The US-Canada dispute has crossed an important line. What began as tariff pressure designed to extract concessions is becoming a reciprocal trade war in which neither side can retreat easily without appearing to lose. Canada has responded to Washington’s latest tariffs with a dollar-for-dollar counterattack. Existing duties on US steel and aluminium will rise to 50%, while new tariffs will hit American dairy products, furniture, clothing, electronics and other goods. Around $20 billion of annual US exports will be affected. Ottawa has also announced C$7.5 billion of support for Canadian companies and is openly encouraging consumers to buy domestic products. Washington is now considering another escalation. That is the problem. Tariffs work as leverage when the other side believes concessions will end the pressure. Once retaliation becomes automatic, the mechanism changes. Each new measure justifies the next one. Negotiation becomes secondary to credibility. Governments stop asking what an agreement is worth and start asking what political price they would pay for backing down. Canada appears to have reached that point.

Mark Carney initially tried accommodation. He removed earlier retaliatory measures, abandoned the digital services tax, and sought to rebuild the relationship. The strategy failed. Ottawa now argues that Washington is attempting to weaken strategically important Canadian industries, including steel, aluminium and automobiles. The political consequence is predictable: compromise becomes harder. And the economic consequences increasingly fall on both sides of the border. The US exports hundreds of billions of dollars of goods to Canada every year. The latest Canadian measures specifically hit manufacturing states including Ohio, Michigan, Pennsylvania and Illinois. That matters economically. It matters even more politically. These are not abstract trade flows. They are factories, farms, jobs and congressional districts. A tariff designed in Washington to protect American industry can therefore return through Canada as a tax on an American manufacturer in Michigan or a dairy producer in Wisconsin. The administration can raise tariffs again, but Canada can respond again. At some point, the question becomes what victory actually looks like.

The deeper problem is that North America was built around precisely the opposite economic model. USMCA assumed that the United States, Canada and Mexico would increasingly function as one industrial platform. Investment decisions were made around integrated production, predictable access and continental scale. The economic advantage over China was not simply American manufacturing. It was the combination of US capital and technology, Canadian resources and Mexican manufacturing capacity. That architecture is now being politicised. The more tariffs rise, the more companies must price the border back into decisions that were previously made on continental economics. Supply chains become less efficient. Inventories increase. Capital expenditure is delayed. Production may eventually move, but the transition itself is expensive.

And this time Canada is preparing for a longer confrontation. The C$7.5 billion support package is important because it changes the nature of the response. Ottawa is no longer simply retaliating through tariffs. It is beginning to subsidise the adjustment away from dependence on the US market. That should worry Washington more than the tariffs themselves. Every programme that helps a Canadian company find another customer, every infrastructure project that opens alternative export routes, and every consumer encouraged to replace an American product reduce future US leverage. Economic coercion contains an inherent contradiction: the more frequently dependence is weaponised, the stronger the incentive to eliminate that dependence becomes. Canada cannot economically detach itself from the United States. Geography makes that unrealistic. But it does not need to. It only needs to become marginally less dependent. Over time, that means more trade with Europe and Asia, more domestic processing, different supply chains and less willingness to assume that access to the American market will remain politically predictable. The US therefore risks exchanging long-term influence for short-term concessions.

There is also an inflationary consequence. Steel tariffs raise industrial costs. Aluminium tariffs affect everything from vehicles to packaging. Retaliation reduces competition and pushes companies towards more expensive suppliers. Government subsidies then absorb part of the economic damage through public finances. What begins as a tariff becomes a chain of additional costs. The political timing makes this even more dangerous for Trump. Canada’s retaliation is concentrated partly in states Republicans cannot afford to ignore ahead of the midterms. If exporters lose sales while consumers continue worrying about prices, the trade war stops being a foreign-policy issue. It becomes domestic economics. Trump may still force concessions from Ottawa. The United States remains vastly more important to Canada than Canada is to the United States. But asymmetry does not mean immunity. Canada can hurt sectors and regions that matter politically, while gradually reorganising its economy to make future American pressure less effective. That is the strategic mistake Washington risks making. America entered this dispute with enormous leverage over Canada. If the escalation continues, it may finish with less.