Trade war, eh? Who cares? (It depends)

Here Comes the Trade War

The US and Canada are on the brink of a trade conflict that could either fizzle out as a negotiating tactic or escalate into a prolonged dispute. Trump and Trudeau are apparently scheduled to speak this morning, but tensions are high and the media is playing into it. Mexico and China are in the fray too, but we’ll focus on our northern neighbor for now.

What’s Happening

On Saturday (Feb 1), Trump announced a 25% tariff on imports from Canada and Mexico. In response, Canada’s Prime Minister Trudeau imposed retaliatory tariffs—also 25%—on a phased $150 billion of American goods, explicitly calling out iconic US products like beer, bourbon, wine, and fruit.

While these tariffs only cover about 43% of US exports to Canada (which were about $352 billion last year), the real strategy lies in the specifics. By hitting products tied to politically influential regions—think Kentucky bourbon, Washington apples, Florida oranges, and Wisconsin dairy—Trudeau aims to create domestic pressure within key US states thereby building some geopolitical leverage.

The Strategy Behind the Tariffs

Canada is also leaving room for escalation. By targeting only about half of US exports, Trudeau retains leverage to impose further tariffs if negotiations turn sideways. That said, expanding tariffs would also increase the economic strain on Canada, which relies heavily on the US market. While about 17% of US exports go to Canada, a staggering 75% of Canada’s exports head south to the US, making this a delicate balancing act for Ottawa.

Who Gets Hurt?

Despite the headlines, the broader economic impact on the US is likely to be limited. For example, exports of US alcohol to Canada account for just 0.1% of total US alcohol production. The industry thrives primarily on domestic consumption. The same is true of fruits and juices—certain regions and companies may feel a pinch, but the overall US economy is unlikely to suffer significant harm.

Some Canadian provinces, like British Columbia and Ontario, have taken even stricter measures, removing American alcohol products from government-run liquor stores entirely. Yet, again, given that exports represent such a small fraction of US production, the impact remains minimal at a national level.

The Bigger Picture

These targeted tariffs are geopolitical chess moves. During the 2018-2019 Trump trade disputes, other countries similarly zeroed in on symbolic American products — Harley-Davidson motorcycles, Levi’s jeans, and bourbon whiskey — to apply political pressure on the Trump administration. The goal is simple: create localized economic pain that translates into political pressure back in Washington.

While these tactics increase costs for exporters and heighten tensions, history shows they often serve as leverage to bring parties back to the negotiating table. The current standoff may follow the same path, with economic discomfort paving the way for new trade agreements.

Will be interesting to watch.