In a significant intensification of trade tensions between the United States and Canada, President Donald Trump signed an executive order on July 31, 2025, increasing tariffs on Canadian imports not covered under the US-Mexico-Canada Agreement (USMCA) from 25% to 35%. The new tariffs took effect in the early hours of August 1, marking a major development in a long-brewing economic standoff between the two North American neighbors.

While other allies such as the United Kingdom, Japan, South Korea, and European Union succeeded in negotiating partial deals with Washington, Canada stands out as one of the few developed nations left without any protective arrangement in place—raising alarms across multiple sectors of its economy.

However, Canadian officials quickly pushed back, pointing out that their country contributes less than 0.2% of the fentanyl entering the U.S., with most of the drug flowing through ports and land borders from Mexico and China.

Additionally, Trump cited Canada’s retaliatory tariffs from earlier in the year as part of his rationale. White House aides say the move is meant to bring Canada back to the negotiating table on more favorable terms, while also shrinking America’s trade deficit.

Prime Minister Carney, in public statements following Trump’s order, highlighted that Canada’s average export tariff to the U.S. remains one of the lowest globally—a fact he attributes to the strength of existing multilateral agreements. However, he warned that even limited exposure to the new tariff regime could severely affect industries not covered by USMCA provisions.

Instead of direct retaliation, Carney pledged to double down on industrial policy, increase domestic demand, and expand trade partnerships beyond the U.S. He stressed that his administration would protect key Canadian sectors—such as steel, aluminum, lumber, and automobiles—from the fallout of the tariff war.

Meanwhile, business associations and trade experts warned against an immediate retaliatory move. They cautioned that escalating the situation could harm Canadian exporters, provoke further uncertainty, and damage investor confidence.

Public opinion appears to support a tougher stance. A recent Angus Reid Institute poll found that 69% of Canadians favor a firm negotiating position—up six percentage points from mid-July. However, Carney’s approval rating remains steady at 57%, reflecting confidence in his more measured, strategic approach.

Markets responded swiftly: the Dow Jones and Nasdaq both dropped more than 1%, while similar declines were recorded in Europe and Asia. A weaker-than-expected U.S. jobs report on the same day compounded investor anxiety, leading to increased market volatility.

At the same time, legal experts are questioning the president’s use of the International Emergency Economic Powers Act (IEEPA) to sidestep Congress. While executive authority gives the president latitude in imposing tariffs, some federal judges have already raised concerns about potential overreach. Lawsuits challenging the legality of Trump’s action are expected to continue in the coming months.

In the meantime, Ottawa is accelerating efforts to diversify trade routes and reduce dependence on the U.S. economy. A new long-term policy shift focused on Asia-Pacific, South America, and Europe is already underway. Carney’s administration sees this moment as a wake-up call to reshape Canada’s global economic strategy for the post-Trump era.