In its latest shakedown, the United States and Canada are going head-to-head with tariffs against each other bringing a whole new level of uncertainty and risk to the world of trade. Canada has now joined China to retaliate against the United States, following President Trump’s initial move to impose tariffs across a broad range of trading partners accused of benefiting from large trade surpluses with the US. With multiple rounds of failed negotiations, this only adds on to the chaos the world is in right now indicating signs of prolonged volatility that businesses, consumers and investors will have to deal with moving forward.
What’s really going on between the two countries?
Despite being long-time allies and close trading partners historically, the two neighboring nations have been going through a rough patch ever since President Trump returned to office in January 2025. What started off by the US back in February 2025, and retaliatory measures taken by Canada in between, has eventually turned into a continuous back and forth impacting key industries like steel, aluminum, dairy, automobiles and lumber.
The latest announcement was from Canada’s Prime Minister Mark Carney who framed the move as a “dollar-to-dollar” and “strategic retaliation” designed to match the latest US tariffs – who imposed a 50% levy on $20bn worth of Canadian goods which is around 5% of Canadian exports to the US. President Trump has escalated matters further by threatening to double duties charged on Canadian cars and car parts to 50% come January 1st. Tariffs also extend to paper products, alcoholic beverages – which accounted for around USD 1.5 Billion of US imports last year and a wide array of dairy products – which accounted for about USD 750 Million worth of imports by the US last year.
Canada is still facing lower average tariffs than others
Despite the headlines with numbers that seem stark, data shows that Canada still faces some of the lowest US tariff rates compared to other countries on average paid across all imports. While it was almost on par with Mexico (~3% on average) before the latest escalation, even after the imposed 50% on Canadian goods, the average is still close to 6% - similar to the average rate faced by countries like Vietnam and the UK. China still faces the highest average rate of around 20.5% with Japan – 10% and India – 8% following behind. The world average stands at around 7% according to data from the US Census Bureau.
How will this impact consumers and firms?
The two countries are heavily reliant and deeply integrated when it comes to trade. The US buys close to 70% of Canada’s exports and is a leading partner alongside Mexico and China for the US. However, data shows that Canada’s non US exports has picked up notably since President Trump took office and PM Carney has pledged to double it over the next decade. While Canadian businesses will have to deal with the additional burden of tariffs on top of already high commodity and energy prices stemming from the Iran war, this gives a broad sense of the longer-term pathway and highlights the importance of diversification for alternate markets.
The obvious impact for US consumers and importers come from possible price hikes as a result of higher tariffs on products. If the tariffs imposed by President Trump remain in effect and US importers are unable to absorb the added costs without hurting profit levels, it is likely that they will to pass on a greater share of these costs to consumers, leading to continued increases in domestic prices. While it’s costly for all parties involved, individuals and businesses will have to account for a sustained period of high uncertainty and heavy volatility particularly in the short to medium term as specifics are blurred and stability is far from reach.
In terms of spillover effects, one key point to note is that costs of a prolonged tariff war could extend beyond the North American region as well. As input costs for intermediate goods such as metals, chemicals, machinery components, and selected agricultural products rise, it could filter through into final consumer prices across multiple regions – from Europe to even Asia. This effect could potentially become more impactful when added on top of existing supply-side shocks – such as higher commodity and energy prices – and weather-related disruptions linked to El Niño conditions - and could drive inflation further across countries.
What does this mean for Sri Lanka?
For Sri Lanka, a full-blown trade war on the Western front only adds on to the already chaotic global trade landscape. As that part of the world does account for a major portion of our exports – particularly apparel - those who are directly exposed to the western trade flows may have to remain on high alert as new developments of the clash come in to the picture every day. As Canadian exporters look to diversify markets, and supply chains also shift alongside any changes happening, it could also bring newer niche export-import opportunities for local players. In of financial markets, as sentiment around stability dampens and investors are looking to park funds in emerging economies – this could also carry a huge upside for Sri Lanka to attract foreign inflows given the strong macro fundamentals the country has recorded over the past three years.