Trade negotiations between the US and Canada collapsed last night, shortly before President Donald Trump’s 50% tariffs were due to take effect on roughly $20bn in Canadian goods. In a statement, Prime Minister Mark Carney said Canada had suspended the negotiations over “last-minute changes” that were “unfair, uneconomic, and called into question the reliability of any deal”. He vowed to impose dollar-for-dollar retaliatory tariffs and announce new support measures for Canadian workers in the days ahead. Jamieson Greer, the US trade representative, called it “a missed opportunity for Canada”, claiming that Washington had offered “the best treatment of any major exporter to our market”.

The rupture comes after a long period of turbulence. Trump announced an initial round of tariffs on Canada and Mexico early last year—before targeting America’s traditional adversaries—and despite the trade agreements struck during his first term. Those measures were largely undone by a series of reversals, carve-outs, and legal challenges—but not before they had done enormous damage to relations between the two countries, prompting Canadian consumer boycotts of American products and travel, while weakening export sales and raising prices for US businesses in many northern states, driving many to lobby against the duties. Actions taken by Canadian provincial premiers—including taking out television ads featuring President Ronald Reagan (an avowed free trader) speaking against tariffs—inflamed the issue further.

For Canada, the direct damage from the new tariffs alone should be fairly modest. The Section 338 duties cover goods that account for about 5% of the country’s exports to the US, and our own calculations, published soon after Trump’s initial announcement, suggest the average tariff rate on Canadian exports will rise by roughly 2.5 percentage points—still well below the rate faced by most of America’s trading partners. This also implies a limited impact in the United States, where slight price increases across a range of categories are unlikely to lead to widespread consumer awareness.

But the economy will suffer concentrated pain. Exporters of machinery and electronics, chemicals and petroleum by-products, textiles, wood, furniture, toys and food could see revenues fall and may shed workers. A credible estimate from Trevor Tombe of the University of Calgary puts the eventual job losses at between 50,000 and 90,000, heavily concentrated in Ontario, Quebec and British Columbia. And the uncertainty that has already curbed hiring, investment and household spending will persist, weighing on growth over time.

Depending on scale, Ottawa’s retaliatory tariffs could stoke imported inflation. But with the economy still growing well below potential, the Bank of Canada is likely to judge that the risks tilt towards weaker growth rather than higher prices, and we expect investors to further downgrade their expectations for monetary tightening. At the margin, this shift in expected rate differentials should represent a headwind for the loonie.

The Canadian dollar had rallied ahead of the deadline after Treasury Secretary Scott Bessent said the US Treasury would “at least” double its purchases of long-term government debt from next month—reviving worries about a dilution in the dollar—and as investors had grown hopeful about a deal. That optimism now looks set to unwind. We expect the loonie to gap lower at the Sydney/Tokyo open tomorrow as the trade-risk discount is rebuilt and bullish bets are flushed out.

The next leg will depend on Canada’s retaliation and any signs of re-engagement. A measured and symbolic response followed by a return to the negotiating table could see the currency settle into range-bound trading. Evidence that both sides are digging in could see the exchange rate revisit July’s levels. The political calculus is complex: polls suggest the Canadian population supports Carney taking a hard line even amid risks to the economy, while Trump is heading into November’s mid-terms facing sliding polls, high gas prices, stubborn inflation, rising interest rates and mounting public anger. Both sides have much to gain from a deal, but could nonetheless find themselves locked in entrenched positions for many months yet.

We will be watching for Ottawa’s retaliation list, monitoring for any new contact between the two leaders over the weekend, and bracing for a jawboning effort from the White House before North American markets reopen on Monday.