Escalated U.S.-Canada trade talks threaten fallout

What's going on: The U.S.-Canada trade fight is shaping up to become an all-out trade war, threatening economic and political fallout on both sides of the border. Neither side is backing down, with Canada expected to target politically sensitive U.S. sectors with tariffs in the run-up to the midterms.

• The Trump administration reportedly plans to impose an additional 7.5% tariff on Chinese goods in the weeks ahead over allegations that the world's second largest economy is flooding the globe with its goods, Bloomberg reports.
• Treasury Secretary Scott Bessent is expected to announce a new round of sanctions on Monday that President Trump has described as "economic D-Day," focused not just on Iran itself but on other countries and entities that do business with the nation, per a Reuters report.

Zoom in: U.S.-Canada trade talks collapsed Friday night, triggering 50% tariffs on roughly $20 billion of Canadian goods, including wine, cement and dairy products.

• Unlike earlier rounds of Trump tariffs, the new duties don't spare goods compliant under the U.S.-Mexico-Canada Agreement, eliminating an exemption that had kept much of the bilateral trade relationship untouched.
• Already Monday morning, Trump says the U.S. will double car and truck tariffs to 50%, though the duties won't take effect until 2027.

It was a swift reversal. Trump announced that the two countries were nearing a deal three days earlier.

• Negotiators spent weeks hammering out the details with pleasantries along the way. (For instance, talks stretched through Trump's top trade negotiator Jamieson Greer's birthday and his Canadian counterparts gave him a card.)

Zoom out: Over the weekend, both sides blamed the other for the talks blowing up.

• Canadian Prime Minister Mark Carney said Washington introduced unacceptable last-minute demands, while Greer on CNBC Monday morning accused Canada of seeking additional concessions after the two sides had reached the outline of a deal.

What they're saying: In a speech on Saturday, Carney said that the decadeslong path toward greater U.S.-Canada economic integration was over.

• "In short, they asked too much and they offered too little," Carney said. He accused the U.S. of introducing last-minute demands that would restrict Canada's ability to strike trade deals with other countries, calling it a "power play" that raised questions of Canadian sovereignty.

• Canada's retaliation doesn't take effect until Sept. 8, leaving time for an off-ramp. But right now, neither side sounds interested in restarting talks.

The big picture: Economists had growing confidence that the inflation hit from Trump's tariffs was largely in the past. The new Canada tariffs — and any further tit-for-tat actions — threaten to restart that process just as the Iran war's energy shock is putting fresh upward pressure on prices.

• Morgan Stanley economists wrote this month that tariff pass-through was "at or close to the finish line." They estimated tariffs had already raised the overall price level by roughly 0.6 percentage point, with little additional effect on core goods inflation since February.
• Now, Canada is preparing to retaliate against U.S. steel, dairy, appliances, agricultural equipment, pulp and paper, and electronics.
• Carney also appeared to issue a warning about energy, reminding Americans that Canada supplies much of the oil, natural gas and electricity that the U.S. imports. "I don't think they want us to stop sending any of that energy," he said.

The bottom line: The disinflation outlook was counting on calmer trade and energy. Both now look like sources of fresh uncertainty.