For most of the past century, U.S.-Canada trade policy moved in one direction: toward progressively greater economic integration. The second Trump administration has sharply disrupted that trajectory. Beginning in 2025, Washington imposed new tariffs on Canadian goods, initially linking some measures to fentanyl and border-security concerns, while separately targeting steel, aluminum and automobiles. The confrontation intensified in 2026. The United States declined to renew USMCA in its current form during its scheduled July review, although the agreement remains in force, and subsequently imposed additional duties on certain Canadian products over disputes involving dairy, automobiles and alcoholic beverages.
The historical parallel is striking. Following passage of the Smoot-Hawley Tariff Act in 1930, Canada retaliated against higher U.S. tariffs by raising duties on American products while lowering tariffs on hundreds of goods from the British Empire. The objective was not merely retaliation but diversification: Canada sought to redirect commerce away from the United States.
That experiment in protectionism did not last. Following Roosevelt’s election, Washington reversed course: Congress passed the Reciprocal Trade Agreements Act in 1934, empowering the president to reduce Smoot-Hawley tariffs in exchange for reciprocal concessions, and Canada responded by negotiating tariff reductions of its own. The two countries signed a reciprocal trade agreement in 1935, beginning nearly nine decades of progressively deeper integration. Both became founding members of GATT in 1947; the 1965 Auto Pact integrated automobile manufacturing; the 1989 Canada-U.S. Free Trade Agreement eliminated most bilateral tariffs; and NAFTA expanded the arrangement to Mexico in 1994. Even the first Trump administration ultimately preserved the basic architecture, replacing NAFTA with USMCA in 2020. What emerged was one of the world’s most integrated bilateral economic relationships, with goods, energy, capital and components moving across an increasingly open commercial border. The second Trump administration has now begun moving that relationship in the opposite direction.
Washington’s grievances are not entirely without merit. Canada’s supply-management system heavily protects dairy, poultry and eggs, and the United States has legitimate complaints over market access, including dairy quotas it has challenged under USMCA. But scale matters. Total U.S. dairy exports worldwide were only $9.6 billion in 2025, compared with roughly $872 billion in total U.S.-Canada goods and services trade. Nor are the grievances one-sided: Canada has long challenged U.S. duties on Canadian softwood lumber and domestic-content procurement policies favoring American suppliers. Yet historically, Ottawa pursued those disputes through negotiation and the dispute-resolution mechanisms of NAFTA, the WTO and now USMCA rather than allowing them to dictate the broader trading relationship. Washington has every reason to enforce Canada’s market-access commitments; it is harder to argue that relatively narrow disputes justify jeopardizing the much larger free-trade architecture governing one of the world’s most integrated economic relationships.
Just as in the 1930s, Canada’s response is increasingly about more than retaliation. As we argued in our 2025 Outlook Commentary, the world is moving from MAGA toward MEGA—“Make Everyone Great Again”—a resurgence of economic nationalism in which governments increasingly favor domestic industries, production and workers over the efficiencies of greater global integration. In a MEGA world, diversification makes sense for Canada, particularly when roughly three-quarters of its merchandise exports go to a single country. Europe is the obvious alternative. Canada and the EU already have the Comprehensive Economic and Trade Agreement (CETA), a free-trade agreement provisionally in force since 2017 that eliminates duties on 99% of tariff lines. But the relationship is rapidly expanding beyond trade into defense, critical minerals, technology and economic security. Canada has already gained access to Security Action for Europe (SAFE), the EU’s €150 billion defense-financing program supporting joint procurement and expansion of defense-production capacity, becoming the first non-European country to participate. European Commission President Ursula von der Leyen has now gone considerably further, proposing Canada become the EU’s first “associate member,” an unprecedented status intended to create much deeper economic, security and political integration without Canada becoming a full EU member. The details remain to be negotiated, but Prime Minister Mark Carney has welcomed the proposal, with further discussions expected at the October EU-Canada summit.
Canada cannot replace the United States as its principal economic partner, nor does it need to. Diversification requires only creating credible alternatives at the margin.
And therein lies the historical irony. In 1930, American protectionism helped push Canada to look across the Atlantic for alternatives. Nearly a century later, Washington is invoking Section 338 of the very same Tariff Act of 1930 in its latest confrontation with Canada. Once again, Canada is looking across the Atlantic.
The question for Washington is therefore not simply whether pressure can extract Canadian concessions. It is whether sustained use of American economic leverage ultimately encourages its closest trading partners to build alternatives that reduce that leverage over time. If Canada’s response is replicated elsewhere, the cumulative effect could reinforce the broader forces of deglobalization—more regional trade blocs, duplicated supply chains and greater emphasis on national economic autonomy. Over time, the same desire to reduce dependence could extend to financial relationships as countries diversify reserves, payment systems and sources of financing, adding at the margin to existing pressures toward dedollarization. The irony is that policies intended to strengthen American economic leverage could, if pushed too far, encourage the development of the very alternatives that gradually diminish it.
As always, stay tuned.
Ardavan Mobasheri
Chief Economist