The Canadian dollar dropped sharply Monday after trade negotiations between Ottawa and Washington collapsed, triggering a full-scale tariff dispute between the two neighbors.
The U.S. imposed 50% tariffs on roughly $20 billion worth of Canadian imports on Saturday, targeting dairy, wine, wood products, ceramics, and several other categories of goods.
Canada is the second-largest trading partner of the United States after Mexico, making the breakdown in talks especially significant for global markets and supply chains.
Canadian Prime Minister Mark Carney announced retaliatory tariffs pledged “dollar for dollar,” set to take effect September 8, covering steel, dairy, agricultural equipment, paper, and electronics.
Carney said details of the Canadian countermeasures would be released “in the coming days,” signaling a prolonged and potentially worsening standoff between the two countries.
The Canadian dollar, known as the loonie, was 0.55% lower against the U.S. dollar at 4:30 a.m. ET, while also weakening against the euro, British pound, and Japanese yen.
FX strategists at ING noted that “as a smaller, more open economy, Canada has more to lose from this, but Prime Minister Mark Carney seems to have opened the door to more fiscal stimulus to support affected business.”
Bradley Saunders, North America economist at Capital Economics, told CNBC that Canada faced a disproportionately larger impact on growth and inflation compared to the United States.
“The high levy rate means the most exposed industries could be crippled,” Saunders said, noting the removal of exemptions for goods compliant with the United States-Mexico-Canada Agreement, currently under renegotiation.
Although the targeted goods represent only around 0.6% of Canada’s GDP, Saunders warned that “a collapse in exports would still be enough to push already-weak GDP growth back towards zero.”
He further cautioned that weaker U.S. demand for finished goods such as furniture and electrical equipment could create knock-on effects for upstream primary industries already strained by Section 232 tariffs.
Saunders estimated that extending the 50% tariff regime to cover 20% of Canada’s U.S. goods exports, up from 5% previously, could strip roughly 2% from Canadian GDP and tip the country into recession.
Negotiations had appeared close to a resolution throughout the week, but the tone shifted sharply over the weekend, with both sides publicly blaming each other for the failure.
Carney stated the U.S. had “asked too much and offered too little,” adding: “We were not prepared to compromise Canada’s sovereignty or undermine our key industries.”
When pressed by reporters on whether Canada was entering a trade war, Carney responded bluntly: “Because we got attacked. You’re at war when you get attacked. We got attacked.”
President Donald Trump, posting on Truth Social on Sunday, wrote: “Canada wants the benefits of being a State, without being one!!! They have also charged our great farmers, for many years, massive amounts of Tariffs. No more!!!”
