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The U.S.-Canada Tariff War: The Impact on Canada, and the Implications and Takeaways for Korea |
| March 25, 2025 |
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WoonAn KamVisiting Research Fellow, The Sejong Institute | wakam96@gmail.com
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The tariff war initiated by US President Trump against Canada is ongoing. This is developing into an unprecedented economic conflict between long-time allies and even into a national conflict. Furthermore, the tariff war initiated by Trump is foreshadowing a fundamental change in the global trade order. The conflict over tariffs between the US and Canada is also serving as a warning signal to major US trading partners, including Korea, and attention is being paid to its outcome.
As initially announced, President Donald Trump has been pursuing a strong tariff policy based on the 'America First Trade Policy' since taking office in 2025. As part of this policy, on March 4, 2025, the Trump administration implemented a measure to impose a 25% tariff on products from Canada and Mexico. In addition, a 10% tariff was applied to energy products such as Canadian crude oil and natural gas. The White House stated that the justification for this measure was that Canada and Mexico had failed to curb illegal immigration and the deadly influx of drugs into the United States.
The Trump administration's tariff policy began with an additional 10% tariff on China, expanded to tariffs on Canada and Mexico, and then expanded to a 25% tariff on steel and aluminum imported from all countries around the world starting March 12. This is a measure to eliminate all exceptions, such as tariff exemptions provided to some countries under Section 232 of the Trade Expansion Act during the first Trump administration. The second Trump administration's tariff policy is aimed primarily at reviving manufacturing and strengthening the technological base in the United States, while also being actively utilized as a means to resolve the United States' trade deficit and fiscal deficit. -
The tariff dispute between the United States and Canada has been escalating through several stages. On February 1, 2025, immediately after taking office, President Trump announced plans to impose tariffs on Canada and Mexico. The tariffs were originally scheduled to take effect on February 4, but were postponed for a month until March 4 as both countries promised to strengthen border security. On February 24, President Trump reaffirmed his intention to impose tariffs on Canada and Mexico as scheduled starting on March 4.
In response, Canadian Prime Minister Justin Trudeau announced in a statement on March 3 that if the US tariffs go into effect, Canada will also impose a 25% tariff on US goods worth 155 billion Canadian dollars (about 156 trillion won). Specifically, it announced that it would impose a 25% tariff on 30 billion Canadian dollars (about 30 trillion won) worth of US imports starting at dawn on March 4, and that it would impose additional tariffs on 125 billion Canadian dollars (about 125 trillion won) worth of US imports within 21 days.
The tariff war gradually intensified, and on March 11, the Canadian province of Ontario announced that it would impose a 25% surcharge on electricity exported to the US. In response, President Trump threatened to impose a 50% tariff on Canadian steel and aluminum. Eventually, Canada backed down, saying it would temporarily suspend its plan to impose additional electricity charges, and President Trump appeared to respond.
As the next step, President Trump announced that he would implement reciprocal tariffs starting on April 2. President Trump claims that reciprocal tariffs are “essential measures for fair trade.” -
In relation to the progress of this tariff war, we can examine its background or intention. First, why were the issues of illegal immigration and drug inflow linked to the tariff issue? These issues were raised during Trump’s first term, but at that time, the focus was on measures within the United States, such as the construction of a wall on the Mexican border. However, it seems that, based on the unsatisfactory experience during the first term, it was judged that it would be difficult to see results without cooperation from both Canada and Mexico. In this context, it seems that the non-economic issue of border security was used as a means of pressure to secure cooperation of the two countries by linking it to the economic issue of tariffs.
However, the issue of drugs and illegal immigration through the US-Canada border is not as serious as that of the US-Mexico border. Nevertheless, why such pressure is being applied to Canada as well. What can be examined here is blocking the possibility of a bypass route. Recently, as it has become difficult to enter the US through Mexico, there has been an increasing cases of illegally entering the US after entering Canada. Therefore, it can be said that it has been recognized that controlling the Mexican border alone has its limits and that the Canadian border must also be controlled.
However, even so, it is difficult to easily understand why Mexico and Canada, which are friendly neighboring countries, were targeted first with China, which is considered an enemy country. This could be seen as an attempt at an example effect. In other words, by targeting Canada, which is the closest ally and economically intertwined, as an example, it can be seen as a signal that the United States will show its firmness to other countries and take strong measures without exception.
In addition to the issues of illegal immigration and drug inflow, let's also look at the context in which the issue of Canada's incorporation as the 51st state was raised and why it has been continuously mentioned. First, as is well known, this was raised during the dinner meeting between President-elect Trump and Prime Minister Trudeau (2025.11.29.). According to the reports, Prime Minister Trudeau said that if tariffs were imposed, the Canadian economy would die. In response to Prime Minister Trudeau’s remarks, President-elect Trump reportedly joked that the U.S. has been running a trade deficit with Canada, which is equivalent to subsidizing Canada, and that if the Canadian economy is going to collapse due to such tariffs, it would be better for it to become the 51st state of the U.S.
There would be several possible intentions behind the continued mention of this remark by Trump, which was initially considered a “joke.” First, we can consider the naming strategy of “exploiting weaknesses” and “branding.” President Trump has consistently given mocking nicknames to his opponents, such as calling former President Joe Biden “Sleepy Joe,” and his repeated mention of the 51st state can be understood in this context.
In addition, there has been an interpretation that it seems to be an attempt to secure access to Canada’s abundant natural resources, especially rare earths and mineral resources. Former Prime Minister Trudeau said in a private event that Trump’s continued talk of making Canada the 51st state was due to their vast critical mineral resources, and that such comments were not simply negotiating tactics but “a real thing.” This inference has gained some weight recently as the Trump administration has raised the issue of annexing Green Land and shown keen interest in Ukraine’s rare earths and natural resources.
Next, what was Trump’s intention in invoking the International Emergency Economic Powers Act (IEEPA) as a basis for imposing tariffs? Trump used the IEEPA as a basis for imposing tariffs on Canada and Mexico, and this approach was unprecedented and controversial in that it utilized a law that was generally used against hostile countries rather than allies or friendly countries. However, the fact that the newly established ‘Circumvention Export Monitoring Task Force’ based on Article 32 of the same Act is operating a logistics route tracking system (Block-chain Based Logistics Tracking) suggests that the intention of applying this bill is to secure speed and block connections with the ‘hostile country’ China. In this context, it can be seen as an intention to block the possibility of China’s circumvention of the US market, but since this problem is serious in Mexico and not in Canada, it seems a bit far-fetched to say that this was taken into consideration for Canada as well. -
(Economic impact) The tariff war is having a deep and wide impact on the Canadian economy as a whole, and some sectors are experiencing serious disruption. Canada relies on the United States for about 75-80% of its exports, so a trade conflict with the United States is bound to have a direct economic impact. This high dependence is one of the main factors increasing the instability of the Canadian economy. In addition, the tariff war is disrupting the supply chain across North America. Canadian companies are experiencing increased production costs due to the 25% tariff on raw materials and parts from the United States, which is leading to higher product prices and weakened competitiveness.
First, there are concerns about the impact on key industries. There is analysis that the North American automobile industry could be hit the hardest by this tariff war. This is because the three countries of the United States, Canada, and Mexico are highly dependent on each other, accounting for 40-70% of total imports of major automotive materials and parts within the region. Automotive components cross the U.S.-Canada border multiple times during the manufacturing process, with approximately $97 billion worth of auto parts and 4 million finished vehicles flowing into the U.S. from Canada and Mexico each year. A 25% tariff would significantly increase production costs and disrupt the efficiency of this integrated system, forcing industry restructuring and threatening thousands of Canadian jobs in the auto sector.
The oil and energy industry is also being severely impacted. The U.S. accounts for approximately 95% of Canada’s crude oil exports. Canada accounts for 60% of U.S. crude oil imports by 2023. If Trump’s proposed 10% tariff is implemented, crude oil producers could lose approximately $6.9 billion, mainly through reduced profit margins. U.S. refineries would face increased costs, and U.S. consumers would pay an additional $22 billion annually. The New York Times forecasts that gasoline prices in the Midwest, where U.S. refineries are concentrated, will rise by 15 to 20 cents per gallon. In the case of gas, Canada exported about 45 percent of its total gas production to the United States in 2023. Gas is more complex due to several factors, including market structure, the existence of alternative markets, market elasticity, and policy uncertainty, making it difficult to calculate the specific impact of tariffs, but similar situations are expected to occur.
The steel and aluminum industries are also taking a big hit. In 2018, when similar tariffs were imposed, Canadian steel exports fell 38 percent, and in 2019, they reached their lowest level in the past 10 years. Canada was the largest exporter of these materials to the United States in 2024, exporting $11.2 billion in steel and $9.5 billion in aluminum. The new 25 percent tariff is likely to significantly reduce the competitiveness of these sectors, threatening production levels and jobs across Canada’s industrial heartlands.
The impact on economic growth and financial markets will also be significant. The Bank of Canada cut its benchmark interest rate from 3.00% to 2.75% on March 13, 2025. This was a measure to respond to the economic uncertainty caused by the tariff war with the United States. The Bank of Canada estimated that if Canada and other countries impose retaliatory tariffs of 25% on the United States, Canada's economic growth rate could decrease by 2.5 percentage points in the first year and 1.5 percentage points in the following year. Financial markets have shown considerable volatility as trade tensions have increased, and this volatility has spread to Canadian financial markets, complicating business planning and investment decisions.
In addition, the North American trade agreement, the 'United States-Mexico- Canada Agreement' (USMCA), is also in danger. The USMCA, a trade agreement that was implemented in 2020 to further strengthen the economic bloc of the three countries by revising the North American Free Trade Agreement (NAFTA) that went into effect in 1994, is fundamentally shaken. The agreement is scheduled to be reviewed in 2026, but the Trump administration’s tariffs are rendering the agreement itself meaningless.
(Political Impact) This tariff war has expanded beyond a simple economic conflict to a matter of national identity and sovereignty. President Trump's repeated remarks that "it would be better economically and militarily for Canada to become the 51st state of the United States" are increasing anti-American sentiment among Canadians. This situation shows that economic issues can soon escalate into issues of national identity and sovereignty, and has raised concerns that 'economic dependence' in trade relations could lead to 'political dependence'.
Now that the US-Canada relationship is experiencing its most serious crisis since World War II, its fundamental nature seems to be undergoing a historical change that goes beyond simple policy or interest conflicts. This change could have lasting effects beyond the tariff dispute. In addition, discussions about the risks of excessive economic dependence on the US and the need for trade diversification are rapidly increasing in Canada.
It has also brought about significant changes in Canada's domestic political landscape. The ruling Liberal Party, which was on the verge of a change of government due to fatigue and declining approval ratings from a decade-long term in power, is showing the possibility of a political revival as it experiences a sharp rebound in approval ratings due to the trade war and Trump’s 51st state comments. According to data from major Canadian public opinion polling organizations, the Liberal Party’s approval rating has dramatically rebounded from around 21% before the full-scale trade war with the Trump administration to 35-38% in the weeks since the trade war began in earnest, while the overwhelming approval rating of around 43% of the main opposition Conservative Party before the trade war has fallen to around 37-38%. As a result, it seems that the current situation is uncertain whether the government will change.
One of the factors behind this rebound in the Liberal Party’s approval ratings is that Prime Minister Justin Trudeau, who has led the Liberal Party for 10 years, has announced his intention to resign, which appears to have been one of the factors in the recovery of popularity. Prime Minister Trudeau’s announcement of his resignation provided the foundation for a rebound in the ruling Liberal Party’s approval ratings. In addition, the election of former Bank of Canada Governor Mark Carney as the new Liberal Party leader was also an important variable. As an “economic expert” who had served as the governor of the Bank of Canada and the Bank of England in succession, he is considered the right person to respond to Trump’s tariff threats.
On the other hand, the main opposition Conservative Party, which had been expecting a change of government after 10 years while securing overwhelming approval ratings compared to the ruling Liberal Party, is facing a backlash. The Liberal Party has been successfully highlighting the image of Conservative Party leader Pierre Poilievre as Canada’s Trump. By the way, this is having a strong negative effect as anti-Trump sentiment spreads in Canada. In addition, Elon Musk’s announcement that he will support Conservative Party leader Poilievre as Canada’s next leader also had a negative effect on the Conservative Party. On the other hand, the Conservative Party which had been gaining political benefits from attacking the unpopular Prime Minister Trudeau could no longer take the benefits of negative strategies due to his resignation. -
First, we can consider the direct impact on Korean companies in Canada. The US-Canada trade war will have an immediate impact on approximately 400 Korean companies that have established manufacturing facilities in Mexico and Canada as part of their North American market strategy. These companies had previously strategically entered the market to take advantage of the United States-Mexico-Canada Agreement (USMCA), which provided tariff-free trade within North America. However, Korean companies that have been exporting to the US from Canada without tariffs will be hit hard by the 25% tariff. In addition, the new Trump administration has announced its intention to review subsidies under the Inflation Reduction Act (IRA) and the CHIPS and Science Act, further increasing the possibility that Korean companies’ global operations will be disrupted.
The Korean battery industry, which has invested significantly in Canada, is particularly vulnerable. So far, the joint venture between LG Energy Solution and Stellantis, the partnership between POSCO Future M and General Motors, the collaboration between SK On and EcoProBM, and Ford have all started operations in Canada and benefited from tax incentives and tariff exemptions under the USMCA. However, with the implementation of the tariffs, these companies have lost their price competitiveness for their products. Vehicles equipped with K-batteries manufactured in Canada may see their prices increase due to the tariffs, which will likely result in a loss of price competitiveness and slowdown in market sales.
In addition, the tariff war between the US and Canada makes it quite likely that Trump will also strongly threaten tariffs against Korea. On March 5, President Trump complained about Korea, claiming that “the average tariffs in Korea are four times higher,” and “we are helping Korea militarily and in many other ways, but this is happening.” These remarks are interpreted as an attempt to justify the reciprocal tariff policy scheduled to take effect on April 2 and to gain support from the American people. In particular, President Trump expressed his intention to impose tariffs on various products, including semiconductors, steel, and aluminum, which are Korea's largest exports, "within a few months." This is causing considerable concern in the Korean industry.
First, according to the Bank of Korea's analysis, if the tariff war initiated by Trump escalates to the worst, Korea's economic growth rate could fall to 1.4% this year and next year. In particular, the 25% tariff currently imposed by the US on steel and aluminum was implemented immediately without a grace period as of the 13th (local time), and this is expected to have a direct impact on the economy of steel industry-centered regions such as Pohang. What is particularly concerning is that Trump's tariff policy is gradually expanding. Following the imposition of tariffs on China on February 1 and tariffs on Canada and Mexico on February 2, tariffs on automobiles are scheduled to be imposed starting April 2. Furthermore, the US plans to investigate tariff rates for all countries by April 1 through the reciprocal tariff policy and decide whether to impose additional tariffs.
Now, as concerns grow that exports to the two major markets of the US and China will shrink, the importance of export diversification and domestic demand activation is being highlighted even more. Korea’s dependence on exports to the US and China has consistently remained high. In particular, while exports to China have decreased, exports to the US have steadily increased, but the possibility of both major export markets shrinking has increased due to Trump’s tariff policy. According to a scenario analysis by the Korea International Trade Association, if the US imposes a 10% universal tariff, Korea’s exports to the US could decrease by about 10%.
In this context, one of the biggest lessons from the Canada-US tariff war is the danger of excessive dependence on a single market. Just as Canada relies on the US for about 75-80% of its exports, Korea also has a very high dependence on exports to the US and China. This is creating an economic structure that is vulnerable to external shocks. Korea should diversify its export markets to prepare for risks that may arise from the aftermath of the US-China trade dispute, and expand its economic and diplomatic space through the New Southern and New Northern policies and strengthening solidarity and cooperation with like-minded countries in the region.
However, this concern presents us with a more complex situation as it is linked to another new issue. As countries affected by US tariffs readjust their excess production, competition in alternative markets will intensify. In particular, it is expected that Chinese companies will further expand their influence in the Asian market in order to dispose of excess production in response to the US tariff measures, which will have a negative impact on the performance of Korean companies. This market substitution effect could put secondary pressure on Korean exports in markets beyond North America.
Meanwhile, the need for measures to alleviate the Korea-US trade imbalance is also being raised more strongly. According to the Korea International Trade Association, Korea's trade surplus with the US was $11.5 billion during the first Trump administration, and increased nearly fivefold to $55.7 billion last year. The reason for the upward trend is analyzed to be the AI craze and increased demand for automobiles in the US. Due to this, the US is likely to demand renegotiation of the existing Korea-US FTA to improve the trade deficit, so we will need to prepare for this as well.
Of course, the impact of the tariff war will vary by sector and industry, but on the other hand, it is possible that it will be linked to other sectors such as security issues. In the steel sector, the removal of the existing 'quota system' export volume restriction may provide an opportunity to expand exports to the US, but the 25% tariff will weaken the price competitiveness of Korean steel products. If the tariffs on other major export items such as semiconductors, automobiles, and pharmaceuticals mentioned by President Trump are implemented, the Korean economy is expected to suffer a greater blow. In addition, there is a high possibility that issues regarding non-tariff barriers, agricultural and livestock products, and the financial sector will be raised, so we should thoroughly prepare for these as well. In addition, since tariff-related negotiation issues are likely to be linked to defense and security issues such as SMA(Special Measures Agreement) negotiations, etc., it will be necessary to pursue a comprehensive response plan at the inter-ministerial level that takes these factors into consideration.
| Overview
| Progress
| Background of the Development
| Impact on Canada
| Implications and Takeaways for Korea
※ The opinions expressed in 'Sejong Focus' are those of the author and do not represent the official views of Sejong Institute
