US and Canada: Trade Talks and Future Relations

New Tariff Threat on Canada is Negotiation Strategy

Trump announced 50% tariffs on many Canadian imports using Section 338 of the 1930 Tariff Act, a law apparently used by a president for the first time. The move targets goods such as wine, dairy, cement, hockey gear, furniture, and more, and is set to begin August 19. Canada and the U.S. disagree over trade practices, including Canada’s dairy system and restrictions on American alcohol.

• New tariffs: 50% tariffs on a broad range of Canadian products, covering about $20 billion in imports.
• Legal basis: Trump used Section 338 of the Tariff Act of 1930 for the first known time.
• Affected goods: Wine, dairy, cement, hockey sticks, swimming pools, wigs, furniture, fishing rods, and others.
• Canada’s response: Prime Minister Mark Carney said Canada has already made proposals and stands ready to keep negotiating.
• Trade tensions: The action raises fears of a larger U.S.-Canada trade conflict and comes amid wider disputes over tariffs, retaliation, and review of review of the USMCA.

Trump’s latest move marks another sharp escalation in the long-running trade dispute between the United States and Canada.

The White House said the tariffs are meant to pressure Ottawa over what it calls unfair trade barriers, particularly in sectors like dairy and alcohol. U.S. officials have long complained that Canada’s supply-managed dairy system limits access for American producers, while Canadian provinces have at times imposed restrictions on U.S. wine and spirits. Incidently, the Prime Minister of Canada has no legal path to force the Canadian privinces to remove alcohol restrictions on US products.

Canadian leaders, however, argue that the country is being unfairly targeted and that its own trade rules are designed to protect domestic farmers and industries. Prime Minister Mark Carney said Canada remains committed to talks and has already put forward proposals aimed at reducing tensions.

Business groups on both sides of the border warned that the tariffs could raise prices, disrupt supply chains, and hurt companies that depend on cross-border trade. Analysts also said the move could invite retaliation from Canada, further escalating the economic standoff.

The decision comes as the U.S. continues to use tariffs more aggressively as a negotiating tool in global trade disputes. It also highlights the fragility of the current North American trade relationship, despite the framework of the USMCA agreement.

Meanwhile, U.S. negotiations with Mexico are moving faster. The article suggests Washington may be using progress with Mexico to put pressure on Canada and possibly sideline it in the CUSMA review process. That could leave Canada in a weaker bargaining position if it does not engage more actively.

The Problem of Internal Canadian Trade Restrictions

The Canadian Federation of Independent Business says Canada made major progress in reducing internal trade barriers, with the federal government improving from a C to an A-plus in its 2025 report card. However, small businesses say the changes have not yet translated into much real-world improvement, and more work is needed to fully implement reforms across provinces and territories.

The federal government’s improved grade was driven in part by the passage of the One Canadian Economy Act, which removed a number of redundant federal rules affecting trade across provincial borders. Ottawa also eliminated several exceptions under the 2017 Canada Free Trade Agreement, helping simplify procurement and reduce administrative friction. CFIB said this progress was helped by federal leadership in pushing provinces and territories to treat internal trade reform as a political priority.

Most provinces and territories also received stronger marks, with the exception of Nunavut, which got a C-. Newfoundland and Labrador was not graded because of a recent change in government following the 2025 provincial election. Ontario was credited as a leader in removing barriers, while Quebec was noted for adding new exemptions, showing that progress remains uneven across the country.

One of the report’s biggest positives was the adoption of mutual recognition policies. These rules allow goods that can be sold in one province to be sold in another without requiring new applications or approvals. The Canada Mutual Recognition Agreement, signed by provinces in November 2025 and expected to take effect in June, is viewed as a major step forward. However, CFIB noted that not all provinces have fully implemented it yet, and the report card did not account for full implementation.

Despite the gains, CFIB says many small and medium-sized businesses still experience very little change in practice. The group’s senior director of Alberta interprovincial affairs, Keyli Loeppky, said progress on paper is not the same as progress on the ground. She pointed out that many businesses still face obstacles when trying to sell across provincial and territorial boundaries.

The CFIB also wants the mutual recognition framework expanded beyond goods to include services and labour, which remain subject to significant barriers. In addition, long-standing restrictions continue to affect direct-to-consumer sales of alcohol and food between provinces. For example, while an item such as a chainsaw might be sold in another province, it may still not be permitted for use there due to different standards and rules.

The report also noted that some provinces are still slow to open up alcohol sales across borders, despite public commitments to do so. Manitoba and New Brunswick were singled out as provinces that have not fully opened up interprovincial booze sales.

CFIB said it would like to see stronger enforcement, including potential penalties for provinces and territories that do not follow through on their commitments to remove barriers. Loeppky warned that if governments fail to keep moving, grades could fall in future report cards.

The organization’s latest survey suggests why the issue matters. About 62 per cent of the small businesses surveyed said they had explored domestic markets or new suppliers to offset losses from U.S. tariffs and global uncertainty. However, only limited numbers said internal trade had become easier, and 17 per cent said it had actually become harder.

CFIB said reducing internal barriers could help businesses offer more competitive pricing and give consumers a wider selection of goods. The survey was based on responses from 1,000 member businesses polled between March and May. The Canadian Research Insights Council notes that online surveys cannot be given a traditional margin of error because they are not random samples.

Overall, the report paints a mixed picture: Canada has made clear policy progress on internal trade, but the real test will be whether those reforms are fully implemented and felt by businesses across the country.

Canadian Internal Trade Frictions: Cost 7% of GDP Yearly

An FT article says that Trump’s tariffs and trade threats have pushed Canada to seriously reform its own internal trade barriers. In fact the title of the article was: ‘Donald Trump’s threats push Canada to bulldoze its byzantine internal trade barriers.’ This has allowed Ottawa to use the moment to remove provincial restrictions that hinder the movement of goods, workers, and services, which economists say could significantly boost Canada’s economy.

• Trump’s tariff pressure is speeding up Canada’s effort to break down costly barriers between its provinces and territories.
• Internal trade reforms could add meaningfully to GDP and raise incomes by making it easier to sell goods and move workers across Canada.
• The biggest obstacles are political: provinces, professional bodies, and protected industries have long resisted change.
• Business leaders and some provincial premiers support the reforms, but exceptions and old regulations still limit progress.

This push has also exposed a long-standing contradiction in Canada’s economic model: the country champions open global trade, yet still allows a patchwork of domestic rules that make commerce harder inside its own borders. For many companies, these barriers are as costly as tariffs, forcing them to comply with different standards, licensing rules, and transport requirements from province to province.

The Trump administration’s aggressive stance has therefore acted as a kind of external shock, giving Ottawa political cover to do what previous governments struggled to achieve. By framing internal trade reform as a matter of national resilience, federal and provincial leaders have been able to advance measures that were once seen as politically untouchable.

Still, the reforms are incomplete. Some provinces have moved faster than others, and many industries remain protected by special carveouts. Critics warn that unless governments follow through with deeper harmonization, Canada will continue to underperform relative to its potential.

In the end, the article argues that Trump’s tariffs may have done Canada an unintended favor: they forced the country to confront its own economic inefficiencies. Whether that moment leads to lasting change will depend on how much political momentum survives once the immediate threat from Washington fades.

Canadian Approach: Hope versus Reality

Chrystia Freeland the former Deputy Prime Minister of Canada, wrote an opinion piece in the Financial Times, titled: ‘Why Canada isn’t listening to American whining in the wine wars.’

The author argues that Canada’s response to U.S. tariffs and trade pressure shows retaliation can be effective, protectionism can backfire, and the relationship between Canada and the U.S. has been seriously damaged under Trump-era policies.

• Canada’s boycott of U.S. alcohol is presented as a successful example of retaliation, sharply reducing U.S. exports.
• The author says Canada’s earlier tariff response in 2018 helped force the U.S. to lift tariffs within a year.
• S. tariffs on intermediate goods like steel and car parts are criticized as bad economics because they hurt American manufacturers.
• The episode highlights a deeper rift: many Canadians no longer trust the U.S. as a reliable ally.
• The piece warns that if the U.S. wants to rebuild trust, it will need more than friendly words.

Trust, once broken, is not restored by a speech or a handshake. It is rebuilt through consistency, restraint, and respect for agreements.

For Canada, the lesson is equally blunt. Dependence on a single, unpredictable market is a strategic vulnerability. Diversifying trade, strengthening domestic industries, and treating economic security as national security are no longer optional; they are necessities.

In the end, the tariff war was not just about steel, aluminum, or liquor. It was about leverage, credibility, and the costs of treating allies like adversaries. Canada showed that retaliation can work. The United States showed how quickly goodwill can be squandered. And both countries were left with a harder truth: in international trade, power matters, but so does trust—and trust is far easier to destroy than to earn back.

Our Reply to this article is as follows:

Good insight from the Canadian point of view. However, there are some real issues with some of this framing.

First, trust among allies, specifically allies in NATO, requires meeting security spending and readiness. Canada has long reneged and underspent on this important commitment for decades. Although, I don’t support Trump’s style, this security spending has been a major issue for him.

Second, internal tariffs between Canadian providences are significant, about 7% of GDP from what I recall. This means that Canadian providences actually have quotas and tariffs against each other. The fact that is has not been resolved implies that there are protected interests in providences that impede trade within Canada. Logically, that would carry over to trade with the US.

Third, Canada has some quotas on milk products and cultural products like 30% of media content has to be Canadian etc. This is understandable as Canada probably has to have some carve-outs in trade with the US.

Fourth, the framing that the US is the problem is false. The US economy in general is more open than most of its major trading partners such as Japan, South Korea and Europe. This is a relic of the Cold War.

Fifth, in any trade confict with the US the other party has more to loose. The US is 30% of global demand thus a very attractive market. Foreign auto firms might set up shop in Canada for example but their ultimate goal is to have access to the US market. For reference, the China represents only 15% of global demand. Thus any idea of pivoting to China for example is a poor strategy since China is strongly a mercantalist country. For counties like Canada, economic theory and logic means that it will do a majority of its trade with the US. The size of the US market and closeness to Canada is a huge positive for foreign direct investment into Canada in addition to positive domestic reasons.

Finally, the idea that other countries, so-called ‘friends’, will somehow team up with Canada to replace the US is an oversimplification of reality and a dangerous strategy that will lead to more fractured world and actually weaken security, trade and freedom. The current Canadian internation relations approach is part of the problem in my opinion. Instead of spending on defense and integrating more with the United States to secure North America, Canada is playing around and undermining the US with trying to put together a coalition of ‘weak’ small to middle powers. It is a fantasy to think these countries would somehow team up with Canada instead of the US in both security and trade.

 The solution is very simple. Canada and the US have important common interests in security and trade. Recognize that there are some internal issues on free trade within Canada and hope some carve-outs will still be possible with the US. Don’t delay the security issue and play games with defense. For example, by delaying the F-35 plane order commitment longer. A fourth-generation fighter is no substite for the F-35 and future access to more advanced planes from the US. In short, this is two-way street and lot’s of the blame for the current state of relationships did not begin with Trump. Reliability and trust run both ways.