In recent months, the Trump Administration has engaged in another inscrutable series of trade actions against its neighbor to the north, relying on a never-before-used tariff authority from the 1930 Smoot–Hawley tariff legislation (Section 338) to levy tariffs up to 50% on a subset of Canadian trade. Canada followed with “dollar for dollar” retaliation, and since then Trump has announced more measures, including import bans on certain goods and moves to strip Canadian products from government procurement programs. Canada has not backed down, instead making overtures to Europe that have produced an invitation to become the EU’s first “associate member”. President Trump has called these steps a possible “hostile act”, leading to more tariff threats.
This logic is puzzling. The Trump Administration has spent more than a year making itself an unreliable partner to Canada. Yet, as Canada reaches out to search for more reliable partners, its actions are viewed as an affront. Indeed, Trump’s latest singling out of Canada for aggressive trade action is mysterious, but it is not new. One of the first actions of the second Trump Presidency was to target Canada (alongside China and Mexico) for aggressive tariffs, supposedly over border security and fentanyl, though there was scant evidence of these problems originating in Canada. Regardless, the tariffs deployed (relying on the International Emergency Economic Powers Act, or IEEPA) were ultimately ruled unlawful by the Supreme Court. Since then, the IEEPA tariffs have been replaced by tariffs based on other questionable authorities that are also under challenge.
At this point in the second Trump Administration, economic research has demonstrated that the tariffs are clearly failing by any tax policy criteria. First, consider tariff incidence. Despite frequent claims that foreigners will pay the tariffs, the research has been clear that the lion’s share of the burden falls on American consumers and businesses, confirming the findings of studies based on the 2018-2019 US tariffs. Minton et al. (2026) find that pass-through to consumer prices is one-to-one, and that tariffs account for the entirety of post-pandemic excess inflation relative to pre-pandemic inflation. Cavallo et al. (2026) find a cumulative effect on the consumer price index (CPI) of about 0.8 percentage points by early 2026. Amiti et al. (2026), Fajgelbaum and Khandelwal (2026), and Gopinath and Neiman (2025) all find a degree of pass-through that implies that US buyers of imports – US consumers and firms together – bore about 90% of the tariff burden in 2025. Evidence in Ahn et al. (2026) also suggests that the quality of US imports has declined.
Second, tariffs have harmed economic efficiency by destroying the gains from trade and hampering US production processes, since about half of what the United States imports are intermediate goods. Indeed, this concern is likely even larger with respect to Canadian trade, since Canadian and US production processes are deeply entwined in many sectors. At some level, the Trump Administration seems to recognize the harms of tariffs on inputs, as it has exempted some industries (including AI) from tariffs. Yet other manufacturing firms have been less fortunate, and JPMorganChase finds that midsize firms are facing significant cost pressures.
Third, tariffs are also a regressive tax. Unlike the income tax, tariffs exempt savings, and they thus disproportionately burden those lower in the income distribution who spend nearly all of their income, as discussed in Clausing and Obstfeld (2026a). And these costs are significant. At present, the Budget Lab estimates US household tariff costs of about $1,100 per year.
Presumably the Trump Administration is after something other than efficient, fair taxation. What are its possible goals? One constant refrain has been that the tariffs would supply a revenue stream, held up as a source of funding for multiple administration desiderata. In reality, revenues from the tariffs have disappointed; they are below forecasts, short of what would be required to pay for the 2025 tax cut legislation, and far below what modest corporate tax increases would raise (Clausing, 2026). Revenues turned sharply negative for two months in mid-2026, as refunds outstripped new tariff collections (Clausing & Obstfeld, 2026b). What about manufacturing jobs? There, too, the record is disappointing. As of August 2026, manufacturing jobs were tens of thousands below their level at the beginning of 2025, according to the Bureau of Labor Statistics, and blue-collar employment (including industries like construction) has been essentially flat over the same period.
What about the mercantilist desire to drive up US exports and drive down US imports? Both US exports to Canada and US imports from Canada shrank in 2025 as a result of the trade war, causing damage to both economies. The trade deficit with Canada is structural, and more than accounted for by the energy sector, so even if the Trump Administration wanted to rectify the imbalance, it would likely raise energy costs. So far, Trump’s tariffs have exempted energy. Because the United States is a larger share of the Canadian economy than vice versa, the pain is larger north of the border, but Canada has been seeking to diversify trade and liberalize with other nations, whereas the United States has a relatively uniform protectionist stance. Importantly, the American public is growing impatient with tariffs, with polling data indicating deep disapproval; both chambers of Congress have voted against prior rounds of tariffs on Canada.
In contrast, the Canadian public is strongly supportive of Canadian retaliation, despite the personal cost. The Trump Administration’s rhetoric, which belittles Canada’s sovereignty, has fueled strong anti-American sentiment, which has shown up in both reduced tourism and reduced US exports. Even though tariff retaliation clearly harms Canadians themselves, the public is willing to endure costs to stand up to bullying. Meanwhile, Canada has strengthened ties with other trading partners, not just Europe, and Canadian exports to the rest of the world have risen strongly.
At the same time, the Canadian Prime Minister, Mark Carney, has emerged as the most vocal and eloquent critic of President Trump on the world stage. His Davos speech in January 2026 called out the US protectionist stance, as well as broader changes in US foreign policy that have been particularly transactional, undermining rules-based norms across multiple issue areas. His subsequent September speech to the European Parliament was an eloquent statement of the need for the rest of the world to continue their efforts on joint collective problems, with or without the United States. In the end, what is most clear from the US–Canada trade war is how little the United States has achieved, and how much damage has been done to a longstanding partnership.
References
Ahn, J., Rotunno, L., & Ruta, M. (2026, July 17). Tariff Pass-Through and Import Reallocation. IMF Working Paper.
Amiti, M., Flanagan, C., Heise, S., & Weinstein, D. E. (2026, February 12). Who Is Paying for the 2025 U.S. Tariffs? Federal Reserve Bank of New York.
Cavallo, A., Llamas, P., & Vazquez, F. M. (2026, September 7). Tracking the Short-Run Price Impact of U.S. Tariffs. Harvard Business School.
Clausing, K. (2026, June 16). The future of US international corporate tax reform. Policy Proposal. The Hamilton Project.
Clausing, K., & Obstfeld, M. (2026a). Tariffs as Fiscal Policy. National Tax Journal, 79(1).
Clausing, K., & Obstfeld, M. (2026b, July 30). “Optimal tariffs” are far from optimal: Part 1. RealTime Economics PIIE Blog.
Fajgelbaum, P., & Khandelwal, A. (2026, March 25). Tariffs in 2025: Short-run impacts on the US economy. Brookings.
Gopinath, G., & Neiman, B. (2025). The Incidence of Tariffs: Rates and Reality. Harvard University.
Minton, R., Ray, M., & Somale, M. (2026, April 8). Detecting Tariff Effects on Consumer Prices in Real Time – Part II. Board of Governors of the Federal Reserve.