JPM US and Canada trade war

J P M O R G A N North America Economic Research 24 August 2026

US and Canada: Trade war with your friends and neighbors

Trade negotiations between the US and Canada broke down late in the evening on Economic and Policy Research Friday, August 21, resulting in 50% tariffs on about 5% of US imports from Canada Michael S Hanson (roughly $20bn) imposed just after the stroke of midnight on Saturday. Canada has ( announced that it will retaliate with dollar-for-dollar counter-tariffs on September 8. US Trade Representative Greer has stated that the US would respond to such Bennett Parrish action with additional tariffs on Canada, setting up a risk for a tit-for-tat ( deterioration into a broader trade war. On Monday morning, President Trump JPMorgan Chase Bank NA posted on social media that he would raise the tariffs on all vehicle imports from Canada to 50% at the start of 2027. That said, as the experience of “Liberation Day” and other events have shown, the maximal positions put forth by the administration are often more of a negotiating tactic and not where policy ulitmately ends up.

The 50% tariffs are being imposed under section 338 of the Tariff Act of 1930, which gives the president authority to put tariffs up to 50% on any country he determines has discriminated against the US. The Yale Budget Lab reportedly has estimated that the effective tariff rate on Canada would rise to 7.6% from 5.3% while the current section 338 tariffs remain in place. Given the relatively small portion of total US imports that would be impacted, the Yale Budget lab has estimated that the current overall effective tariff rate for all US trading partners, which last week stood at 11.3%, would rise about 0.2%-pts with the 338 tariffs. We estimate as a rough rule of thumb that extending the 50% tariffs to all vehicle and parts imports from Canada would add 1.7%-pts to the effective tariff rate for Canada, and around 0.1 to 0.2%-pts to the overall US effective tariff rate.

This increase in effective tariff rates on Canada is large enough to suggest some additional downside risk for growth to a Canadian economy that had appeared poised for a midyear rebound after contracting around the start of the year. Given how the Bank of Canada has characterized the risks to its outlook, we see today’s news as reducing the likelihood that the BoC will resume hiking by early next year as markets are currently priced. On the US side, the rise in the overall average effective tariff rate is small enough that it will likely have minimal effects on the outlook for inflation. For both economies, business sentiment could suffer a modest setback on the risks for further escalation, particularly for the auto sector. That said, businesses on both sides of the border have had well over a year now to adjust to the stop-go nature of the administration’s trade policies.

Unlike section 301 or section 232 tariffs, section 338 does not require investigations prior to the imposition of the tariffs. But section 338 is a previously unused Depression-era law that was originally part of the Smoot-Hawley tariffs, and some legal experts have questioned its use. As such, it could face legal challenges; other tariffs (e.g., IEEPA, section 122) have already been overruled by US courts. In addition, the fact that USMCA-compliant goods are not exempted from this round of tariffs is also likely to face a challenge in court as illegal under USMCA.

See page 3 for analyst certification and important disclosures.

Michael S Hanson North America Economic Research ( August 2026 JPMORGAN

The reasons cited in news reports for the breakdown in talks vary by source, suggesting more distance between the two sides than had been appreciated. Indeed, a deal may have been less imminent than news reports made it seem late last week. Despite both sides agreeing that “substantial progress” had been made, Canadian negotiators apparently walked away from the talks late on Friday. Both sides are now blaming the other for the failure. PM Carney has stated that the US asked “too much, offered too little,” and asserted that “last-minute changes” made by the US side were “unfair, uneconomic, and called into question the…