Although the tariff dispute between the United States and Canada covers only a limited portion of the two countries’ roughly $1 trillion in annual trade, it creates significant risks for automobile production, consumer goods, energy flows and investment. The combined value of the tariffs and counter-tariffs has reached approximately $40 billion, equivalent to about 4% of annual two-way trade.
Canada began imposing tariffs of 15%, 25% and 50% on goods from the United States on September 8. The measures cover imports worth 27.6 billion Canadian dollars, or approximately $20 billion, and were prepared to match Washington’s latest measures on a dollar-for-dollar basis.
Ottawa’s list included steel, dairy products, household appliances, agricultural machinery, paper and pulp, electronic products, furniture and clothing. Following feedback from industry representatives, the Canadian government removed fish and seafood from the list, saying the change was intended to limit broader economic damage.
On August 22, the United States imposed a 50% tariff on goods imported from Canada worth approximately $20 billion. Washington’s measures cover Canadian motor vehicles and alcoholic beverages, while dairy policies were also included in the scope of the measures.
Auto supply chain faces higher cross-border costs
The tariff burden is expected to be felt most clearly in automobiles, trucks and auto parts, as well as consumer goods such as alcoholic beverages, cheese and toys. Gary Clyde Hufbauer of the Peterson Institute for International Economics said the direct macroeconomic impact would remain limited if the dispute did not expand.
Automobile production, assembly plants and suppliers concentrated in Ontario are closely linked to factories in Michigan, Ohio, Indiana and other Midwestern states. Because parts can cross the border several times during production, tariffs imposed at each stage could raise total costs and encourage companies to shift future investments to other regions.
Canada’s exports of motor vehicles and parts fell by 3%, or $2 billion, in 2025. These exports had also declined by 7%, or $5.1 billion, in 2024. Hufbauer said Canada faced a heavier economic impact than the United States, with Ontario and the U.S. Midwest among the regions most at risk.
More than 70% of Canada’s goods exports go to the United States, while slightly more than half of its services exports are directed there. Hufbauer said this dependence creates a greater risk than the tariffs’ share of trade volume because of the production chains linking the two countries.
Inflation and investment decisions under pressure
Hufbauer estimated that the tariff dispute would increase U.S. inflation by less than 0.1%, while the increase in Canada would be approximately 0.3 percentage points. He said the greater economic impact could come from weaker investment rather than a short-term decline in trade.
As companies build new assembly plants, battery factories or processing facilities, they will have to consider the possibility that preferential access to the U.S. market could narrow further. In addition to the roughly $18 billion in support previously announced for affected workers and businesses, Canada unveiled a $5.4 billion aid package.
Canada’s economy grew by 1.9% in 2025. This was its weakest performance since the pandemic period. In the same year, exports of goods and services rose by 0.7%, while imports increased by 3% and the trade deficit reached $20.9 billion.
Energy and critical minerals among Ottawa’s leverage points
If Canada restricts oil and electricity exports, prices could rise and supply shortages could occur in the Midwest, New York and New England. Although Canada’s economy is smaller than that of the United States, it supplies energy resources and industrial inputs that some U.S. regions cannot replace quickly.
Energy trade between the United States and Canada totaled approximately $137 billion in 2025. The United States bought $111 billion worth of energy products from Canada, while it sold Canada $26 billion worth of energy products.
Canada has historically supplied approximately 60% of U.S. crude oil imports. Because many refineries in the Midwest were designed to process Canada’s heavy crude oil, rapidly changing suppliers could increase costs.
Electricity trade between the two countries reached $3.2 billion in 2025. U.S. imports from Canada accounted for 67% of this total.
Critical minerals could also become a bargaining tool for Ottawa. The United States became Canada’s largest critical-minerals trading partner in 2025, with trade between the two countries recorded at $26.7 billion. Hufbauer said Canada could delay the development of mineral deposits for the U.S. market or seek to reduce its dependence on American automotive supply chains.
However, these steps could also harm Canadian producers. For that reason, Hufbauer said the measures were more likely to be used for negotiations than as permanent restrictions.
USMCA faces annual uncertainty over its future
The tariff dispute escalated after the review process for the United States-Mexico-Canada Agreement, held on July 1, failed. Washington refused to renew the agreement in its current form.
The decision did not immediately end USMCA, and the agreement between the three countries remained in force. If the parties fail to reach an agreement, annual reviews will come into effect; if the agreement is not extended, it will expire in 2036.
Hufbauer said the future of USMCA was uncertain and that closer economic integration was no longer a U.S. objective. According to the Canadian government, approximately 85% of goods trade remains tariff-free. While the average U.S. tariff on Canadian exports stands at 5.2%, the global average is 11.4%.
Hufbauer said he expected the dispute to continue through the remainder of 2026 and conclude with a negotiated arrangement in January 2027. Under this scenario, U.S. tariffs on imports from Canada could rise to a higher level, while Canadian products could retain more favorable access than products from other major trading partners and disputes in some sectors could continue.
Canada turns to new export markets
Canada has accelerated efforts to diversify its export markets to reduce its dependence on the United States. Canadian exports to the United States fell by 3.7%, or $19 billion, in 2025, while exports to other countries rose by 11.1%, or $24 billion.
The share of markets outside the United States in Canada’s exports rose to 32.8%, its highest level since 1981. Nevertheless, geographic proximity, energy infrastructure and the integrated structure of production chains make it difficult for other markets to replace the United States quickly.
Hufbauer assessed that Canada would remain dependent on the U.S. market despite its diversification efforts.
