Retaliatory tariffs may be defensible as a negotiating weapon, but they are not economically beneficial simply because they are reciprocal.
The US-Canada trade deal was close but no cigar. Last-minute changes and new demands led the US’s predictably unpredictable president to impose tariffs on imports from Canada. The cost of those tariffs will mostly be borne by American consumers.
Prime Minister Mark Carney felt he had to show strength to Canadians and declared that we find ourselves in a trade war. In retaliation, Canada has imposed tariffs on certain imports from the US. Those tariffs will mostly be borne by Canadians.
The question is whether tit-for-tat retaliation is merely a demonstration of strength to Canadians or whether it is also good economic policy.
I like metaphors and somewhat exaggerated examples because they make the point clearer.
Let us assume that there are only two countries in the world and that they use the same currency, so we can take currency fluctuations out of the picture.
Country S produces shoes, and Country B produces bread. The terms of trade are 20 loaves of bread for one pair of shoes. That is how it has been for many years.
But now Country S decides that it wants to produce its own bread. It introduces a 20% tariff on imported bread.
The question is: should Country B impose a similar tariff on shoes?
The tariffs are a cost to the domestic consumer. They make consumers poorer because a higher proportion of their income must be spent either on imported goods that are now 20% more expensive or on more expensive domestically produced substitutes. Country S has, in effect, made its own consumers poorer to protect its bread producers.
If Country B imposes a similar tariff on shoes, it will also make its own consumers poorer.
That is the basic problem with retaliatory tariffs. Two countries can quite rationally decide to make each other poorer while convincing their citizens that they are demonstrating strength.
The numbers in the current dispute make the point particularly stark.
On August 22, the United States imposed a 50% tariff on C$27.6 billion of Canadian goods. Canada has announced that, effective September 8, it will impose counter-tariffs covering the same C$27.6 billion of US imports, not matching the American 50% rates but imposing either 15%, 25% or 50%. At first glance, imposing retaliatory tariffs on an equal amount on exports to the US sounds symmetrical. Economically, it is anything but.
The US economy is vastly larger than Canada’s, and the dependence of the two countries on each other is also asymmetric. In 2025, 71.7% of Canada’s merchandise exports went to the United States, while the US accounted for 58.8% of Canada’s merchandise imports. Canada’s goods surplus with the US was C$81.6 billion.
The US, meanwhile, traded about US$719.5 billion in goods with Canada in 2025. Canada was the second-largest market for US goods exports. The US also had a US$28.9-billion services trade surplus with Canada.
Canada can certainly inflict economic pain on the United States. We supply Americans with energy, minerals, metals, agricultural products and countless components incorporated into American production. But the capacity to inflict pain is not the same as the capacity to inflict as much pain as one receives.
If both countries impose equal tariffs, the percentages may be identical, but the economic consequences need not be.
And there is another problem with the idea that retaliation is good policy.
A tariff is not a cheque sent by the foreign producer to the Canadian government. It is a tax collected at the border from the Canadian importer. The importer may absorb some of it, but much of the cost will eventually be passed through the supply chain to consumers. The same principle applies to American tariffs: American importers and ultimately American consumers bear much of the cost.
So, when Canada retaliates, Canada is not simply “making America pay.” It is in fact taxing Canadians.
This is where the political language of a “trade war” can become dangerous. Wars are generally described in terms of defeating the enemy. But in a trade war, you can win a battle and still lose economically.
There is, however, a legitimate argument for retaliation. Tariffs can be used as leverage. If refusing to retaliate makes the other side believe that Canada will accept every new demand, a limited and carefully targeted response may improve Canada’s negotiating position.
But that is very different from claiming that tariffs are good economics.
The sensible Canadian strategy should therefore be to keep the rhetoric down and the economic reform up.
Canada should use this crisis to become the freest-trading country in the world.
Remove interprovincial trade barriers. Make it easy to sell a product from Newfoundland to British Columbia without encountering a maze of provincial rules. Open procurement. Reduce unnecessary regulation. Make Canadian companies genuinely competitive at home and capable of competing abroad.
This is not a minor issue. If Canada is going to tell the United States that protectionism is damaging, we should make sure that we are not protecting our own markets.
Canada’s internal market is already too small to justify unnecessary barriers between provinces. We should not respond to American protectionism by becoming more protectionist ourselves.
There will eventually be another trade agreement with the United States. If there is not, Canada will have to live with a more difficult relationship with its largest trading partner. Either way, the answer is the same: diversify, become more productive and make Canada exceptionally easy to trade with.
And perhaps we should be willing to demonstrate this with something more powerful than rhetoric.
Canada should be able to say to the world: Come and trade with us.
There is an interprovincial twist; Canada’s dairy supply-management system and related import regulations disproportionately benefit Quebec.
Our economy should be so open that nobody needs to be persuaded that Canadian cheese is worth protecting.