Carney Vs. Trump: Where The Trade War Goes Next

Canada’s hefty new counter-tariffs on U.S. goods came into effect early Tuesday morning, pushing the ongoing trade war with the United States into uncharted territory. Talks broke down late last month, and Ottawa and Washington have been blaming each other ever since.

So, what happens next? How much pressure is on Prime Minister Mark Carney, and what, if anything, will get President Donald Trump back to the negotiating table?

We put these questions to four of POLITICO’s reporters who have most closely followed the twists and turns of this saga: Zi-Ann Lum, a Canadian trade reporter; Nick Taylor-Vaisey, our Ottawa bureau chief; Oliver Ward, a U.S. trade reporter; and Megan Messerly, who covers the White House.

We’re not any closer to ending the trade war, but we have as good a grasp as we can of where it stands — and why neither country’s leader chickened out with this round of tariffs.

This conversation has been edited for length and clarity.

Carney did not TACO. Zi, where are we now?

Zi-Ann Lum: We're bracing for hard times here in Canada. We're hearing from Carney, who released a polished explainer-style video today, tell Canadians (again) that this isn't the first time the United States has tried weaponizing Canada's tariffs to "break" Canada — and it won't be the last. So that sets expectations the Canadian countertariffs that came into force today may provoke more retaliatory actions stateside.

Carney's “Expect Hard Times” message to the Canadian public suggests they should expect more money in his government's upcoming budget to go to sectors and businesses that will be hardest hit in this trade war escalation.

I'll add that Trump targeting the Canadian dollar over the weekend was particularly interesting because that signals how serious the administration is in snatching Canada's share of the North American auto industry. One compelling reason to build in Canada is that it can be cheaper for labor costs when you pay workers on the Canadian dollar vs. U.S. dollar, so seeing Trump zero in on that raises the question: What's Trump going to do about it?

Trump also did not “chicken out.” Megan, why didn’t he back down? How willing is the White House to absorb the political and economic risks of escalation?

Megan Messerly: The administration genuinely believes this bubbling trade war will hurt Canada more than it hurts the U.S. — even with some of Canada's retaliatory tariffs targeting key states in the midterms. So, they're willing to absorb quite a lot. Just think of where we're at with Iran. Different stakes there, obviously. But the president has been unwilling to back down even as the war has sent gas prices rising.

I talked to a senior White House official about this last week, who actually said the Canada situation was "almost like Iran." The person told me: "They have a whole hell of a lot [more] to lose than we do." The president has a lot of wherewithal.

Oliver, you’ve mentioned in the past how much uncertainty there is. Same up here for obvious reasons! Based on your reporting in Washington and beyond, what comes next?

Oliver Ward: All eyes are on the U.S. for how it responds to the latest Canadian tariffs. President Trump over the weekend suggested that he could ban Canadian aircraft manufacturer Bombardier from the U.S. market — although that idea has already got some pushback from GOP Sen. Jerry Moran, who has a Bombardier facility in his state that could suffer from such a move.

USTR Jamieson Greer said recently that the administration is looking at going beyond tariffs and considering banning goods or services, and this would certainly open a new front in the trade conflict. But remember, Trump has already said that the U.S. will impose 50 percent tariffs on Canadian vehicles, steel and other goods starting in January in response to the deal talks collapsing, so any additional retaliation could potentially land on top of that.

Nick, you’ve heard today that Ottawa and Washington are talking, but not negotiating. Do you see a way back to the table? What’s your sense of how Ottawa views its next move? 

Nick Taylor-Vaisey: If either side wants to try to hammer out a deal, there's clearly some trust that needs rebuilding. Both sides have watched the other on TV for a few weeks — sometimes in measured tones like Jamieson Greer's typical approach, other times more freewheeling a la Howard Lutnick. Mark Carney has also deployed the language of war.

Getting back on track could start with something as simple as a conversation — with as little fanfare as possible — between Greer and Canada-U.S. Trade Minister Dominic LeBlanc. They've always described their interactions as professional. But Carney's latest video suggests little appetite in his office for backing down in any way. As Zi describes, the prime minister is preparing Canadians for a structural change in the relationship.

Zi, what is the biggest sticking point from the Canadian perspective?

Lum: I don’t know if there’s a single issue that they got stuck on. The impression I got after speaking with Janice Charette, Canada’s lead negotiator, after talks collapsed was that it was a whole ball of sticky issues that compelled them to walk away. One factor was the last-minute U.S.-proposed carveout of medium- and heavy vehicles being exempt from the reduction in Section 232 tariffs. That apparently caught the Canadians off guard when they were reviewing the text in the drafting room because they had been asking for tariff relief for all autos and were under the impression that was the deal. Of the trio of Section 338 threats, the autos piece by far had the biggest economic impact. Way more than the ban on U.S. booze and restrictions on market access for dairy.

Another big factor was the evolution of a conversation the two sides had been having for a while on Canada’s existing free-trade agreements, and how Ottawa applies its tariffs to FTA and non-FTA partners on products including steel. According to Charette, what happened on the day that talks collapsed in a meeting with U.S. Trade Representative Jamieson Greer was that he floated the concept about the administration being concerned about Canada’s future FTAs. There was not text exchanged on this point, but the lack of details was enough of a red flag for Canadians unsure if the U.S. wanted a say in future FTAs with third countries — making it a sovereignty issue for the Carney government — and that's the framing we've been hearing from the PM since talks collapsed.

Oliver, the White House has been sharing a different take! What do you suppose is the biggest sticking point from Washington’s perspective?

Ward: Yes, both sides pointed the finger at each other following the breakdown of negotiations last month. On the U.S. side, they complained that there was a late ask from Canada to include trucks in the tariff relief package and that negotiators walked away from a commitment to collaborate on the Keystone XL pipeline.

But it's not clear that the same sticking points would reemerge if negotiators returned to the negotiating table, or if the same deal would even be on the table.

At a minimum though, U.S. officials have said that they want any deal to address the three issues that prompted the Trump administration to initiate this tit-for-tat escalation: Getting U.S. booze back on Canadian shelves; rescinding Canada’s auto tariffs; and making progress on longstanding U.S. complaints over how Ottawa manages dairy import quotas. But if Canadian negotiators are looking for tariff reductions on U.S. metals tariffs, Washington will likely want some closer alignment from Canada on its treatment of imported steel, aluminum and downstream products from third party countries, as Zi-Ann mentioned.

Lum: For what it’s worth, I spoke to a few Canadian auto industry sources who all called BS on the idea that Charette, a woman who's led the federal public service twice and is on the record for saying her primary objective is to reduce or eliminate all Section 232 tariffs, forgot about an entire category of vehicles until the very last minute

Megan, based on your reporting from the White House, how much political pressure is Trump feeling from U.S. lawmakers, businesses and voters? Is Canada going to become a midterm issue?

Messerly: So, there's definitely political pressure. We've seen Mike Rogers in Michigan and Susan Collins in Maine have to respond to the Canada tariffs. But Trump himself isn't going to feel a lot of political pressure. He obviously wants Republicans to win — and hold onto the Senate. I don't see him being pressured by just this set of retaliatory tariffs Canada has announced. But if he starts getting calls from business leaders, etc., that could of course persuade him.

So I think the short answer is yes, it is going to become a midterm issue in some of these key states that do a lot of business with Canada. It's adding additional pressure to an election already focused on high prices and affordability. But I haven't heard from anyone close to the White House who thinks that pressure is going to change Trump's mind on this, especially now that it's gotten into this kind of tit-for-tat fight. He'll need a kind of face saving way to back down, if he's going to back down at all from this.

Nick, how much of Carney’s position is driven by economic strategy, and how much by Canadian politics — including the upcoming election in Quebec and the October vote in Alberta over whether to pursue a referendum on separation?

Taylor-Vaisey: Canadian officials mostly insist the newest counter-tariffs are meant to protect tariff-exposed Canadian sectors. The Canadians don't want to be seen as escalating the trade war. Two proof points suggest it's a little more complicated. First, Industry Minister Mélanie Joly told reporters that her government was "being wise and strategic to put political pressure" on certain American sectors. Second, the initial counter-tariff list targeted seafood products, which had so far escaped any tariffs. That would've been seen as escalation. Canadian seafood reps complained loudly about those measures, and the government dropped them.

When it comes to the Alberta and Quebec votes, Carney may be guided by the "do no harm" principle. Alberta has so far managed to avoid too much of the tariff blowback. The prime minister has repeatedly said "nothing is off the table" in Canada's trade-war playbook, but he's never threatened to slap, say, an export tax on energy — from Alberta or anywhere else. It's unclear how much of a political impact the tariffs will have on the separation referendum. Meanwhile, in Quebec, incumbent premier Christine Fréchette is basically campaigning against Trump. Tariffs are a top ballot question.

This last one is for everyone: How does this end? What is the most likely endgame?

Ward: Canadian officials have made much of the U.S. demands around French language laws and U.S. efforts to limit its trade dealings with other countries. The U.S. has offered a different characterization of those demands, which could offer a path back to the negotiating table. If those asks are clarified and end up being less forceful than the Canadian government anticipated, it could offer an opening for returning to negotiations without either side losing too much face or having to make large concessions. But it’s a big IF, and the longer the two sides spar in public and dig in to their respective positions, the harder it becomes to find a way back.

Taylor-Vaisey: A new cross-border Pacific utopia, Cascadia, will finally emerge as its own west-coast nation — a tariff-free zone for Canadians and Americans tired of fighting and tired of apologizing. Where lumber crosses borders without strain or ill will.

Messerly: A lot of people I talk to around the White House think that Trump is going to need some kind of “out” here. He's going to need something that looks like a "win" to remove those 50 percent tariffs and get back to the negotiating table. The question is: Will Canada be able to give him that win in light of how tense things are between the two countries and how sour Canadians' views of the U.S. are right now. It’s a classic case of domestic politics here making things tricky on both sides of the border.

Lum: Well, if you ask a Carney acolyte, it’s seriousness from the Trump administration side. And that may involve some kind of concession from the Canadian side, if we look at previous stop-start cycles of trade talks in the last year, especially if Trump isn’t feeling any political pressure to come back to the table, as Megan mentioned.

It’s frankly very hard to see how this ends. Who's to say this disdain against Canada ends with Trump? And we haven’t yet seen how the administration will respond to more Chinese EVs landing in Canada as Ottawa and Beijing pursue more economic co-operation. The Trump administration wants Canada to be more hawkish with China, but the administration still hit Canada with tariffs when its policies mirrored the U.S., so the view from this side of the border is it’s a bit of you're damned if you do, damned if you don’t.