Reshma Kapadia

Another trade war has started with a volley of tariff threats, and this time the fight is with America's neighbor and closest trading partner, Canada.

So far, there's no clear off-ramp to repair this critical relationship, and the back-and-forth threats will likely continue. Both companies and investors should buckle up for another bout of tariff-driven volatility-especially in sectors that depend most on trade between the two countries, such as autos, agriculture, and alcohol.

This weekend, both sides pushed for last-minute changes to a proposed trade agreement, ultimately upending a deal that would've staved off 50% tariffs on $20 billion, or a fraction of Canada's exports. However, the U.S. tariffs-now in effect for goods such as alcohol, furniture, and cement-are based on a little-used section of trade law, and analysts expect them to face court challenges. Hanging in the balance is a relationship that involves $40 billion worth of trade between the two countries.

One of the big deal breakers was the U.S. attempt to restrict trade between China and Canada. Prime Minister Mark Carney has sought to strengthen other trade ties as Canada's relationship with the U.S. has become more fraught-including rehabbing a strained relationship with China. At the center of the tensions between the U.S. and Canada is the Trump administration's decision this summer to not renew the U.S.-Mexico-Canada trade pact, which had been signed during the first Trump term. While the U.S. has held several formal negotiations with Mexico this year about the USMCA, it hasn't done so with Canada.

Over the weekend, Canada threatened to retaliate with its own tariffs on $20 billion of U.S. goods if the two sides don't reach an accord by Sept. 8. That makes Canada one of the few major trading partners to push back against the U.S. besides China. Its firmer stance could inspire others already feeling wobbly about their preliminary trade pacts to defy U.S. demands in their own way.

Some strategists warn that the latest trade skirmish could inject further volatility as countries rethink making concessions and reassess some of their preliminary U.S. trade pacts reached last year.

"If Canada agreed today to sever economic ties with China, who is to say what the U.S. might ask for tomorrow? Sever ties with Europe should President Donald Trump become angry at the European Union? With Brazil if President Donald Trump changes his mind about President Luiz Inácio Lula da Silva?" writes Gavekal's Louis Gave in a note to clients.

Over the weekend, Carney said Canada recognized early on that the U.S. had changed and would transform all its commercial relations and use economic integration as a weapon.

"We recognized that sometimes its signature was written in pencil," Carney said.

Veda Partners' Henrietta Treyz says her discussions with Canadians suggest Prime Minister Mark Carney has strong support and investors shouldn't anticipate a quick capitulation. Carney set retaliatory tariffs to go into effect Sept. 8, leaving the door open to negotiations. But Treyz doesn't expect Canada to jump-start a path to an off-ramp. Instead, she says, Canadians are looking to affected businesses-like autos and auto parts-to start lobbying the Trump administration to rethink its latest levies.

Trump on Monday met Carney's threat of retaliation with a threat of another 50% tariffs-on autos, steel and auto parts-but it's worth noting those wouldn't go into effect until Jan. 1, 2027.

That leaves plenty of room for continued posturing. Analysts say the counter-retaliatory tariffs Trump threatened Monday will likely fall into the growing bucket of threats that haven't materialized.

For now, both trade experts and Wall Street strategists are betting that the coming midterm elections and continued angst about inflation will limit U.S. tariffs.

The Canadian dollar and assets dipped on the trade friction on Monday. But Gavekal's Gave sees a possibly positive longer-term outcome if trade tiffs provide the needed "electroshock" for Canada to do more self-improvement-such as rolling out its commodity infrastructure to Canadian pensions repatriating some of their assets from the U.S.

U.S. steel stocks were early winners of the spat on Monday as shares of Steel Dynamics, Nucor, and others rising. But shares of auto giants like Stellantis, Ford Motor, and General Motors were down 1% to 3%.

But Treyz expects the White House to re-escalate the tariff battles to get rates against its global partners back to where they were before the Supreme Court invalidated global tariffs in February, but likely not ahead of the election.

The threats, until then, might begin to lose some of their sting.