Can Canada stop the U.S. trade war from escalating? Or should it lean in even harder?

“You kind of see a pattern here,” explained Dimitry Anastakis, the L.R. Wilson and R.J. Currie Chair in Canadian Business History at the University of Toronto. 

“The way to avoid escalation is by cutting a new deal.” 

That’s exactly what Prime Minister Mark Carney promised to do. But last month he abruptly suspended negotiations, declaring Canada was “attacked” by American trade demands that would sacrifice the country’s independence.

Now Ottawa is preparing to strike back against the latest round of Trump tariffs on almost $28 billion worth of Canadian imports. At one minute past midnight on Tuesday morning, Canada’s response is set to kick in. Tariffs on American steel and aluminum will double to 50 per cent. Other tariffs will hit U.S. cheese, molasses, makeup, copper, smartphones and more. The U.S. government has already signalled it will respond to this retaliation, as Trump threatens to increase tariffs on Canadian autos on Jan. 1 in what experts warn could be ”cataclysmic” for the Ontario-based sector. 

This is what the road to trade war escalation looks like. And it’s not clear how, if or when the two countries will change course. 

“You’ve got an administration here that is completely detached from reality,” said Anastakis of the U.S. government, noting that Trump has shown an ideological commitment to high tariffs and given no sign he’s going to budge. 

“We’re in the unfortunate situation of having a target on our back because of an irrational administration that really wants to prove a point, which is ultimately self-destructive for their economy, for their consumers, and for the global economy,” he added.

“We are in a kind of Never Never Land.”

Right now, Carney and several of his cabinet ministers have insisted that Canada can weather the storm. Ottawa and provincial governments have pledged to support workers and businesses impacted by the trade war, including through a $7.5-billion aid package that bolsters Employment Insurance and provides favourable loans to impacted businesses. The government is also orienting Ottawa’s spending power towards a multibillion-dollar rearmament plan for the Canadian military, which it wants to use to boost domestic industries, while striving to double the amount of annual exports to countries other than the U.S. within the next decade. 

But with Trump’s latest round of tariffs, and the Canadian retaliation, the trade war could be entering a new and more damaging phase — especially if it keeps escalating. 

“A war of attrition is not going to go well for either side, but it’s going to go particularly poorly for the Canadian side,” said Matthew Holmes, chief of public policy at the Canadian Chamber of Commerce. 

“From the messages we had from the prime minister and the negotiating team recently, there are serious questions about whether they’re negotiating in good faith.”

After focusing largely on specific sectors like steel, autos, aluminum and lumber, on Aug. 22 the Trump administration slapped 50 per cent import taxes on a range of Canadian-made consumer goods and manufactured products. The new tariff list included honey, hockey sticks and cement, and had an impact on many more small- and medium-sized businesses across the country, Holmes said. 

The Canadian Chamber of Commerce estimates these newly tariffed exports represent about five per cent of the total volume of trade sold into the U.S. from businesses that employ about 90,000 people. 

In its response that comes into effect Tuesday, the federal government said it tried to send a message to the U.S. while doing a minimal amount of damage to Canadian businesses, including by trying to avoid increasing costs of material that Canadian manufacturers need to make their products, and ensuring the tariffs hit in areas where non-U.S. alternatives exist. 

Holmes said the chamber is still analyzing the impacts, but that the balancing act of minimizing the effects of the trade war on Canadians will get harder the more things escalate. 

So far, the economic hit — at least at the national level — is “nominal,” Holmes added, even if it is more pronounced in sectors that have been targeted. The Canadian economy grew at an annualized rate of 3.3 per cent in the second quarter of this year, according to Statistics Canada, while University of Calgary economist Trevor Tombe predicts the new American tariffs could shave 0.4 per cent off the country’s gross domestic product (GDP). 

But further escalation will increase the damage. In a report last week, Deloitte estimated that a total collapse of free trade between Canada and the U.S. — in the form of a withdrawal from the Canada-United States-Mexico Agreement (CUSMA) that Trump signed in 2018 — would result in $402 billion of lost GDP growth by 2036. About 163,000 jobs per year would also be lost, the report predicted, with sectors like automaking, electronics and machinery manufacturing taking a much steeper hit. 

Overall, such a scenario would be “bad” but “not devastating,” said Matthew Stewart, a partner in the economic and financial advisory group at Deloitte. 

To Brian Clow, who served as deputy chief of staff to prime minister Justin Trudeau, the federal government seems to be changing tack after the collapse of trade talks by using a strategy that Ottawa used with Trump during his first term. Under Trudeau, the government imposed retaliatory tariffs in 2018, before the two sides — along with Mexico — replaced the North American Free Trade Agreement inked in the 1990s with CUSMA. 

“Will it work this time? We’ll see — but clearly, the government and the Canadian people broadly are behind the strategy,” Clow told the Star.

“The goal is to create economic and political pressure within the United States so that there is influence on Trump to back down.”

That may require more pressure, and some Canadian leaders argue the country should be ready to ramp it up. Premier Doug Ford, after proclaiming that Trump should “kiss my ass,” said Canada must consider slapping export taxes on electricity to make it more expensive in the U.S. Others, like former Alberta premier and federal Conservative cabinet minister Jason Kenney, say Canada should be ready to tax exports of potash, critical minerals and oil — the latter a major export to the U.S. that was worth $126.1 billion in 2025 alone. 

Kenney is aware this puts him offside with Alberta’s current government, as well as the provincial administration in Saskatchewan. But it would be a mistake to take those measures off the table, Kenney argued, describing the export taxes as “very powerful economic levers to pull” in a trade conflict against a country with an economy that is more than 10 times larger than Canada’s. 

“We’re talking here about a president who has said explicitly that he will use ‘economic force’ to annex or acquire Canada — an idea with which he seems to be nearly obsessed, and which he has backed up with prejudicial tariffs,” Kenney said. 

“I think the best way of avoiding escalation is that they know that we have a very powerful tool to further increase energy prices in the United States, when that’s the number-one issue for Americans in a product that they cannot substitute.”

He added that he believes Canada has time on its side, in part because of a sense of public solidarity and the approach of midterm elections in the U.S. that could see opponents of his tariffs voted into the national legislature. 

Such swings in power have helped end trade wars in the past, said Anastakis, the historian at the University of Toronto. In the 1930s, a protectionist Republican agenda was thwarted in the U.S. when Franklin D. Roosevelt became president and a law was passed that paved the way to lower tariffs. 

The difference now, however, is that social media makes it difficult to tone down hostile rhetoric, he argued.

And then there’s Trump’s devotion to tariffs, which he describes as the “most beautiful” word in the English language. 

“It’s not going to get resolved until cooler heads are actually in spots where they can prevail,” he said. “Right now there are no cooler heads on the American side.”