Tariffs can extract concessions, as the latest US-Canada negotiations confirm. The problem is that, against Canada, they can also produce something considerably more damaging: higher costs for American industry, reduced investment visibility, retaliation against US exporters, and a gradual dismantling of one of the most integrated production systems in the world. Washington has postponed the introduction of 50% tariffs on a range of Canadian goods by three days after announcing what it describes as an agreement in principle with Ottawa. The White House says Canada has committed to remove discriminatory measures affecting American automobiles, dairy products and alcohol, while the US Trade Representative refers to broader commitments on market access, economic security and digital trade. Canada is considerably less categorical. Prime Minister Mark Carney says substantial progress has been achieved, but that important work remains. The most difficult disputes — automobiles, steel, aluminium and lumber among them — have not obviously disappeared. That gap matters.

Trump’s tariff strategy is often evaluated according to whether foreign governments eventually concede something. That is the wrong measure. The relevant economic question is whether the concessions obtained are worth the costs created in the process. With Canada, that calculation is particularly unfavourable to the United States. Canada is not China. It is not principally a low-cost manufacturing competitor selling finished products into the American market. It is part of the American production system. Automobile components cross the border repeatedly before a finished vehicle reaches a dealer. Aluminium moves south into American factories. Machinery, chemicals, timber, agricultural products and industrial inputs circulate through supply chains built over decades around the assumption that the border between the two countries is commercially predictable. A tariff placed on that system is therefore not simply a tax on Canada. It is a tax on American production. This is the fundamental weakness of using tariffs against a deeply integrated neighbour.

The closer the supply chains, the greater the self-inflicted cost. Take automobiles. A vehicle assembled in Michigan may contain Canadian components. Those components may themselves incorporate American inputs. Engines, transmissions, steel, aluminium, electronics and specialised parts can cross the border several times during production. A 50% tariff applied somewhere inside that chain does not neatly transfer wealth from Canada to America. It raises the cost basis of the entire vehicle. American manufacturers then face three choices. Absorb the cost and accept lower margins. Pass the cost to consumers through higher prices. Or reorganise supply chains. None is free. And the third option is not something companies can execute overnight. Factories, suppliers and production networks require years of investment and, above all, confidence that the rules will remain stable. This is where the uncertainty created by tariff policy becomes almost as damaging as the tariff itself.

The current Canadian dispute illustrates the problem perfectly. The proposed duties were announced in July. They were scheduled to begin this week. They were suspended less than two hours before implementation. They may still return depending on negotiations. This may be effective bargaining. It is poor economic planning. The consequences extend directly to American consumers. The proposed measures covered products including beer, milk, plywood and hockey equipment. These may appear marginal compared with semiconductors or oil. But tariffs operate cumulatively. A tax on Canadian timber affects construction. A tax on dairy products affects food prices. A tax on industrial inputs affects manufactured goods. Each individual measure may appear manageable. Together they reinforce an inflationary bias inside the economy.

And the cost does not stop with consumer prices. More persistent inflation also means higher interest rates, higher bond yields and a higher cost of capital across the economy. Tariff revenues may marginally improve the fiscal position, but that benefit can easily be overwhelmed by the broader increase in financing costs. The Canadian relationship also exposes another contradiction in the strategy. Washington is increasingly emphasising economic security. Yet Canada is one of the principal sources of the commodities required to achieve it. The United States imports more than four million barrels a day of crude oil and petroleum products from Canada. The proposed tariffs deliberately excluded some of the most strategically important Canadian supplies, including oil, potash and minerals. That exclusion is revealing. The administration understands that certain dependencies cannot be taxed aggressively without hurting America. Canada is deeply embedded in US energy security. Canadian heavy crude feeds refineries designed specifically to process it. Potash is essential to agriculture. Critical minerals matter for batteries, defence and industrial policy.

The closer Washington examines the relationship, the clearer the limits of economic coercion become. The US can threaten Canada because Canada depends enormously on access to the American market. But America also depends on Canada. The dependence is asymmetric. It is not one-sided. Keystone XL provides another illustration. Trump simultaneously announced that the pipeline project would be revived while threatening punitive tariffs on the country supplying the oil it would carry. The economic logic is difficult to reconcile. Washington wants more secure Canadian energy infrastructure. It also wants to demonstrate that access to the American market can be withdrawn unpredictably. Infrastructure investors notice these contradictions. Pipelines require decades of predictable cash flows. Mining projects require long investment horizons. Automobile factories require stable cross-border supply arrangements. Economic nationalism may encourage some companies to move production into the United States. Policy volatility can discourage others from investing altogether.

Nor are the costs confined to investment decisions. Tariffs rarely remain unilateral for long. Canadian provinces have already removed American alcoholic beverages from retail outlets in response to earlier US measures. That matters because tariffs rarely remain confined to the sectors originally targeted. A Washington action against Canadian manufacturers can prompt Ottawa or provincial governments to retaliate against American farmers, distillers or consumer brands. Those companies then become collateral damage in a dispute they did not create.

But the deeper cost goes beyond individual sectors or individual rounds of retaliation. Repeated tariff threats begin to damage the institutional architecture that was designed precisely to prevent this uncertainty. USMCA was supposed to establish the rules under which companies could make long-term investment decisions across the continent. If sectoral tariffs can repeatedly override the spirit of that framework, the value of the agreement declines. Rules become provisional. And once businesses conclude that trade agreements offer limited protection against political intervention, they incorporate that uncertainty into investment returns. Capital demands a premium. That is not how competitive economic zones are built. The irony is that North America’s greatest strategic advantage over China is precisely its ability to operate as an integrated continental economy. The United States has capital and technology. Canada has enormous natural resources. Mexico provides competitive manufacturing capacity. Together they combine energy, minerals, agriculture, manufacturing, technology and a consumer market approaching half a billion people. Few economic blocs can reproduce that combination. Fragmenting it through internal tariff battles weakens the very industrial architecture Washington says it wants to strengthen. The most serious cost is therefore not whether American consumers pay more for Canadian beer. It is strategic inefficiency.

The three-day reprieve may ultimately produce an agreement. Trump may even obtain meaningful concessions on dairy, alcohol, automobiles or digital trade. That would allow the administration to present the episode as another demonstration that tariff pressure works. But the economic ledger is wider than the negotiation. The United States is not bargaining with a distant adversary. It is bargaining with one of the countries most deeply integrated into the American industrial economy. That changes the arithmetic completely. Tariffs can force concessions from Canada because Canada needs the American market. But the more aggressively Washington weaponises that dependence, the stronger Canada’s incentive becomes to reduce it. And in the meantime, American manufacturers pay more, American exporters face retaliation, American consumers absorb part of the cost, and American companies invest under rules that can change overnight. The administration may call that leverage. For the US economy, it increasingly looks like a tax on itself.