialized in components, technology, minerals, batteries, and energy.

What Leverage Does Canada Have?

Canada cannot match American economic size, but it still possesses resources the United States needs.

The first is energy.

American refineries rely heavily on Canadian oil, particularly heavier crude that differs from much of the oil produced domestically. Canada also exports natural gas and electricity to American markets.

Historically, Canada’s limited pipeline and export infrastructure left producers dependent on American buyers. Expanding access to global markets would give Canada more options and strengthen its negotiating position.

The second source of leverage is critical minerals.

Canada has significant reserves of minerals needed for defence, batteries, advanced manufacturing, and artificial intelligence infrastructure. The United States wants reliable access to these resources without depending on China.

The third is electricity.

Canada’s relatively abundant power has supported industries such as aluminum production and could become increasingly important for data centres and artificial intelligence.

These resources are not simply weapons Canada can threaten to withhold. They are opportunities to build a stronger economic partnership.

Producing more energy, minerals, and electricity would create Canadian jobs while giving American businesses a reason to advocate for stable relations with Canada.

The strongest leverage may come not from threatening the United States, but from becoming more valuable to it.

Canada’s Economic Problems Began Before Trump

The trade war is serious, but Steinberg argues that it is not the main reason Canada has underperformed economically.

Canada’s productivity problems, weak business investment, regulatory delays, housing costs, internal trade barriers, and declining growth per person developed over many years.

Those are largely domestic problems.

The risk is that American tariffs become a convenient explanation for every economic difficulty. Politicians can blame Washington while avoiding difficult reforms at home.

Canada cannot control American politics. It can control whether major projects take a decade to approve. It can reform its tax system, reduce internal trade barriers, improve infrastructure, encourage investment, and make it easier to build housing and businesses.

Steinberg had hoped the trade crisis would create the urgency required to make those changes.

So far, he has not seen reform on the scale Canada needs.

What Happens Next?

Canada will likely continue negotiating for relief on steel, aluminum, automobiles, and other products.

The future of CUSMA will be central. The United States may seek stronger North American production rules, greater restrictions on Chinese content, and concessions in areas such as agriculture and digital trade.

Canada may secure partial tariff reductions, exemptions, or quotas. A complete return to the previous trading system appears less likely.

Businesses will continue adapting. Some will shift production into the United States. Others will search for new export markets, automate, consolidate, or leave tariff-exposed industries altogether.

The political relationship may change faster than the economic relationship. Geography ensures that Canada and the United States will remain deeply connected even when their governments disagree.

The task is to make that connection more stable and mutually valuable.

What Canadians Need to Know

The trade war will not be solved by slogans.

Buying Canadian may support certain domestic businesses, but it cannot replace integrated North American supply chains. Retaliatory tariffs may send a message, but they can also raise prices at home. Trade diversification is valuable, but it cannot eliminate Canada’s dependence on the American market.

There is no single policy that will protect every industry and restore the old system.

Canada’s most effective response is to strengthen its own economy.

That means building energy and transportation infrastructure, developing critical minerals, improving investment conditions, removing unnecessary barriers between provinces, and evaluating policies based on how they affect ordinary Canadians.

Steinberg argues that economic debates often become dominated by groups receiving highly concentrated benefits. The broader costs are spread thinly across millions of consumers and receive less attention.

Each unnecessary cost may seem small. Together, they reduce purchasing power, discourage investment, and weaken productivity.

The answer is not one dramatic reform. It is the steady work of improving policy across the economy.

The United States has exposed Canada’s vulnerability, but it did not create all of it.

What happens next will depend on whether Canada treats the trade war only as an external attack—or as a warning that the country must become more productive, competitive, and economically resilient.

The challenge is not simply defeating the United States in a trade war.

It is ensuring Canada is strong enough to prosper in a world where the rules of trade have fundamentally changed.