Exorbitant Burden

The US is one of the world’s richest economies, yet it also runs one of the largest trade deficits — a characteristic that it shares with the British Empire during its declining years. The persistent US trade deficit is tied to two key developments in the post-WWII order. First, in its effort to consolidate capitalism on a global scale, the United States absorbed surplus production from Western Europe and Japan, helping to stabilize their economies while reinforcing its own economic and political hegemony.

Second, to secure the dominance of the dollar as the world’s primary reserve currency, the US had to function as the global consumer of last resort — continuously importing goods and allowing dollars to circulate worldwide, thereby ensuring their availability for international trade. This structural role made trade deficits an integral part of American imperialism rather than a problem to be solved by protectionist measures like tariffs.

This historical context highlights the paradox at the heart of Trump’s tariff strategy: while the US trade deficit has long been a structural feature of its global dominance, Trump portrayed it not only as an economic weakness that needed urgent correction, but also as a burden the nation has shouldered for the benefit of global economic stability. Consequently, for the Trump administration, tariffs are a means of rectifying this imbalance to prioritize domestic prosperity.

MAGA was the rallying cry for a turn away from global economic dominance. On the campaign trail, Trump positioned tariffs as a central tool for addressing the trade deficit. His professed goal was to reduce this trade deficit, drive reindustrialization, and create jobs by shifting the economic burden from American taxpayers to foreign countries and generating, in his words, “massive revenue” for the US government.

However, Trump’s ideas, despite their narrative coherence, relied on an oversimplification of the economics of tariffs that flew in the face of historical evidence that undermines the idea that tariffs are effective in reducing trade imbalances or generating significant economic benefits. A cursory look at trade between the United States and its key trading partners — Canada, Mexico, and China — reveals the limitations of this approach. In 2024, American imports from these countries totaled around $1.5 trillion, while US exports were approximately $1 trillion. If the United States were to impose a 25 percent tariff on all imported goods from these nations, and these countries retaliated with similar tariffs, the US would generate roughly $175 billion in tariff revenue.

While this represents a fiscal gain, it amounts to just 3.5 percent of total US government revenue and would do nothing to address the structural causes of the US trade deficit. Moreover, Trump’s strategy includes pressuring these countries not to retaliate, threatening even higher tariffs if they do. All this will mean in practice is a “beggar-thy-neighbor” trade policy whose greatest achievement will be to export American unemployment to Canada, Mexico, and China.

It is true that a tariff war would disproportionately hurt smaller economies like Canada heavily dependent on trade for their production and consumption requirements. Yet Trump’s economic advisory team seems to ignore that a tariff war hurts all the participant countries, regardless of their economic and military strength. If the United States persists with its policy of high tariffs on its neighboring and other countries, the increased value of the dollar, combined with tariff-induced cost increases, could make American goods less competitive in international markets.

Countries looking to maintain their competitiveness may devalue their currencies, further eroding the price competitiveness of US exports. Ironically, instead of boosting US export revenues, an aggressive tariff policy could have the opposite effect — leading to a reduction in export earnings and potentially harming the very industries it aims to protect.

Imposing tariffs on Canada and Mexico, as well as facing retaliatory tariffs from these trading partners, would significantly increase the cost of intermediate goods used in US manufacturing. Since many American firms rely on foreign-sourced inputs, higher import costs would translate into higher production costs for goods manufactured domestically.

Given the highly interconnected nature of supply chains, these increased costs would be passed along the production network, leading to higher consumer prices for industrial goods. The automotive industry, for example, is highly integrated across North America, and tariffs on intermediate goods would drive up the cost of automobiles in the United States, Canada, and Mexico. These price increases would have direct consequences for workers, as firms in these sectors may respond by cutting labor costs through layoffs, wage suppression, or automation. Additionally, as inflation erodes purchasing power, the real wages of workers decline, meaning that even if nominal wages remain unchanged, the higher cost of goods and services will result in lower standards of living for workers.

It is possible that the Trump administration believes that tariffs are capable of addressing America’s trade deficit by attracting increased capital inflows. However, this is complicated by two factors. First, Trump’s restrictive immigration policies, including large-scale deportations and tighter migration controls, could hinder the demographic growth needed for sustained economic expansion and foreign investment. Skilled workers and talent from emerging economies may choose other destinations, weakening the US labor market and its attractiveness to foreign capital. Second, tariffs disrupt global trade flows, which could reduce both imports and exports, making the US less appealing to foreign investors and diminishing capital inflows.

Thus, in a highly integrated global market, relying on tariffs to curb imports, stimulate reindustrialization, and boost US production and exports as a means to reduce the trade deficit is ultimately self-defeating. Such an approach would slow down production and employment growth not only in trade partners but also within the United States. Moreover, the expectation that capital inflows would help offset the trade deficit, an assumption central to the Trump administration’s strategy, would become increasingly unrealistic under these conditions.

The Consequences of Tariff War on the Canadian Economy

The economic strength of the United States has long been characterized by its ability to exert pressure on even its closest allies, particularly those with structural dependencies on it, either in the form of market access or military security. The sheer size of the US economy allows it to dictate economic terms to its North American partners, Canada and Mexico, whose economies are deeply intertwined with the United States.

According to the White House Fact Sheet, trade accounts for 73 percent of Canada’s GDP and 67 percent of Mexico’s GDP, with the majority of their exports and imports directed toward or coming from the US. In contrast, international trade comprises only 24 percent of the US GDP, and while Canada and Mexico are key trading partners, their leverage over the United States remains limited. This structural asymmetry enables the US to impose economic directives on these nations with little fear of meaningful economic retaliation.

Many policymakers, politicians, and scholars argue that Canada should respond to US tariffs by imposing equivalent retaliatory tariffs and diversifying its trade relationships to reduce its dependence on the United States. While theoretically, both ideas have some merits, they are motivated more by a romantic spirit than the facts on the ground.

If Canada were to impose equivalent tariffs on US imports, the overall economic impact on the United States would be marginal. Given the size of the US economy, the share of international trade in its total GDP, and the fact that Canadian imports make up only 13 percent of total US imports, such countermeasures would not inflict substantial economic damage on the United States.

In contrast, Canada’s dependency on the US means that the economic fallout from a US tariff increase would be far more severe. According to the Bank of Canada, a 25 percent tariff imposed by the United States on Canadian goods would lead to a 2.5 percentage point contraction in Canada’s GDP in the first year, followed by a 1.5 percentage point contraction in the second year. While Canada might eventually regain economic growth, the overall level of output would be permanently lower due to long-term distortions in investment and production patterns.

The economic dislocation caused by a US-Canada trade conflict would also have severe labor-market implications for Canada. The export sector plays a crucial role in maintaining the aggregate level of employment in the Canadian economy, supporting over 3.6 million jobs in 2022. Of these, 2.4 million jobs are directly linked to exports to the United States.

The disruption of trade flows due to tariffs would inevitably result in job losses, particularly in export-dependent industries such as manufacturing, automotive production, and natural resource extraction. Additionally, the backward linkages of these sectors — such as in transportation, logistics, and business services — would further amplify the employment crisis. In the short term, these job losses would place downward pressure on wages and consumer spending, exacerbating the economic downturn.

Beyond its impact on production and employment, a trade war with the United States would have immediate and tangible effects on Canadian consumers. The composition of Canada’s Consumer Price Index (CPI) basket reveals that 13 percent of household expenditures go to American imported goods. This means that an average Canadian consumer relies on US imports for a significant portion of their monthly purchases.

Retaliatory tariffs would raise the prices of these goods and increase the cost of living. Essentials such as fresh fruits, vegetables, juices, meat, and so on, many of which are imported from the United States, would become more expensive, as would household appliances, clothing, footwear, furniture, and recreational goods such as sports equipment. The inflationary impact of countertariffs would disproportionately burden lower- and middle-income households.

To offset the competitive disadvantage imposed by US tariffs, Canada would likely pursue currency devaluation as a policy response, allowing the Canadian dollar to weaken against the US dollar. A devalued Canadian dollar would make Canadian exports more competitive in the US market, partially mitigating the impact of tariffs.

However, this strategy comes with significant trade-offs. A weaker Canadian dollar would simultaneously make US imports more expensive for Canadian consumers, intensifying inflationary pressures. Additionally, devaluation could lead to capital outflows and higher borrowing costs.

Thus, this partial equilibrium approach to imposing retaliatory tariffs overlooks the structural economic constraints that limit Canada’s ability to effectively counter US economic coercion. In the short run, it is quite possible that these tariffs could be rolled back by the US, as they were in February, creating the mistaken impression that Canada’s countertariffs were effective.

Regardless of how long Trump persists with his trade war, the tariffs he has imposed serve as an important warning for Canada to reconsider its economic dependence on the United States, for this may not be the last time it is subjected to America’s economic statecraft. In fact, given the possibilities of a further deepening of the crisis of American imperialism, economic coercion of Canada could become even more brutal as time goes on. Canada’s response must go beyond symbolic retaliation and focus on long-term strategies that would have the potential to enhance the economic resilience of its economy.

What Is to Be Done?

Canada has long assumed that deep economic integration with American imperialism would serve its best interests. However, Trump’s trade policies have exposed the fragility of this assumption, revealing the limits of a strategy premised on alignment with US imperial objectives, and more important, this issue extends beyond tariffs. The United States has long leveraged its economic dominance over Canada to extract “voluntary” concessions on issues of critical natural resources access, immigration, border security, and military spending — demonstrating a broader pattern in its foreign policy.

If Canada really wants to consolidate its economic autonomy and sovereignty, delinking from American imperialism is no longer just an option but a necessity. However, this shift should not be framed as a retreat into nationalist economic sovereignty. Instead, as Sam Gindin argues, it requires a democratically driven restructuring process that prioritizes collective economic control.

This necessitates a critical reassessment of the foundations of Canadian economic and foreign policy: Should Canada continue embracing neoliberalism? Should it maintain its heavy reliance on international trade that is, by default, centered on the United States? Must it remain a junior partner in American imperial politics, including NATO commitments and broader imperial ambitions?

These questions require serious consideration, as Canada’s chosen path will shape not only its economic future but also its broader social trajectory.