Here’s how Canadian policymakers should respond to Trump’s tariffs

The recent last-minute collapse of Canada-United States trade negotiations raises an obvious question: What comes next for this increasingly troubled bilateral relationship?

As announced by President Trump, 50 per cent U.S. tariffs on approximately C$28 billion in Canadian export goods are now in effect. These so-called “section 338” tariffs, which might face legal challenges (like Trump’s earlier emergency tariffs), cover roughly 5 per cent of Canada’s southbound exports in value terms. According to one leading forecaster, the section 338 tariffs could trim Canada’s economic growth rate by as much as 0.4 per cent per annum in the short term (2026/27).

Aside from the latest U.S. levies, other Trump-inspired tariffs on Canadian steel products, aluminum, lumber and motor vehicles also remain in place. Reducing or eliminating these “sectoral” tariffs was a key Canadian objective in the failed negotiations. That hope has been dashed, for now.

Apparently, the U.S. insisted on maintaining relatively steep sector-specific duties while also demanding that Canada increase U.S. access to Canadian markets for dairy products, return U.S. alcohol products to the shelves of provincially-regulated liquor stores, remove Canadian tariffs on certain U.S. goods instituted in 2025, and commit to buying more U.S.-made defence equipment. In exchange, Canada would have escaped the threatened section 338 tariffs and received partial relief on U.S. sectoral tariffs.

Evidently, the deal on offer didn’t satisfy Prime Minister Carney. As the talks ended, he promised Canada will levy “dollar for dollar” retaliatory tariffs on U.S. goods by Sept. 8. While this response is understandable politically (particularly given President Trump’s deep unpopularity in Canada), it will compound the domestic economic damage caused by the spreading bilateral tariff war. Retaliatory tariffs will increase the cost of living for Canadian households but are unlikely to weaken Trump’s tariff fixation. Indeed, the Trump administration may respond to any incremental Canadian “retaliation” by announcing additional market access restrictions targeting various Canadian industries.

The failure to secure an acceptable agreement with the U.S. to avert the section 338 tariffs, against the backdrop of Trump’s feverishly mercantilist instincts and his willingness to wield tariffs as an all-purpose weapon, casts a cloud over the Canadian investment and business landscapes.

This at a time when the country is in desperate need of a sustained rebound in private-sector investment, which has essentially been stagnant (in inflation-adjusted terms) since 2014. The timing couldn’t be worse. After a soft patch, the Canadian economy recently has shown signs of life. Moreover, next month Carney plans to host global bankers and business leaders at a high-profile investment summit in Toronto. Selling Canada as a top-tier investment jurisdiction will be difficult amid an unresolved trade war with a country that’s the biggest customer for our exports, the principal supplier of our imports, and the number one source of foreign capital.

With the latest chapter in the Trump-driven tariff saga, a rising share of Canada’s exports is now caught up in the president’s ever-shifting tariff maze. However, it’s worth remembering that more than three-quarters of Canada’s U.S.-destined goods continue to enjoy tariff-free access under the Canada-U.S.-Mexico Agreement (CUSMA). Although the Trump administration declined to renew CUSMA on July 1, the agreement lives on, albeit with an uncertain future.

Where does all of this leave the Carney government?

Getting to “yes” with President Trump on trade issues might be an unachievable goal. Nevertheless, we offer the following suggestions, as Canadian policymakers struggle to chart the path ahead.

First, recognize that CUSMA still exists and is worth “saving,” even in a diminished form. The idea of unfettered bilateral free trade is dead for the foreseeable future, but the CUSMA framework affords Canada (along with Mexico) better access to the U.S. market than other countries. It’s worth preserving.

Second, guard against the reflexive impulse to retaliate against the U.S. in the wake of Trump’s unfair and disproportionate tariffs. Canada is a comparatively small economy and is far more open to foreign trade than our giant neighbour to the south. Canadian retaliation will lead to higher costs for our firms and consumers, put additional strain on integrated North American supply chains, and slow overall economic growth on our side of the border. With the prime minister’s Sept. 8 deadline for Canadian retaliation, there may still be time to find a more constructive response.

Third, continue to pursue the goal of diversifying Canada’s international trade and investment relationships, recognizing it will take decades to materially reduce our heavy reliance on the U.S. as a market for Canadian goods and services. Policymakers should prioritize investment initiatives focused on improving trade-enabling infrastructure to enhance Canada’s competitiveness, particularly in fast-growing Asian markets.

Finally, it will be easier to make the case for Canada as an appealing investment location if our policymakers had an appetite for significant tax and regulatory reforms that make Canada more attractive for private-sector investment and top talent. Committing to a program of far-reaching policy reforms arguably has become more urgent in the wake of the latest negative developments on the Canada-U.S. trade front.