TACO expectations not met! US-Canada trade talks break down, US imposes 50% tariffs, Canada suspends negotiations and prepares "equivalent retaliation"

According to Zhitong Finance APP, after the collapse of U.S.-Canada trade negotiations, starting from Saturday Eastern Time, the U.S. has imposed tariffs of up to 50% on certain Canadian goods. Previously, the two long-standing North American allies failed to reach a consensus on trade agreements, with both sides blaming each other for disrupting days-long negotiations.

The tariffs officially took effect just after midnight in the U.S. (04:00 GMT), covering about $20 billion worth of Canadian goods, including such key products as wooden hockey sticks, which are now rarely used. For Canada, the second-largest U.S. trading partner after Mexico, this is far from enough to fundamentally alter its economic growth pattern; statistical data shows these goods account for just over 5% of Canada’s exports to the U.S.

U.S. negotiators once proposed lowering auto tariffs to 15% and steel and aluminum tariffs to 25%, but changed the terms in the final stages; Canada considered the new conditions uneconomical and undermining the deal’s reliability, while the U.S. accused Canada of making additional demands to the agreed framework. Coupled with the Carney government’s limited domestic political space to make major concessions to Trump, negotiations ultimately escalated from economic bargaining to a dispute over sovereignty and U.S.-Canada trade policy credibility.

Prior to the implementation of this 50% tariff, the U.S. did not apply a single rate to Canadian goods but rather a combination of “USMCA exemptions + universal tariffs on non-compliant goods + sector-specific tariffs”: most goods that meet the USMCA rules of origin could still enter the U.S. duty-free in principle; non-compliant Canadian goods typically faced a 35% universal tariff with energy and potash at 10%; steel and aluminum products were already subject to a 50% “Section 232” tariff, autos generally faced a 25% tariff, and softwood lumber and other industries also had their own high tariffs. Thus, before the new measures, Canada was already bearing significant, though highly stratified, tariff barriers.

The key point of the new measure is not simply raising all Canadian goods' tariff rates “from 35% to 50%,” but rather, according to Section 338 of the Tariff Act of 1930, imposing an additional 50% ad valorem duty on about $20 billion worth of designated goods, accounting for about 5% of Canada’s exports to the U.S., and some goods could not be exempted even if they complied with USMCA rules; the legal text also specifies that this duty is in principle cumulative with other applicable duties and fees, but goods already subject to “Section 232” are excluded. Thus, previously duty-free goods may face an immediate 50 percentage point cost increase, while goods already facing ordinary tariffs may bear a total burden exceeding 50%. The direct macro impact is limited but signals a policy gap in USMCA’s duty-free protection, enough to raise risk premiums in North American manufacturing, consumer goods, and cross-border supply chains.

$20 Billion Worth of Goods Caught in a Tariff Storm! U.S. 50% Tariff Officially Implemented, Canada Halts Negotiations and Launches Equivalent Countermeasures

However, the new tariff marks a further escalation of tensions between U.S. President Donald Trump and Canadian Prime Minister Mark Carney, and could make broader negotiations for renewing the US-Mexico-Canada Agreement (USMCA) even more difficult.

Carney stated he had suspended trade talks and that Canada would implement “equivalent" countermeasures in response to the new tariffs.

In a statement, Carney said: "I have decided to suspend trade negotiations with the United States and instructed Canadian negotiators to return to Ottawa immediately."

He said: “Up to the last moment, they remained diligent and defended Canadians’ interests in good faith. However, the U.S. made last-minute changes to the proposed terms, which were neither fair nor economically sound, and caused our negotiators to have serious doubts about the reliability of any agreement.”

The core issue in the failure of the U.S.-Canada negotiations is not the $20 billion in goods themselves, but a fundamental disagreement on the “final terms of exchange” and the credibility of the agreement: the U.S. wants Canada to accept auto tariff deduction rules based on U.S. domestic content and give way in dairy supply management, U.S. liquor sales, and government procurement; Canada is asking for significant reductions in sectoral tariffs on steel, aluminum, autos, and softwood lumber.

Carney is the only person to have served as central bank governor for two major economies (Bank of England and Bank of Canada). He was elected last year on a promise to take a tough stance against Trump and is still widely popular. Polls show that most Canadians oppose making any concessions to Trump.

Just hours prior, both sides appeared to be close to a deal. At the time, media reports from sources indicated the agreement would have reduced tariffs on steel, aluminum, and autos and could have allowed U.S. liquor products back into Canadian liquor stores.

U.S. Trade Representative Jamison Greer said at a White House briefing: “Tonight, Canada refused to finalize the trade agreement on the terms agreed upon earlier this week.”

Greer stated: “Canada missed the opportunity to partner with the United States, the fastest-growing economy among the G7.”

A senior Trump administration official said the U.S. proposal could have given Canada the most favorable tariff treatment among major U.S. export markets, but Canada sought larger concessions, especially for steel, aluminum, autos, and softwood lumber.

This official also said there are currently no further negotiations scheduled as the U.S. begins implementing new tariffs.

Last month, Trump threatened to impose tariffs on a range of Canadian imports, including wine, furniture, dairy, cement, clothing, fishing rods, and hockey equipment.

Trade experts say these goods, which do not qualify for preferential treatment under the US-Mexico-Canada Agreement, will face tariff shocks, and some already fragile industries may therefore suffer serious damage, leading to job losses and business closures.

Before the U.S. government made this decision, Canadian Minister in charge of U.S. trade relations, Dominic LeBlanc, held three days of talks with Greer in Washington.

The up to 50% new tariffs are an escalation on top of the U.S. government’s existing steel, lumber, and auto tariffs; these sectors have already suffered significantly over the past 18 months, though the resulting weakness is mainly limited to those sectors.

Three-Day Tariff Truce Falls Apart, TACO Trading Strategy Faces Stress Test

Trump’s failure to TACO as markets expected will to some extent impact global investors’ risk appetite in the short term, possibly causing global stock markets at or near historic highs to trend downward or enter range-bound oscillations.

The previously announced three-day suspension of the 50% tariff hike definitely had all the hallmarks of a typical “Trump TACO trade”—initially creating risk shocks with extreme tariffs, then cooling things off with a deal or extension before the deadline, but not equating to a full Trump retreat, as deal details and auto tariffs had not been finalized.

The increasingly popular Wall Street trading strategy—TACO (Trump Always Chickens Out)—originated in April 2025 during Trump’s unprecedented “reciprocal tariff” campaign. At the time, traders were betting either the U.S. government would walk back its tariff threats, or if implemented, they would be much less severe than Trump claimed and insufficient to significantly dampen U.S. economic expansion.

The "TACO" strategy is now widely used and is the hottest trade: whenever Trump issues new, more aggressive tariff threats or other major threats that cause market slumps, global equity and bond investors bet that he will eventually back down or that the actual measures will be much weaker than his rhetoric, choosing to buy heavily during market weakness and betting on a sharp short-term rebound in stocks.

This time, the U.S. imposed 50% tariffs on about $20 billion worth of Canadian goods, roughly just over 5% of Canada’s exports to the U.S.; thus, in terms of direct trade volume, it is not enough to alter the U.S. or global economic trajectory. However, covered sectors such as wine, dairy, cement, furniture, and hockey gear may experience significant shock. The greater risk lies in Canada’s announcement of suspending negotiations and launching “equivalent countermeasures,” while the U.S.’s first use of Section 338 of the Tariff Act of 1930—a rarely invoked authority—means tariffs might continue to serve as a bilateral pressure tool without lengthy investigation procedures, casting a shadow over future USMCA renewals.

For global stock markets, the breakdown in U.S.-Canada negotiations represents a moderate but clear risk-off catalyst: since the tariff took effect on Saturday, equities have yet to price it in directly, and the $20 billion coverage is limited; alone, it is unlikely to trigger systemic sell-offs.

However, the path of “three-day pause—claiming to be close to agreement—final tariff implementation” has weakened market confidence in the “Trump always backs down” TACO trade. Short-term pressure will focus on Canadian assets, the Canadian dollar, and North American steel, aluminum, auto, lumber, and consumer goods supply chains; if the conflict expands to a broader swath of USMCA trade, corporate profit margins, U.S. goods inflation, and policy risk premiums will all rise, and only then might global cyclicals and high-valuation risk assets face a deeper repricing.