Mark Carney must defuse a trade war Canada cannot win

Mark Carney has two weeks to defuse a trade war Canada cannot win. On August 25th his government announced $20bn of dollar-for-dollar retaliatory tariffs on American goods, due on September 8th, after talks with Donald Trump’s administration collapsed. With an economy 13 times smaller than America’s, the prime minister must find a way to rebuff Washington without triggering an escalation that would hit Canada hardest.

Why Trump’s tariffs pushed Canada to the brink

When Donald Trump first ordered tariffs on Canadian goods in February 2025, he said they were needed to force Canada to stop drugs and migrants crossing America’s northern border. He soon dropped that justification and offered a litany of other grievances: the trade deficit, national security, Canada’s dairy industry, a Canadian tax, a television advertisement, Canada’s trade with China, and wildfire smoke.

He repeatedly mused, with a mob boss’s ambiguity, about annexing Canada and making it America’s “cherished” 51st state. The caprice of the world’s most powerful man has now taken Mark Carney to the brink of a disastrous trade war.

Why Carney walked away on August 21st

The trigger for the latest hostilities was Mr Carney’s decision on August 21st to walk away from a trade deal that seemed on the verge of being sealed. The prime minister thinks Canada had little choice — though the Americans blame the Canadians.

The Americans, he says, added late demands that Canadian truck factories remain subject to high tariffs, and that Canada curb its trade deals with other countries and weaken its protections for French culture and language — a red rag to separatists in Quebec.

Stabilising economic relations with the United States is essential to Mr Carney’s efforts to attract the investment needed to diversify Canada’s economy away from its neighbour. In the past the prime minister has played for time, avoided aggression and sought to keep negotiations alive. He repealed a tax, removed retaliatory tariffs inherited from his predecessor and resisted calls to cut energy exports to the United States. This time, however, America’s demands were too much.

The brutal maths: $2.5trn versus $32trn

America’s tariffs went into force shortly after the talks collapsed. Mr Trump has said he will slap further duties of 50% on Canadian cars, trucks and auto parts from January 1st.

Canada’s $2.5trn economy is not only punier than America’s $32trn one, it is also more exposed to its southern neighbour than vice versa. About two-thirds of its exported goods are sold there and most of these are integrated into American supply chains, making it hard to find alternative buyers quickly. Canada’s retaliation would deepen the pain.

What Carney should do before September 8th

Having made his point, Mr Carney should seek to walk back his retaliatory tariffs. His latest tariff threats are proportionate, but the situation could get out of hand.

Make retaliation targeted and reversible

If walking them back outright is politically unfeasible, they should at least be made targeted and reversible — by, say, focusing on the swing states in the midterm elections that trade most with Canada, and whose politicians may have sway with Mr Trump. Some are already grumbling about the needless harm to American interests from picking a fight with a close ally.

Why escalation will be hard to unwind

Both countries’ officials should remember the costs they are imposing by escalating. The existing American tariffs will be hard to unwind. Another reason the talks failed is that protected industries in the United States lobbied the Trump administration hard against lowering tariffs that shield them from Canadian competition.

Only Mr Trump has the power to end his illogical crusade against Canada. He has shown no inclination to do so. Mr Carney has previously demonstrated that a moderate response to Mr Trump need not be politically ruinous.

Now he has two weeks to pull off something much harder. He needs a deal that is better for Canada than America’s latest offer. But to get that, he also needs to rebuff America’s intemperate president without triggering a cycle of escalation that will harm Canada disproportionately, and in which it cannot prevail. ■

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