Canada-US trade war: who pays when the loonie breaks

The loonie is bleeding, and it is not over yet

The Canadian dollar dropped on Monday morning after trade talks between Ottawa and Washington collapsed, leaving both sides bracing for higher prices on a wide array of imported goods and threatening Canada’s economic growth. It was a quiet start to what could become one of the most consequential trade disputes in North American history.

On Saturday, the United States slapped 50% tariffs on approximately $20 billion worth of imports from Canada, its second-biggest trading partner after Mexico. The affected goods span dairy, wine, wood products, furniture, cement, ceramics, and a slew of other areas. The move came as USMCA renegotiations were already underway, stripping away the exemption that had shielded compliant goods in previous rounds of tariffs since Trump’s “liberation day” in April 2025.

Canadian Prime Minister Mark Carney responded immediately, pledging to retaliate “dollar for dollar” with tariffs starting September 8. Canada’s countermeasures target steel, dairy, agricultural equipment, paper, and electronics. Details will be released in the coming days, but the direction was unmistakable: Ottawa intends to hurt where it counts.

By 8 a.m. ET, the loonie was 0.58% lower against the US dollar. It also dipped against the euro, pound, and yen.

Who asked too much

Negotiators had been scrambling to strike a deal all week. But rhetoric turned sour by the weekend, with each side blaming the other for failing to reach an agreement.

U.S. Trade Representative Jamieson Greer told CNBC that a deal was close but that in the “last hours,” Canadians “wanted more” than Washington was willing to offer. “We offered them the best access to the United States of any country in the world,” Greer said. “They simply wanted more.”

Greer said the tariffs affect only about 0.6% of total US goods imports and questioned whether Canada’s position made economic sense. “I don’t know if it was political for them,” he added.

Carney pushed back hard. “We got attacked,” he said. “You’re at war when you get attacked. We got attacked.”

He framed the US demands as a threat to Canadian sovereignty, citing tariff details in autos, steel, and aluminum as sticking points, along with Canadian protections over the use of the French language and the ability to strike separate trade deals. “We were not prepared to compromise Canada’s sovereignty or undermine our key industries,” Carney said.

The exposure map

Canada’s economy is far more vulnerable to this escalation than America’s, economists agreed. The country’s trade-oriented structure means it cannot easily pivot away from the United States, its largest consumer market sitting directly on its border.

Christian Lawrence of Rabobank put it plainly: “Diversifying away from the world’s largest consumer sitting on your doorstep is impossible to do in a truly meaningful way.”

James Knightley, chief international economist at ING, noted that while the tariffs cover only 5% of Canada’s goods exports to the US, “for many individual companies it will be devastating.” He singled out small and medium-size companies in US border states as particularly exposed.

Bradley Saunders at Capital Economics warned that the most exposed industries “could be crippled.” Even though the targeted goods represent only around 0.6% of Canada’s GDP, “a collapse in exports would still be enough to push already-weak GDP growth back towards zero,” Saunders said. He pointed out that weaker US demand for finished items like furniture and electrical equipment would create knock-on effects for upstream primary industries already struggling under Section 232 tariffs.

The situation could escalate further if Trump retaliates against Canada’s countermeasures. Saunders estimated that extending a 50% tariff rate to a fifth of Canada’s US goods exports, up from the current 5%, could knock around 2% from Canadian GDP and push it into recession territory.

What American industries will feel

The tariffs only apply to a small sliver of US imports from Canada, but the ripple effects will be felt well beyond the directly targeted goods.

The United States and Canada export tens of billions in agricultural products to one another each year, and their auto industries are deeply entwined. A disruption in cross-border supply chains would hit US manufacturers that rely on Canadian inputs for steel, aluminum, lumber, and automotive components. Border states — Michigan, Minnesota, New York, Washington — would bear the brunt.

The US trade deficit with Canada stands at $48.3 billion, driven largely by imports of Canadian natural gas, electricity, and crude oil. Those energy flows are not directly tariffed in this round, but they remain a critical vulnerability in the relationship. Any escalation that brings energy into the crosshairs would change the calculus entirely for American consumers and industries alike.

Rabobank’s Lawrence suggested the existing package would have little direct impact on the US, but the risk lies in Ottawa’s options. If Canada chooses a more aggressive stance targeting other goods, the imbalance shifts.

The political dimension

Despite the potential economic hit, Carney’s hard line has found favor with a majority of Canadians, according to recent polling. That support comes with a growing fear for job security. Canadian economist Trevor Tombe estimates that ongoing US tariffs of 50% could cause around 90,000 job losses.

Carney was elected in March 2025 largely on a pledge to stand up to the White House. His stance follows reports of Canadians removing US alcohol from store shelves, a symbolic gesture that highlighted the souring relations between the two neighbors.

Pierre Poilievre, leader of the opposition Conservatives, called the tariffs “one-sided” and warned they would “deindustrialize our country.”

Trump, for his part, took to Truth Social on Sunday: “Canada wants the benefits of being a State, without being one!!! They have also charged our great farmers, for many years, massive amounts of Tariffs. No more!!!”

What happens next

The immediate risk is a tit-for-tat spiral that widens far beyond the current $20 billion scope. Canada’s retaliatory list, coming September 8, will target sectors where the US has political vulnerability — steel in rust-belt states, dairy in swing states, agricultural equipment in the Midwest.

The US trade deficit with Canada is structurally skewed toward energy and commodities, not manufactured goods. That means American consumers and manufacturers will absorb costs quickly, while Canada faces a slower but deeper squeeze on its export-dependent industries.

If the dispute drags into USMCA renegotiations, the entire framework of North American trade could be upended. The exemption for compliant goods is gone. There is no safety net anymore.

Global investors pricing in North American stability should note that this is not a routine trade dispute. It is a structural clash between two economies that are more intertwined than any other pair on Earth, now being pulled apart by political imperatives that ignore economic logic. The loonie’s slide on Monday was just the opening move.