US-Canada Trade War: How Trump’s Tariffs Open a Bigger Battle With China

The trade deal being negotiated between the US and Canada fell apart over the weekend even as acrimony and tariffs shot up between the two neighbours. Canada’s Prime Minister Mark Carney said on Saturday that he had asked his negotiators to return home on Friday. He went to say that, “We cannot accept what the United States is offering us, and we refuse to grant them what they are asking of us.” A day later, in remarks made on Sunday, he said that “…we recognize that sometimes, its (the US) signature was written in pencil.” This was as close as the Canadian PM came to saying that the US could not be trusted.

Canada is not the only country at the receiving end of US tactics to extract as much as possible on the trade front. One of the first acts of the second Trump administration was to launch the so-called “liberation day tariffs.” Free trade, painstakingly negotiated between countries since the Uruguay Round of multilateral trade negotiations between 1986 and the early 1990s, has been burnt down to the ground.

In Canada’s case, the friction between Trump and Carney is not just about a trade deal but is also affected by other elements. Part of it is personal. Carney’s speech at Davos earlier this year riled Trump and in his remarks, he threatened Carney and Canada. In the trade talks that just failed, another element was hinted at: the US allegedly made demands that would have impinged on Canada’s ability to negotiate trade deals with third countries.

American unilateralism on trade deals has left a bitter taste across the world. Close trading partners of the US now withstand the worst of unreasonable demands and have resigned themselves to facing at least a “baseline” US tariff on exports from their countries. But even this baseline is arbitrary. It is dictated by the quantum of US trade deficit with the country in question. Greater the deficit, higher the “baseline” tariff.

Resultantly, close US trading partners like Canada are now open to what was once unthinkable: forging close partnerships with other “middle powers” to act as a bulwark against US unilateralism. While this is not couched as starkly, the intent is clear. In July, Carney along with Alexander Stubb, the President of Finland, penned an opinion in The Economist. The two leaders wrote that, “…we are seeking closer relations with powers like India and, while avoiding strategic dependencies, China, as well as countries of the Global South, because power no longer sits at a single Western centre…” They went on to add that, “The world order built after 1945 is unravelling. Institutions as they stand are ill-prepared to avert the decline…”

The hint was clear even if unstated. The US led order is crumbling and at American hands.

Inter-imperial rivalry, with a twist

All these themes—Trump’s erratic behaviour, geoeconomic fragmentation and middle powers charting a course for themselves—are now clearly visible. But is there is a unifying theme that can explain what has been seen since 2016, when Trump became US President for the first time?

Once upon a time, Marxist theories to explain trade wars turning into wars between countries were fashionable. As data and mainstream theories were sharpened over the course of the 20th century, Marxist explanations lost steam. It is, however, useful to cast another look at these ideas considering current developments.

At their core, Marxist theories of war rest on what are called “inter-capitalist rivalries.” Stripped to its core, the idea is that competition between firms reaches such a pitch that it turns into competition between nation-states. That is the reason behind “inter-imperialist wars.” This idea and the terminology are quaint from a 21st century vantage. But they are not wholly without explanatory merit.

On one side of the global trade equation is China, the world’s manufacturing hub. China now sells virtually the entire set of manufactured goods produced in the world. It has scale as well as cost advantage that it has assiduously built over the past many decades. But the other side of the China story is that it hardly buys any finished goods. China does buy from the world but those purchases are largely raw materials and capital goods that it needs for manufacturing finished consumer goods among other items.

China’s trade with the US is an example. In 2025, China was the US’ third-largest trading partner after Mexico and Canada. The two-way trade between US and China stood at $496 billion. China’s exports to the US stood at $332 billion while China imported almost half the value of its exports to the US at $164 billion.

The composition of China’s imports from the US is interesting. The top three exports from the US to China were, capital goods (valued at $50.7 billion), industrial supplies and materials (valued at $29.1 billion) and consumer goods (valued at $13.5 billion). In contrast, China exported $141.9 billion worth of consumer goods to the US. A substantial portion of the US’ trade deficit with China is explained by this very large skew in the trade of consumer goods.

This story of “China trade” is repeated across countries, especially those in the West. With developing countries that lack an industrial sector, the story is largely of buying resources, largely raw materials, and selling of finished goods. This is a repeat of the classical “colonial” pattern of trade that anti-colonial nationalist of the 20th century railed against. Only this time, it is China and not some Western power that is engaged in that pattern of trade.

The problem for the US is that China is now a peer-power and it shows. In 2025, the Lowy Institute, an Australian think-tank, published the 2025 edition of its Asia Power Index, a variant of Comprehensive National Power, the aggregate of national power used to compare different countries. In six of the eight measures used by the Lowy Institute to construct its index, China ranked second behind the US while on two—diplomatic influence and economic relationships—it outranked the US. More importantly on most parameters where China lags the US, the differential is rather small.

With such a narrow power differential, the US is in no position to confront China, economically or militarily. Far from deterring China’s potential invasion of Taiwan, the US—as current events show—is not even able to force Iran, a much weaker power, to back down in the Hormuz Strait row. Purely from the perspective of wars as products of “inter-imperialist” rivalries, the US must adopt indirect means to keep China at bay.

That is where matters stand. US obduracy on the trade deal with Canada—its second largest trading partner, with a two-way trade of $879.9 billion—is in part due to pressure of Canada over trade deals with third countries. China looms large in this part of the story. Canada has refused to bend and sees greater value in cultivating relationships with other countries as well. This was the substance of the Mark Carney and Alexander Stubb opinion in The Economist. US’ attempts to “fix” China by arm-twisting the latter’s key trading relationships is not working.

The twist in the “inter-imperialist” rivalries story this time is the presence of “middle powers” like Brazil, Canada, India, and others. Before a full-blown global conflagration emerges, it is more likely that middle powers will play an important role. Either they will carve out some space for themselves or they will cave in as the two pre-eminent powers fight for influence in this middling space. That story is unfolding and the US-Canada spat is the opening move of that stage.