On August 21, 2026, at the approach of midnight, Canada walked out on talks with the United States to avert new tariffs due to kick in on some US$20 billion worth of US imports from Canada. These tariffs were nominally in retaliation for Canada’s retaliation on US retaliation against alleged unfair trade practices.
However, the timing of the US tariff action says something beyond the specifics of the alleged grievances/extortion demands: the tariff talks with Canada were timed to conclude just before sweeping tariffs on US imports from around the world enter into force. This move has been interpreted as an attempt to pressure Canada — the most trade-exposed country to the United States — to bend the knee and to set an example for others that resistance is futile.
By walking out, Canada set a different kind of example — Canada refused to sign up for collective war on the global economy — an implication of US demands that Canada match US tariff levels on key products against all trading partners outside North America. The rest of the world should follow suit.
You are at war when you get attacked. We got attacked.
A Bit of Trade Theory
Canada has been at trade war for some time, and we have had a lot of time to work out the optimal response. This strategy is rolled up in what might be called “The Carney Doctrine,” which may be summarized as doubling down on open trade and expanding Canada’s international partnerships, falling back on Canada’s own resources to develop domestic capabilities, and managing the US relationship from a position of strength without bending the knee.
This amounts to doing what is best for Canada. And that is, thankfully, straightforward — but none of it entails going to “trade war.” In trade, every piece of trade policy ordnance deployed against the opponent (actually, in this case, against the trade partner — think about that because the Trump administration obviously hasn’t) has an equivalent damaging effect on the country deploying the measure.
That means that Canada should be prepared to sell to the United States what it wants to buy from us — US tariffs on our products or no US tariffs. There is no point to imposing export taxes to harm the US economy. Canada does not do better if the United States does worse (memo to the Trump administration: the United States does not do better if Canada does worse, notwithstanding what certain influential thinkers in the administration seem to think — if the United States agrees with them, it hasn’t done the trade math).
Canada should also continue to buy from the United States what we want to buy, without penalizing ourselves with retaliatory tariffs — self-inflicted blow for self-inflicted blow. We are now beyond the point where our actions should be predicated on bringing about change in the United States — to get it to revert to the bargain that was struck before the tariff chaos. Canada lacks the leverage to bring about change in the political economy of an entity 10 times our size. And it is not our responsibility to “take one for the team” by imposing punitive tariffs that would cause more pain in Canada than in the United States in the now obviously vain hope that it would bring the US administration to senses that it obviously lacks.
But it also means declining to buy what Canadians don’t want to buy or what we shouldn’t buy in the interests of ensuring that vulnerable industries are not brought down by a sucker punch — in some cases, responsive trade protection is in order. So, there is a bit of burden sharing by Canadians in solidarity with our most exposed industries and the Canadians who work in them.
However, this approach should not be conceived as “retaliation.” Trade war is not actually war, and the correct response is asymmetric — it means increasing trade, not decreasing it — just with other partners who actually want to trade. Talk of “retaliation” may be essential rhetoric when a country is attacked, but any trade protection deployed should be surgically aimed at attenuating any harm inflicted by US tariffs.
The Formalities
Imposing Section 338 of the Tariff Act of 1930 in the current trade dispute is Smoot-Hawley redux. The Smoot-Hawley tariff is infamous as one of the contributors to turning a stock market crisis into a decade-long depression. It violates the Canada-United States-Mexico Agreement (CUSMA). Canada should go through the legal motions and challenge the measures under CUSMA mechanisms and under the World Trade Organization agreement.
Why? Because our interest is in preserving the rule of law in trade. We do this with no hope of practical outcomes in the short term but in full confidence of the correctness of our actions. It is also a direct repudiation of US Trade Representative Jamieson Greer’s characterization of Canada’s response to illegal US tariffs as putting us in some pariah-state category. The reverse, however, is true. Cue up Mitchell and Webb.
The Consequences
Gluttony is its own punishment and the same is true of trade protection. The debilitating side effects of gorging on protection are on full display in the United States: worsening of the affordability problem; increasing inflation, which is compromising the conduct of monetary policy; and the loss of export markets through the natural consequence of diverting US production to inefficiently satisfy its own needs in areas where other countries have comparative advantage.
The United States will have to go on a trade-protection diet in due course. But markets (and states) can stay irrational longer than we can stay solvent (as the saying goes), so Canada must fall back on its own resources.
The good news for Canada is that we have already absorbed most of the pain. Canada’s growth stalled for a year — just as the trade models predicted, but the economy is growing again. Foreign direct investment into Canada in 2025 was the highest since 2007 — but it is not obviously predicated on building stuff to sell to the United States. Rather, it is coming to Canada for services, technology, critical minerals and other resources that have global markets.
What Canada should not do is commit to future deals that resemble in any way the undiplomatic demands of the United States, which would lock Canada into an increasingly backward North America and isolate us — not in collective defence but in collective war (which we have not and should not sign on to) in a global economy that is reconfiguring around US-erected trade barriers.
As Tobias Meyer, the CEO of DHL Group, observed: “Supply chains are not shortening; they are stretching further than ever, with average trade distances hitting record levels. The increasing trade in Asia, the Middle East and Africa outweighs the shrinkage of US trade.”
Moreover, notwithstanding the reduction of bilateral trade in final goods between the United States and China, the global factory remains largely intact. This reflects the continued deep interdependence on specialized supply chains that cannot be easily replaced or duplicated. This reality is brought out starkly in Figure 1 by Mary Lovely and Christine Wan, which shows that value-added imports by the United States from China have barely budged.
Figure 1: China’s Share of US Imports, Bilateral and Value-Added, 2007–2024
Canada is a trading nation. The United States has categorically stated — through the words of its chief executive — that it does not want to buy anything that Canada produces. That just doesn’t work for us. The world is reconfiguring around the United States. And if Canada signs on to “Asylum North America,” the world will reconfigure around Canada as well.
Cue up Fleetwood Mac: Canada’s message to Mr. Trump should be: “You can go your own way.” That’s what isolationism is — you take your ball and go home. Trade “war” is not war — it’s not a contest, but rather the opposite — it’s no game. Trade is mutual exchange, and you can’t exchange with someone who is not up to exchange.
So, you move on. And the other party can, as the song goes, “go its own way” and call it a no-trade day. Canada will continue to trade — with countries that want to buy as well as sell — that is, trade.
