Prime Minister Mark Carney — a former central banker who led the Bank of Canada through the 2008 financial crisis and the Bank of England through the Brexit years — drew international attention upon taking office by warning that middle powers must resist economic coercion from more powerful countries. President Donald Trump is now putting that warning to the test with sweeping new tariffs that could reveal how much economic pain Canada can absorb.

Tensions escalated late Friday when Canada walked away from negotiations, after Carney concluded the United States was demanding too much in exchange for tariff relief. On Saturday, the U.S. imposed 50% duties on roughly $20 billion worth of Canadian goods, and Carney announced dollar-for-dollar retaliation to begin Sept. 8.

“We’re going to hit back,” Carney said.

Carney is doing what many other American allies have so far avoided: risking economic pain rather than yielding to tariff pressure.

For Carney, the showdown is the clearest test yet of his argument that middle powers must stand up to economic pressure from great powers such as the United States and China, even when doing so carries a cost. Canada’s response could demonstrate how countries navigate a world in which long-standing alliances offer less protection and economic ties themselves become sources of leverage.

It could also shape how Carney is viewed at home and abroad — and how other U.S. allies respond to the Republican president. Carney’s Liberals won Canada’s 2025 election, a campaign dominated by Trump’s tariff threats and his talk of making Canada the 51st U.S. state.

A test of sovereignty

The trade dispute has also become a test of sovereignty. Carney said Washington introduced language in the final hours of negotiations that would have restricted Canada’s ability to make trade deals with other countries. He called that demand “unacceptable” and “a question of sovereignty.”

British Columbia Premier David Eby said accepting such a condition would have reduced Canada “to the economic equivalent of the 51st state” — a status Trump has mused about often.

Carney’s message resonated in January, when he addressed the World Economic Forum in Davos, Switzerland, as Europe braced for Trump’s threats over Greenland and new tariffs. Carney said the international order was undergoing “a rupture, not a transition.” He argued that sovereignty would depend increasingly on a country’s ability to “withstand pressure,” and warned that middle powers negotiating alone with great powers do so from a position of weakness.

Trump responded a day later by stressing Canada’s dependence on the United States. “Canada lives because of the United States,” he said. “Remember that, Mark, the next time you make your statements.”

The president has repeatedly talked about making Canada the 51st U.S. state and has dismissed the allies’ border as artificial. On Sunday, Trump returned to that theme, writing on Truth Social that “Canada wants the benefits of being a State, without being one!!!” and accusing Canada of charging U.S. farmers “massive amounts” of tariffs for years. “No more!!!” he wrote.

Seven months since Davos, Canada has become a test case for the world Carney described.

“Our government understood, before many, that America would transform all its commercial relationships,” Carney said Saturday. He accused Washington of using “economic integration as a weapon” and said its “signature was written in pencil.”

Canada’s exposure

Historian Robert Bothwell said Canada is uniquely vulnerable to U.S. pressure.

“No country is more exposed than Canada,” Bothwell said. “Other countries have to fear American misbehavior, but none as much as Canada.”

Bothwell said success ultimately means Canada retaining its independence “in the face of Trump’s desire to subordinate it and absorb it.” He said Carney “sees that very well.”

Canada’s dependence on the U.S. market makes that difficult. Nearly three-quarters of Canadian goods exports go to the United States, whose economy is roughly 10 times larger. Canada can sign new trade agreements, but replacing customers and supply chains built around the enormous U.S. market over decades is considerably harder. That relationship has been governed since 2020 by the U.S.-Mexico-Canada Agreement, the pact that replaced NAFTA during Trump’s first term — and it has absorbed shocks before, including the national-security tariffs Trump placed on Canadian steel and aluminum in 2018, which Canada answered with retaliatory duties on U.S. goods.

Carney acknowledged that retaliation would “raise costs and reduce choice for Canadians.”

U.S. Trade Representative Jamieson Greer rejected Canada’s account of the breakdown in talks, saying Ottawa introduced new demands and backed away from commitments even after Washington offered to reduce tariffs on steel, autos, lumber and other goods. He said the United States is moving ahead with additional measures in response to Canada’s retaliation, raising the prospect of further escalation.

The European Union, by contrast, prepared retaliatory tariffs against the United States last year but repeatedly suspended them while negotiating with Washington.

Echoes for other middle powers

Nelson Wiseman, a professor emeritus of political science at the University of Toronto, said Canada is providing the biggest test yet of whether Carney’s strategy can work — and whether resistance by one middle power could change the calculations of others.

“Will there be a domino effect? We’ll see,” Wiseman said.

Ian Bremmer, president of the Eurasia Group, said Americans underestimate how angry Canadians are with the Trump administration.

“Taking a hard line in response to U.S. policy perceived as predatory — even with major economic cost to Canada — is popular among most Canadians,” he said in a social media post.

Manitoba Premier Wab Kinew said Canadians should be prepared for a prolonged confrontation, and that Trump could emerge weaker after the U.S. midterm elections in November.

“He’s got two more years left in office. We should be prepared to duke it out for two years, and then hopefully, sanity will return,” Kinew said.

Carney has framed the confrontation as a test of whether Canada can preserve its independence under U.S. pressure.

“Last spring, I warned that America is trying to break us so that they can own us,” Carney said Saturday. “And I promised: ‘That will never, ever happen.’ We are keeping that promise.”

This story was originally featured on Fortune.com.