Canada and the United States appeared close to a trade agreement last week. On Aug. 18, U.S. President Donald Trump delayed his new tariffs on Canada by three days and briefly declared on Truth Social that the two countries “have a deal.”
By Aug. 22, however, Prime Minister Mark Carney had recalled Canada’s negotiators, saying the U.S. had “asked too much and offered too little.”
American trade representative Jamieson Greer disputed Ottawa’s account that the U.S. had introduced last-minute demands, and said Canada had backed away from earlier commitments.
No negotiating text has been made public, so outsiders cannot judge. But the economic question at the heart of this is simple: was the deal on offer worth more to Canada than its best alternative without a deal?
That is the logic behind the negotiation concept known as BATNA — the “best alternative to a negotiated agreement.”
Ottawa’s decision to walk away was defensible if the proposed agreement would have left Canada worse off than its alternatives. But walking away is costly, particularly for an economy so dependent on the U.S. market.
What was on the table?
The prospective deal would have cut the U.S. tariffs on Canadian cars and light-duty trucks from 25 to 15 per cent, and on steel and aluminum from 50 to 25 per cent, subject to a steel quota.
Canada was prepared to remove its remaining counter-tariffs on steel, aluminum and autos, encourage provinces to restore U.S. alcohol sales and adjust dairy import administration without changing supply management, quotas or tariffs.
The apparent breaking points were medium- and heavy-duty trucks and Canadian-content rules. Carney said the lack of comparable tariff relief for trucks would make production at Ford’s Oakville and GM’s Oshawa plants increasingly uneconomic.
Canada also said the U.S. would have constrained future trade agreements with other countries and affected French-language and cultural policies; the U.S. says Canada abandoned agreed terms.
Canada is still highly exposed
Canada entered these negotiations from a position of considerable economic dependence.
Bargaining theory explains the leverage: if one side believes the other cannot afford to leave, it can push the offer toward that side’s reservation point — the worst deal it will accept — and capture more of the gains.
RBC Economics estimates that the new tariffs cover about five per cent of Canadian exports to the U.S., while more than 80 per cent remain duty-free.
Yet Canada remains highly exposed: 72 per cent of its merchandise exports went to the United States in 2025, down from approximately 87 per cent in 2000. Much of the recent decline in the U.S. share came from gold exports to the United Kingdom and crude oil shipments to Europe and the Asia-Pacific, rather than manufacturing diversification.
Those aggregate figures also mask concentrated harm. Economist Trevor Tombe estimates that just over 87,000 direct and indirect Canadian jobs could be at risk if the duties persist.
The immediate risks are increasing. On Aug. 24, Trump threatened to raise tariffs on all Canadian cars, trucks and auto parts to 50 per cent from January 2027.
The importance of durability
The expected value of a trade agreement also depends on whether its terms are likely to endure. This is particularly relevant when tariffs can be changed through unilateral executive action, and when even CUSMA-compliant goods can face new duties.
Consider the Gordie Howe International Bridge, financed by Canada under a 2012 agreement that gave Canada the tolls until the debt was repaid. Its scheduled June 2026 opening was delayed amid bilateral disputes.
A later agreement-in-principle directs half of net revenues for 15 years to an American-controlled fund and gives the U.S. rights over certain toll changes.
This resembles what economists call a hold-up problem: after one party makes an irreversible, relationship-specific investment, the other may seek new terms when the investor’s fallback is weakest.
Trade agreements are also incomplete contracts. No document can anticipate every future dispute. Consequently, a tariff reduction promised for several years is worth less if firms believe it may be withdrawn sooner. Its value must therefore be discounted by the probability that the deal survives.
A pattern, not an exception
Canada is not unique in facing uncertainty over the durability of U.S. trade commitments.
The U.S. threatened to restore 25 per cent tariffs on selected South Korean imports months after agreeing to 15 per cent, and later threatened 25 per cent tariffs on EU cars and trucks while the so-called Turnberry framework awaited implementation.
The details differ, but both episodes show why U.S. partners must assess a deal’s scope, durability and enforceability, not merely today’s tariff rate.
China provides a contrasting example. Its tariff truce with the U.S. has been repeatedly negotiated and extended since May 2025. Despite a 20 per cent fall in U.S.-bound exports in 2025, growth elsewhere helped produce a record US$1.2 trillion trade surplus, strengthening China’s fallback.
China’s critical-mineral and market-access leverage make a breakdown costly for the U.S., weakening the American fallback.
The truce therefore reflects both diversification and reciprocal dependence. For other countries, the lesson is that leverage, rather than goodwill alone, helps sustain a deal.
Retaliation is not enough
Ottawa’s response also illustrates the limits of simply matching U.S. tariffs. From Sept. 8, Canada will impose tariffs of 15, 25 and 50 per cent on $27.6 billion of U.S. imports, matching the American rates on the affected products.
But Canada cannot simultaneously target pivotal states, hit exporters dependent on Canadian buyers and avoid products for which Canadians lack alternatives.
Some targeted goods — including steel, electronics and agricultural equipment — are also inputs for Canadian businesses. As I argued previously, tariff retaliation should create political pressure while limiting harm at home.
Retaliation may therefore affect the bargaining environment, but it does not address the underlying asymmetry between the two economies.
The real test is diversification
Walking away did not strengthen Canada’s BATNA overnight. It may, however, have changed the U.S. belief that Canadian dependence made rejection impossible, revealing a firmer reservation point without making the no-deal alternative less costly.
Returning to negotiations would not destroy that credibility unless Canada accepted essentially the same terms. The longer-term issue is whether Canada can make its alternatives more credible.
Geography and integrated supply chains will keep the U.S. as Canada’s most important trading partner. Although Canada’s 15 free-trade agreements with 51 countries help, Canada needs infrastructure and businesses capable of reaching those markets.
There are some signs of progress. The Trans Mountain expansion helped increase the non-U.S. share of Canadian crude exports to 10.9 per cent in 2025, while LNG Canada’s Kitimat terminal now provides direct access to East Asian markets.
These routes cannot replace the U.S. market, but they make diversification — and Canada’s walkaway option — more credible.
That’s ultimately how Canada can turn its willingness to walk away into bargaining power. For Canada and other trade-dependent economies, success depends on preserving a route back to negotiation, limiting current damage and making the next walkaway less costly.
Gaayathri Dineshkumar, a research assistant and undergraduate student at MacEwan University’s Triffo School of Business, contributed to this article.
Subhadip Ghosh, Associate Professor, School of Business, MacEwan University
This article is republished from The Conversation under a Creative Commons license. Read the original article.
