The US-Canada trade war has moved well beyond a diplomatic spat and is now reshaping the economies of both countries, with Ontario bearing the sharpest domestic pain and swing states such as Ohio facing deliberate political pressure from Ottawa’s retaliatory measures.
Canada’s counter-tariffs, which took effect on 8 September, cover what the Canadian Department of Finance lists as C$27.6 billion in US imports, spanning steel, dairy and a range of industrial and consumer goods. Earlier reports put the figure at C$28 billion; the government’s own product list is the more precise measure. Ottawa describes the strategy as ‘dollar-for-dollar’ retaliation, and Industry Minister Mélanie Joly has said Canada is ‘targeting products that will target states in the U.S.’ to maximise political leverage.
Ontario Takes the Hardest Hit
Within Canada, the damage has been uneven. Ontario, home to the country’s largest manufacturing base, has absorbed the brunt of US sectoral tariffs on steel, aluminium and automobiles. Several auto parts and assembly plants have announced layoffs; the province has shed tens of thousands of manufacturing jobs since early 2025.
Quebec’s metal sector has also taken a serious blow. Metal exports from the province fell 36% between February 2025 and February 2026, with a 3.6% contraction in sector employment, according to data released in July. The Royal Bank of Canada estimates Ontario and Quebec are the two most exposed provinces, while Newfoundland and Labrador, Alberta and Saskatchewan are among the least vulnerable.
Nationally, around 55,000 manufacturing jobs were lost between January 2025 and January 2026, according to Bank of Canada data. Calgary economist Trevor Tombe estimates that a further 35,000 could follow if the latest US tariffs persist, bringing the potential total to 90,000.
Ohio, Illinois and Pennsylvania in Ottawa’s Cross-Hairs
The US-Canada trade war’s political architecture is clearest when you look at which American states Canada chose to hit. According to CBC News, citing Canadian trade data, approximately C$3 billion of Ohio’s exports face Canadian counter-tariffs, the highest of any US state, representing around 12% of Canada’s total imports from Ohio. Illinois follows at C$2.7 billion and Pennsylvania at C$2.3 billion. All three are swing states that could shift the balance of power in the upcoming US midterm elections.
Derek Holt of Scotiabank has noted that Ottawa’s choices appear ‘very deliberately oriented’ towards states that carry electoral weight for the Trump administration.
A separate analysis by Texas A&M University’s PERC puts Illinois’s combined two-way trade with Canada at $75.6 billion, Ohio’s at $33.3 billion, and Michigan’s at $61.2 billion, down from $73.6 billion in 2023. Michigan’s decline captures how deeply embedded cross-border manufacturing has become, and how quickly disruption can unwind it.
Canada’s Tariff Rate Has Converged with the Pack
Prime Minister Carney has insisted Canadians still face lower US tariff rates than most other countries. That argument is eroding. The average effective US tariff rate on Canada was 2.9% in June, according to Royal Bank of Canada data, but has since risen to 5.7%, above Mexico’s rate and now approaching the 6.2% faced by the UK. China remains the outlier at around 20.5%.
For context, the Wharton Budget Model puts the average effective US tariff rate across all trading partners at 6.7% as of July 2026, up from 2.3% in January 2025. The Bank of Canada’s July monetary policy assumptions place the US tariff rate on Canada at 5.0%, with Canada’s own rate on the US at 1.5% after accounting for remissions.
The US-Canada trade war’s costs fall on households as well as industries. The Tax Foundation estimates the average American household will pay $840 more this year because of Trump’s tariffs. Canadian counter-tariffs are more narrowly targeted, but economists expect businesses manufacturing goods with US inputs to absorb higher costs regardless.
Investment Bucks the Trend, but the Relationship Is Fragmenting
One genuinely bright spot: foreign direct investment into Canada hit C$96.8 billion in 2025, the strongest inflow since 2007, according to Statistics Canada’s balance of payments data. Of that, C$43.6 billion came from mergers and acquisitions, with manufacturing, trade and management of companies as the leading sectors. The US remained the largest single source of that capital, even as the two governments trade blows.
The underlying relationship remains colossal. A Congressional Research Service report puts US foreign direct investment stock in Canada at $488 billion; Canada supplied 64% of US crude oil imports by volume in 2025, up from 41% a decade earlier. Severing those ties entirely would cost both sides far more than either has publicly acknowledged.
Canada’s GDP rebounded to 3.3% growth in the second quarter of 2026, recession fears receding for now. But with US tariffs still elevated and Ottawa’s Canada Investment Summit in September designed partly to accelerate the pivot away from the US market, the structural shift is already under way. The question is whether it becomes a managed diversification or an irreversible fracture.
