U.S.-Canada trade talks collapse as Trump prepares 50% tariffs on autos and steel

KUALA LUMPUR, 28 AUGUST 2026 —

Trade negotiations between the United States and Canada collapsed last week, allowing the Trump administration to impose a 50% tariff on Canadian cars, trucks, automotive parts and steel starting January 1, 2027.

President Donald Trump announced the new tariffs on August 24 via social media, accusing Canada of “ripping off” the United States and suggesting companies could avoid the levies by producing goods domestically. Canadian Prime Minister Mark Carney responded by pledging to match U.S. tariffs “dollar for dollar,” with retaliatory levies on U.S. steel, dairy, appliances, agricultural equipment, pulp and paper products, electronics and other goods beginning September 8.

The Trump administration is invoking Section 338 of the Tariff Act of 1930, a dormant authority that permits the president to act by proclamation and override the U.S.-Mexico-Canada Agreement (USMCA), according to the White House. The legal basis cited is retaliation for measures Canada imposed after earlier U.S. tariffs under Section 232 national security provisions on steel, aluminum, autos and trucks.

Brad W. Setser, a senior fellow at the Council on Foreign Relations and former senior advisor to the U.S. Trade Representative, estimates the direct cost of the new 50% tariff at $10 billion, equivalent to 0.05% of U.S. GDP. While the impact would be limited if tensions do not escalate further, Setser writes, the effect on Canada—an economy one-twelfth the size of the U.S.—would be much larger.

Canada’s geography also complicates finding alternative markets for displaced exports.

The breakdown in talks also forfeits potential benefits from reducing earlier tariffs, including those on primary aluminum that have raised costs for U.S. businesses without boosting domestic production. The U.S. aluminum market remains dependent on Canadian imports, and high U.S. tariffs have pushed domestic prices above global levels, making new investment uncompetitive.

Setser notes the USMCA was already “functionally dead” in key sectors due to existing Section 232 tariffs, which ended open trade in steel, aluminum, autos and trucks. While the USMCA maintained most North American trade tariff-free in theory, its structure—allowing each member to set independent external tariffs—has become problematic in a world of high U.S. trade barriers.

According to reporting by the New York Times, the proposed deal involved Canada agreeing to a “Fortress North America” approach, aligning tariffs on third countries, but only if the United States dropped its current auto, steel and aluminum tariffs on Canada—an offer the Trump administration rejected.

Setser argues the USMCA’s design, which permits open internal trade alongside divergent external policies, no longer fits a world of elevated U.S. tariffs. He suggests the agreement may need structural changes to remain viable. For now, the largest bilateral trade flow—four million barrels of oil per day from Canada to the U.S.—remains unrestricted.