U.S. Economy Could Feel the Sting From Trade War With Canada

Since President Trump has returned to office, the United States and Canada have repeatedly come close to an all-out trade war — only for Mr. Trump to dial back some of his harshest attacks against one of America’s closest allies.

But that period of relative calm came to an end on Saturday, as new 50 percent tariffs from Washington took effect, drawing a pointed threat from Canada to respond in kind. The resulting clash left the two North American neighbors barreling toward a dangerous tit-for-tat escalation, one that may yet inflict real harm on the U.S. economy.

For Mr. Trump, the return to trade brinkmanship reaffirmed a time-old truth: His tariffs are taxes on imports, meaning some of the cost of his latest duties may ultimately fall hardest on U.S. importers stung by years of persistently high prices.

Although Mr. Trump’s tariffs only cover a small subset of Canadian goods, the consequences could quickly spiral. If Canada retaliates, and Mr. Trump does the same, the result could be a series of new shocks for the U.S. economy at a time when it is already weathering plenty.

“The bigger deal is uncertainty,” said Scott Lincicome, the vice president of general economics at the Cato Institute.

Mr. Lincicome said that volatility had pervaded Mr. Trump’s entire second term, as his ever-shifting tariffs — raised and lowered sometimes by the stroke of a pen — roil Wall Street, anger the courts, infuriate U.S. allies and help to drive up the price of consumer goods domestically.

With Canada, though, Mr. Lincicome said the new clash could weigh heavily on businesses that transact across the U.S.-Canadian border. The retaliatory tariff increases could affect prices, and consequently translate to “slightly less investment, slightly less economic activity,” while the confusing trade climate persists.

In the end, Mr. Trump could still avert catastrophe and strike a deal with Canada as soon as this weekend. But, by Saturday morning, that appeared unlikely: Jamieson Greer, the U.S. trade representative, told Fox News that there were no new talks planned with his Canadian counterparts, adding that the administration was “moving forward” with its tariffs.

In response, Canada showed no sign that it planned to back down. Hours later, Mark Carney, the country’s prime minister, threatened to unveil its own tariff measures against the United States shortly after Labor Day, targeting sectors including agriculture, steel and electronics.

At one point, Mr. Carney even said his country was “at war.”

Mr. Trump’s new duties — set at 50 percent — apply to about $20 billion in Canada’s exports to the United States, according to administration officials. The list of covered goods numbers into the hundreds, and includes Canadian-made hockey sticks, furniture and dairy products, which could become too expensive for U.S. consumers to import.

Overall, though, the tariffs apply to a small fraction of trade between the two nations, muting the impact, at least for now. In an early blockysis, John Ricco, the deputy director of policy blockysis at the Yale Budget Lab, a nonpartisan think tank, said the new tariffs would raise the average tariff rate on Canadian imports to about 7.6 percent, from roughly 5.3 percent.

The United States already had in place steep tariffs on other critical Canadian imports, including its lumber, steel and cars. But, unlike Mr. Trump’s past tariffs, the duties he imposed Saturday come with no special exemption for goods that are otherwise covered under a trade agreement the United States brokered with Canada and Mexico, a pact that the president separately has said he hopes to revise or kill.

Joe Brusuelas, the chief economist at the audit and consulting firm RSM US, said he still believed a deal was possible. But he added that the risks of escalation were also real — and could be costly.

For one thing, Mr. Brusuelas said he expected that Canada might take aim “where it hurts the most,” perhaps including the U.S. auto industry. That could result in “risks around the inflation outlook” at a time when manufacturing continues to lag.

A retaliatory cycle could complicate the nation’s existing battle with inflation, which remains well above the 2 percent target that the Federal Reserve aims for, despite Mr. Trump’s arguments to the contrary. In fact, rising prices prompted the president just this week to relax his tariffs on beef imports, a tacit acknowledgment that his trade policies had hit Americans’ wallets.

Increasingly, those economic anxieties have also spilled into financial markets. Concerns about America’s mounting debt load, which hit $40 trillion this week, helped send yields on government bonds soaring. The war with Iran has also posed economic challenges, crimping growth globally while causing fuel costs to rise.

Some Democrats in Congress cited additional risks as they attacked the president in recent days, arguing that his threats against Canada could create real economic blowback for the United States. Shortly after the tariffs went into effect, Senator Peter Welch, Democrat of Vermont, described the duties as a “slap in the face” to farmers and others in his state that do business across the border.

“Cross-border business relationships, built over decades, are in the lurch,” he said. “Uncertainty about a long-term trade deal with our closest ally has grown, and long-term trade negotiations seem to now be on ice.”

But there was still a sense among some on Washington and Wall Street that the worst with Canada might still be avoided — and that the drama playing out in public reflected the now-usual course of business with Mr. Trump.

“We’ve all been conditioned to the sequencing of these negotiations,” Mr. Brusuelas said.