The United States and Canada, historically close allies, are sliding deeper into a full-blown trade war with no end in sight.

On Aug. 25, 2026, Canada imposed tariffs of up to 50% on hundreds of U.S. goods, responding to similar, long-threatened U.S. levies on Canadian products. The move followed the collapse of trade negotiations that had been inching toward a deal.

The next day, U.S. President Donald Trump called Canada "one of the worst countries in the world to deal with". Canadian Prime Minister Mark Carney claimed Trump was trying to "destroy" his country's auto industry. Only a few days earlier, a deal was reportedly very close.

One of the most notable aspects of the breakdown lies in Trump's unprecedented use of an untested tool in the Tariff Act of 1930, otherwise known as the Smoot-Hawley tariffs. Economists generally agree that the act's escalating retaliatory tariffs extended the Great Depression by sparking a global trade war. Amplified by foreign retaliation and falling global gross domestic product, U.S. trade fell by two-thirds from 1929 to 1932.

Smoot-Hawley contains a provision known as Section 338, which adds another feature: the president may, on his own authority, impose unilateral tariffs of 50% if a foreign country's policies "discriminated" against the United States. But the section was never invoked, as the damage from the other Smoot-Hawley tariffs had already been done — until July 2026, when Trump first threatened the 50% tariffs on Canada for its "discriminatory treatment" of U.S. products.

Why did the trade deal collapse?

Both sides are pointing fingers over what caused the proposed deal to fall apart in the final days of negotiations.

Canada was primarily interested in reducing high U.S. tariffs on steel, aluminum and autos. The Canadians claimed they had a preliminary agreement to lower steel and aluminum tariffs from 50% to 25%.

In the late stages, however, U.S. Commerce Secretary Howard Lutnick was apparently lobbied heavily by U.S. steel and aluminum producers to hold the line on these tariffs. Lutnick was also opposed to reductions in U.S. auto and truck tariffs and allegedly withdrew whatever reductions were on the table.

As a result, other parts of the deal began to unwind as well.

The Canadians had offered to reopen the Keystone oil pipeline deal that had been canceled by President Joe Biden in 2021. But once the agreement on lower steel, aluminum and auto tariffs was nixed, Canada pulled the Keystone offer off the table too.

The U.S. had also demanded that Canada reverse the Canadian provinces' removal of U.S. liquor from their store shelves — sales of U.S. booze in Canada have plunged as a result. But the lack of progress on the major metal and auto tariffs, combined with a backlash from the Canadian provinces themselves, forced that concession off the table as well.

What tariffs did the US place on Canadian goods?

Canada is a major supplier of goods to the U.S., exporting about US$451 billion in 2025 — ranking second after Mexico.

As soon as talks broke off, the Trump administration followed through on earlier threats to impose a 50% tariff on $20 billion worth of Canadian exports, including auto parts, forestry products, furniture, textiles, whiskey and hockey equipment, under Section 338 of Smoot-Hawley. That amounts to about 4% of Canada's exports to the United States.

How did Canada retaliate?

Carney responded with his own already-prepared list of $20 billion in U.S. imports to face tariffs of up to 50%, targeting products chosen to anger voters in swing states heading into the midterm elections. Examples include Wisconsin cheese, Maine seafood and Kentucky washers and dryers — GE Appliances is headquartered in Louisville, Kentucky.

How did two very close allies get into a trade war?

Tensions between Canada and the U.S. have been high ever since Trump returned to office. He has continually complained about Canada "ripping us off" and being "among the worst countries" in the world to deal with.

He has also repeatedly threatened to make Canada the 51st state, an issue that has particularly angered Canadians and united public opinion across the political spectrum against Trump.

For Carney, a critical sticking point was a late addition by U.S. negotiators requiring Canadian trade policy to align permanently with U.S. interests. Carney viewed this demand as a transfer of Canadian sovereignty to the U.S. — a step toward making Canada "the 51st state."

Against that backdrop, perhaps it is not so surprising that a near-deal collapsed into a trade war.

Canada has also been unusual in standing up to Trump in this way. The only other country to do so is China, and it is risky for a smaller country like Canada to retaliate. But Canadians are pretty united in their unfavorable views of Trump, so Carney has a strong domestic position from which to resist.

What does this mean for US consumers and businesses?

The 50% tariffs Trump unilaterally imposed on Canada apply to goods that had previously been exempt from most other tariffs under the United States-Mexico-Canada Agreement, which replaced NAFTA in 2020. That exemption now sits under strain: the USMCA itself is up for its scheduled joint review in 2026, meaning the tariff fight is unfolding just as the three countries are meant to be assessing the trilateral pact's future.

Since tariffs are a tax on the purchaser, U.S. consumers and companies will have to pay 50% more to buy the products subject to the levies. Many of the Canadian imports are concentrated in U.S. border states such as Maine, New York, Pennsylvania, Ohio and Wisconsin. Another border state, Michigan, is closely tied to automobile production with the Canadian province of Ontario — a relationship built on tightly integrated supply chains in which vehicles and parts routinely cross the border multiple times during assembly, which is why tariffs on auto inputs can compound at each stage of production.

In many cases, Canada's retaliatory tariffs will be felt most strongly in states where Trump's Republican Party stands to be hurt by reductions in U.S. exports resulting from the levies.

The political backlash against Trump's tariffs in the U.S. does not appear to be deterring him from imposing more of them, even as the midterm elections hinge on results in several swing states along the Canadian border.

While the total impact on overall U.S. prices may not be large, the combination of U.S. and Canadian tariffs together could be significant for products heavily traded between the two countries — such as Michigan auto parts and New England seafood — as well as in U.S. regions where Canadian market shares are large. U.S. farmers and manufacturers may also lose sales to Canada.

If Trump's tariffs remain in place and U.S. importers can no longer absorb the tariff costs while remaining profitable, U.S. prices are likely to continue rising as importers push consumers to pay a larger share of the tariffs.

It is probably unwise to predict what Trump will do with tariffs between now and the midterms, or between now and the end of his term in 2028. A victorious Democratic Party in charge of the House and Senate could change the political landscape considerably.

It is worth noting that the global trading system that emerged in 1947, from the ashes of war, depression and tit-for-tat trade battles, was purposely designed to eliminate trade wars, since they typically make everyone worse off. And the trade liberalization that followed worked, delivering enormous wealth to the U.S. and the world economy in the decades since. It would be a shame to return to those days, and the unfortunate economic consequences that came with them.

Kent Jones, Professor Emeritus of Economics, Babson College

This article is republished from The Conversation under a Creative Commons license.