The 2025-2026 Canada-US Trade War: Tariffs, Counter-Tariffs and the Cost to Business

The 2025-2026 Canada-US trade war is less a single event than a sequence of legal instruments, each one replacing the last as courts, deadlines and politics knocked out its predecessor. What started as an emergency-powers tariff tied to fentanyl became sectoral steel, aluminium and auto duties, then a 35% penalty rate, then a Supreme Court defeat for the White House, then a revival under a 1930 statute that had never been used in modern times. For Canadian exporters, the practical consequence is that the rules have changed roughly every six weeks since Donald Trump’s second inauguration. This article reconstructs the timeline, explains what Canada’s retaliation actually covered, and uses Bank of Canada and Global Affairs data to measure the cost to business. It is part of the Canada Company Stories hub.

How did a fentanyl emergency become a trade war?

The trade war began on 1 February 2025, when President Trump signed three orders under the International Emergency Economic Powers Act (IEEPA) imposing 25% tariffs on Canadian and Mexican goods, with Canadian energy at 10%, citing fentanyl and illegal migration. The legal choice mattered: IEEPA had never been used for tariffs, and that vulnerability would eventually sink the measure.

Prime Minister Justin Trudeau, already a lame duck after announcing his resignation on 6 January, responded the same day with a 25% counter-tariff on C$30 billion of US goods and a promise of a further C$125 billion within three weeks. Two phone calls on 3 February bought a 30-day pause in exchange for border measures: Canada appointed Kevin Brosseau as “fentanyl czar” on 11 February and agreed to list Mexican cartels as terrorist entities.

The pause ended on 4 March 2025. US tariffs took effect, and so did Canada’s first C$30 billion tranche. Within three days the picture changed again: on 6-7 March the White House exempted CUSMA-compliant goods and cut the rate on non-originating potash to 10%. That exemption, extended indefinitely on 2 April, became the single most important feature of the entire conflict. It meant that goods meeting the North American rules of origin could keep crossing the border duty-free even as headline rates climbed.

Mark Carney won the Liberal leadership on 9 March, was sworn in on 14 March and inherited the file with a mandate to hold firm. His first phone call with Trump came on 28 March; by then Ottawa had added a second 25% tranche on 13 March covering C$29.8 billion of US steel (C$12.6 billion), aluminium (C$3 billion) and miscellaneous consumer goods (C$14.2 billion).

What did the steel, aluminium and auto tariffs do to Canadian industry?

The sectoral tariffs did far more damage than the headline IEEPA rate because they ignored the CUSMA exemption. Section 232 duties of 25% on all steel and aluminium imports took effect on 12 March 2025 and were doubled to 50% on 4 June. Canada is the largest foreign supplier of both metals to the United States, and the Canadian Labour Congress estimated that roughly 32,500 jobs were at risk (about 23,000 in steel and 9,500 in aluminium).

Autos followed on 3 April 2025 with a 25% Section 232 tariff on finished vehicles, applied only to non-US content for CUSMA-compliant cars, and a parallel 25% duty on parts from 3 May. Canada answered on 9 April with a 25% tariff on non-CUSMA-compliant US vehicles and on the US content of compliant ones. Companies that kept producing in Canada were offered a remission framework, and a Large Enterprise Tariff Loan Facility opened on 15 April. The automotive story is covered in more depth in our piece on Canada’s auto industry under the 2025 tariffs, and the steel side in the profile of Algoma and Stelco.

Softwood lumber was the fourth front. On 14 October 2025 a new executive order added a 10% Section 232 duty on timber and lumber on top of existing anti-dumping and countervailing duties, plus 25% on upholstered furniture, cabinets and vanities (rising to 30% and 50% on 1 January 2026). None of these had a CUSMA exemption.

The Bank of Canada’s April 2026 Monetary Policy Report measured the results one year on. Tariffed industries account for only about 1% of Canadian output and employment but roughly 15% of exports. Steel exports to the US had roughly halved under the 50% rate. Aluminium exports fell about 50% below 2024 levels by July 2025, with producers redirecting metal to Europe at lower margins before a partial recovery. Lumber exports were about 20% below 2024 averages by February 2026. Copper, by contrast, saw exports to the US rise about 40% as producers shifted to products outside the tariff. Motor vehicle exports sat only slightly below 2024 levels, cushioned by federal remission policies.

Why did Canada roll back its counter-tariffs in 2025?

Canada lifted most of its retaliation on 1 September 2025 because the arithmetic no longer favoured holding it. By August 2025 Carney could point out that over 85% of Canada-US trade was tariff-free under the CUSMA exemption and that the average US tariff on Canadian goods, at 5.6%, was the lowest of any US trading partner. Maintaining 25% duties on US oranges, whisky, clothing and motorcycles was raising Canadian prices without moving Washington.

The rollback, announced on 22 August 2025, removed counter-tariffs on about C$44.2 billion of US goods while keeping them on US steel, aluminium and autos (313 tariff lines). Carney framed it as matching the US carve-out rather than conceding: Trump had told him by phone the previous day that lifting the tariffs would reset negotiations. Unifor’s Lana Payne called it backing down; Conservative leader Pierre Poilievre called it capitulation.

The rollback followed an earlier concession. On 27 June 2025 Trump had suspended talks over Canada’s Digital Services Tax, a 3% levy on large platforms’ Canadian revenue, retroactive to 2022, that the Parliamentary Budget Officer had expected to raise about C$7.2 billion over five years. Ottawa cancelled it on 29 June, hours before the first payment deadline, and talks resumed on 30 June. The pattern was set: Canada would give ground on irritants to keep the CUSMA exemption intact, while Washington kept layering on sectoral duties. On 1 August 2025 the IEEPA rate on non-compliant Canadian goods rose from 25% to 35%, with 40% for transshipped goods.

Talks were suspended again on 23 October 2025 after an Ontario government television advertisement used archival audio of Ronald Reagan criticising tariffs. Trump cancelled all negotiations and threatened a further increase of “more than 10%”. A 7 October White House meeting between Carney and Trump had produced no trade announcements.

What changed when the Supreme Court struck down the IEEPA tariffs?

On 20 February 2026 the US Supreme Court ruled in Learning Resources, Inc. v. Trump that IEEPA does not authorise the president to impose tariffs, ending the fentanyl tariffs on Canada and Mexico and the global “reciprocal” tariffs in one judgment. The Section 232 duties on steel, aluminium, autos, copper, lumber, furniture, heavy vehicles and semiconductors, which rest on the Trade Expansion Act of 1962, were untouched.

The administration’s response was to reach for every other statute available. On 24 February 2026 it imposed a temporary 10% global surcharge under Section 122 of the Trade Act of 1974, limited to 150 days and excluding CUSMA-compliant goods. On 6 April a proclamation reset steel, aluminium and copper duties at 10-50% calculated on full product value rather than metal content. On 8 June some derivative rates were trimmed to 15%, with a 10% rate for qualifying US-sourced content and a 25%/15% split for CUSMA-compliant Canadian and Mexican goods, in force until 31 December 2027.

When Section 122 expired on 24 July 2026, Section 301 “forced labour” tariffs of 10% (for countries with import bans on forced-labour goods) or 12.5% (for those without) took its place, again exempting CUSMA-compliant goods. For a treasury or customs team, the practical effect was that the same shipment might have been assessed under four different legal regimes in twelve months.

Why did the August 2026 talks collapse?

The August 2026 negotiations failed because Washington tied relief on metals and autos to Canadian concessions on dairy and lumber, and then, according to Carney, changed the terms at the last minute. The sequence began on 20 July 2026, when Trump signed three proclamations under Section 338 of the Tariff Act of 1930 imposing 50% duties on Canadian dairy, alcoholic beverages and a sweeping “motor vehicles” list that extended to hockey sticks, plywood and beer, about US$20 billion of imports in total. The US Trade Representative cited Canada’s retaliatory tariffs, provincial removal of US liquor from shelves and the absence of dairy concessions.

Trump told Fox News on 3 August that he “did not care” about updating CUSMA and would “rather be independent”. Dominic LeBlanc, the minister responsible for Canada-US trade, and chief negotiator Janice Charette nonetheless travelled to Washington in mid-August; LeBlanc met USTR Jamieson Greer four times in three weeks. Reported Canadian offers included repealing the remaining counter-tariffs on US cars. On 18 August Carney and Trump spoke by phone and Trump paused the Section 338 duties for three days, posting that a “DEAL” was near and mentioning a revival of Keystone XL.

On 21 August the talks collapsed. Carney said the US had asked for too much and offered too little, had introduced new terms on car imports at the last minute, and had tried to restrict Canada’s freedom to sign trade deals with other countries. Greer blamed new Canadian demands. The 50% duties took effect at 12:01 a.m. on 22 August. Two days later Trump said tariffs on Canadian cars, trucks, parts and steel would rise to 50% on 1 January 2027.

What is in Canada’s 2026 counter-tariff package?

Canada’s response, announced by Finance Minister François-Philippe Champagne on 25 August 2026 and in force from 8 September, applies tariffs of 15%, 25% and 50% to about C$27.6 billion (US$19.9 billion) of US goods across 629 tariff classifications. The list targets US steel, dairy (50% on milk, cream and whey, 25% on cheese), household appliances, agricultural equipment, pulp and paper and electronics. Some pre-existing 25% rates were raised to 50%. Champagne paired it with a C$7.5 billion support package on top of the nearly C$25 billion in tariff-related support already committed since March 2025.

The design is dollar-for-dollar rather than escalatory. Carney said Canada had taken the step reluctantly and would “sit down and strike that deal when the Americans are ready”, a line he repeated on 3 September while rejecting claims from Commerce Secretary Howard Lutnick and Treasury Secretary Scott Bessent that Canada had walked away for domestic political reasons. The same week he announced a C$4.7 billion order for more than 300 Via Rail passenger cars to be built in Quebec and Thunder Bay rather than imported.

Washington’s reply arrived in stages. On 8 September five further proclamations adjusted the Section 338 scope (122 classifications added, effective 15 September, including ATVs and more dairy lines) and set import exclusions. On 29 September those exclusions took effect: whey, molasses, non-alcoholic beer, most alcoholic beverages and motorcycles from Canada can no longer enter the United States at all. Greer said on 8 October that the US was “holding fast”. Talks have been suspended since 22 August, and on 20 October a legal challenge to the Section 338 tariffs was reported to have been filed in US courts.

How much has the trade war cost the Canadian economy?

The aggregate cost has been smaller than the worst forecasts of early 2025 but concentrated in a handful of sectors and regions. Global Affairs Canada’s Spring 2026 Quarterly Economic and Trade Report put real GDP growth at 1.7% for 2025, the slowest since 2020 and marginally above the Bank of Canada’s April 2025 “better-case” scenario. The fourth quarter of 2025 contracted 0.6% at an annualised rate, making Canada the only G7 economy to shrink that quarter, largely because of inventory drawdowns.

The Bank of Canada’s January 2026 Monetary Policy Report estimated the average effective US tariff on Canadian goods at 5.8%, up from 0.1% before 2025, and judged exports to be about 4% below pre-tariff levels. Exports subtracted 0.9 percentage points from growth in 2025. Unemployment stood at 6.8%, with youth unemployment notably higher. The Bank forecast growth of 1.1% in 2026 and 1.5% in 2027.

The composition of trade has shifted visibly. The US share of Canadian exports fell to 64.1% in the fourth quarter of 2025, the lowest on record, and non-US exports rose 13.4% in that quarter. Much of that gain was gold: it accounted for about 44% of non-US export growth in 2025, and excluding gold Canada’s total exports fell 2.1%. By July 2026 the US share had drifted back to 66.35%, still well below the 72.64% of a year earlier. The product-level damage is stark where Section 338 bites: Canadian alcohol exports to the US fell 81%, from about US$718 million to US$137 million, and motor vehicle exports dropped about 22%, from US$25.9 billion to US$20.3 billion, over the twelve months to February 2026.

One counterintuitive figure stands out: foreign direct investment into Canada reached C$93.6 billion in 2025, the highest of the decade for a second consecutive year, with about 56% from the United States. Capital kept arriving even as goods trade was taxed, partly because producing inside Canada is one way to secure CUSMA origin. Two-way trade still runs at roughly US$880 billion a year.

Which companies and sectors have been hit hardest?

The hardest-hit businesses are those whose products fall outside CUSMA protection and whose customer base is overwhelmingly American: steelmakers, aluminium smelters, sawmills, craft distillers and dairy processors. Steel is the clearest case. With the US rate at 50% and exports halved, Ottawa moved on 26 November 2025 to cut steel import quotas for non-free-trade-agreement countries to 20% of 2024 levels, impose a 50% surtax on over-quota volumes and add a 25% tariff on about C$10 billion of steel derivatives, in effect reserving the domestic market for domestic mills.

Autos sit in a strange middle ground. The Section 232 duty applies only to non-US content of CUSMA-compliant vehicles, and federal remission rules let automakers that keep producing in Canada import US vehicles duty-free. That has kept assembly employment relatively stable, but the January 2027 threat of a 50% rate hangs over every investment decision. Readers interested in how the parts supply chain is coping should see our profile of Magna International.

Small businesses face a different problem: compliance cost. The Canadian Federation of Independent Business notes that tariffs on both sides now apply even to CUSMA-compliant goods in the targeted lists and have no expiry date, and that the 29 August 2025 end of the US$800 de minimis exemption removed the simplest route for small Canadian e-commerce sellers into the US market. Ontario alone has committed C$10 billion in tax deferrals, about C$3 billion in payroll-tax relief and C$40 million for trade-impacted communities.

What role have Carney and Trump personally played?

The relationship between the two leaders has set the tempo of the conflict, swinging from cordial to hostile within days. Carney won a minority government on 28 April 2025 on an explicitly anti-Trump platform, then met the president at the White House on 6 May for two hours, telling him Canada was “not for sale”. Trump left the G7 summit in Kananaskis early in June 2025 but both sides pledged a deal within 30 days; that deadline passed with a letter raising tariffs to 35%.

Carney’s strategy has been to keep retaliation proportional, to protect the CUSMA exemption at almost any price, and to build alternatives in parallel. The last element is explored in our articles on the 2026 CUSMA review and on export diversification beyond the United States. When Trump threatened a 100% tariff on all Canadian goods on 24 January 2026 over Canada’s new trade arrangement with China, Carney responded at Davos with a speech warning of a “rupture” in the world order without naming the president.

Trump’s approach has been to multiply pressure points: an order on 27 August 2026 renaming Lake Ontario “Lake America” in federal references, a February threat to block the opening of the Gordie Howe International Bridge, a Truth Social post in September warning that Canada’s economy would “collapse”. Ontario Premier Doug Ford, whose province sends 81% of its exports to the US, has been both the most aggressive Canadian voice (the 25% electricity surcharge of 10 March 2025, the Reagan advertisement) and the first to seek de-escalation.

What can founders and investors learn from the Canada-US trade war?

The core lesson is that trade policy risk now behaves like interest-rate risk: it must be modelled continuously, hedged where possible and priced into every contract. Three specific lessons follow from the 2025-2026 record.

First, legal form matters as much as headline rate. Businesses that tracked which statute underpinned each tariff were positioned to anticipate the February 2026 Supreme Court decision and to claim refunds on IEEPA duties, while those that treated “the tariff” as a single number were caught by the immediate Section 122 and Section 301 replacements. The same applies to origin: the CUSMA exemption has been worth more than any government support programme.

Second, retaliation has limits for a smaller economy. Canada’s March 2025 counter-tariffs raised domestic prices, prompted a six-month remission scheme for manufacturers within six weeks, and were mostly withdrawn by September. The 2026 package is more carefully targeted at US products with domestic or third-country substitutes. Investors in Canadian consumer businesses should expect counter-tariffs to be used sparingly and to be reversed quickly when talks resume.

Third, diversification is slow and partly illusory. The record-low US export share owes much to gold flows, and the Bank of Canada notes that high transport costs make redirection difficult for bulky goods. Firms that have succeeded, such as aluminium producers shipping to Europe, have accepted thinner margins. For a comparison with how another resource-exporting economy handled a sudden tariff shock, see the Australia Company Stories hub.

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