A sharp American escalation in the trade war with Canada and a ban on dairy products and motorcycles

The United States sharply escalated its trade war with Canada, on Tuesday, after Washington imposed a ban on the import of some Canadian dairy products, motorcycles, and alcoholic beverages, coinciding with the entry into force of Canadian retaliatory customs duties on American goods, worth about $20 billion.

The American escalation was not limited to customs duties; President Donald Trump also moved to exclude Canadian products from large, long-term US government contracts, in a move that expands the scope of the trade confrontation between the two countries, and comes at a time when relations between the two traditional allies are rapidly deteriorating, according to the Associated Press.

The new US restrictions will come into effect on September 29, and include various types of Canadian wines and spirits, some motorcycles and motor bicycles, and dairy products, including whey, in addition to types of molasses.

Canada responds with duties on American goods

Starting at 12:01 a.m. Tuesday, Canada imposed customs duties on hundreds of American products, stressing that they come “dollar for dollar, rate for rate” in response to the American measures.

The duties, which range from 15 to 25 to 50 percent, include several American products, including steel, aluminum, cheese, household appliances, clothing, cosmetics, and agricultural equipment.

Canadian tariffs target about $20 billion in American goods, equivalent to about 6 percent of total US exports to Canada, which amounted to $333.6 billion last year.

Canada also went beyond tariffs; Eight out of 10 Canadian provinces continue to restrict or ban US alcohol sales. The Distilled Spirits Council said US spirits exports to Canada have declined by more than 70 per cent year-on-year since the restrictions began.

Washington opens the front of government contracts

The Trump administration responded to the Canadian measures by announcing a ban on the import of some products, instead of simply increasing customs duties on them.

Trump also directed the US General Services Administration to declare Canadian products ineligible to participate in large, long-term federal government contracts, until Canada allows what he described as “full and fair reciprocity” for American products.

This reflects the shift in the confrontation from a traditional dispute over tariffs to the use of government purchases and access to the American market as additional pressure tools on the Canadian economy.

Since the collapse of trade talks between the two countries on August 21, the Trump administration has intensified tariffs, threats and political attacks on Canada, while the US President has previously warned of the possibility of the collapse of the Canadian economy if Prime Minister Mark Carney continues to deal with him as an “enemy.”

Trump's pressure strengthens Canada's resistance

But American pressures have so far achieved the opposite result inside Canada. The trade war and Trump's repeated talk about making Canada the fifty-first US state contributed to increasing popular anger and strengthening support for Carney.

Carney said on Tuesday that his country's response was no longer limited to trying to bear US duties; Rather, he has become increasingly focused on reducing Canada's dependence on the United States.

“It is about ensuring that no country can blackmail us, and that we can live the way we want,” he said.

Carney had said that resuming talks with Washington requires that the United States “stop spreading memes and sarcastic insinuations, and trying to appear strong, and become serious.”

Canada and the United States have one of the most integrated economic relationships in the world, along with close defense and security cooperation and broad cultural ties. About 400,000 people were crossing the border between the two countries daily before relations deteriorated.

Canada is looking for alternatives to the United States

Since his speech at the World Economic Forum in Davos in January, Carney has become one of the most prominent international voices calling on smaller countries to resist the major powers' use of economic integration as a means of coercion.

Carney is scheduled to address the European Parliament next week, at a time when Canada wants to strengthen its relations with the European Union, as part of efforts to diversify its economic partnerships away from the United States.

Daniel Belland, a professor of political science at McGill University, believes that the success of Canada's approach to confronting Trump may turn into a "model that can be used" by other countries seeking to resist the US administration's trade policies.

The automotive sector is in the crosshairs of escalation

The risks are not limited to the goods covered by the current procedures. Trump also threatened to impose 50 percent tariffs on Canadian cars, auto parts, and steel next year if Ottawa did not comply with American demands.

This could represent a very dangerous escalation for industries that rely on highly integrated supply chains in North America. Spare parts and cars cross the border between the two countries several times during the production process.

Carney warned that the American conditions could lead to a “gradual reduction” of Canadian industries within the country, and then their elimination.

Can Canada win the trade war?

Canada enters the confrontation from an economically weaker position; The American economy is about 13 times larger, and more than 70 percent of Canada's exports head south to the United States.

But analysts believe that the current confrontation is not a completely traditional trade war; Especially with the approaching US midterm elections, and the continuation of judicial appeals that could lead to the cancellation of some US fees.

On the other hand, Washington also has weaknesses; American refineries depend on about 4 million barrels of oil per day from Canada, and American farmers also depend greatly on Canada to obtain potash fertilizer.

However, the Canadian government has so far avoided using some of these cards, refusing to impose taxes or restrictions on key exports that it could use to pressure the United States.

Canada enters this round of conflict also enjoying relative economic momentum; Its economy grew at an annual rate of 3.2 percent during the second quarter, more than double the US growth rate of 1.5 percent.

“I am convinced that we will be able to show the world that Canada will win this trade war,” Canadian Industry Minister Mélanie Joly said, in a clear summary of the government’s ambition.

Gold prices held steady on Wednesday, with the dollar remaining weak, while markets awaited US inflation data, amid escalating tensions between the United States and Iran, which kept attention focused on the path of interest rates.

Gold rose in spot transactions by 0.4 percent to $4,372.19 per ounce by 02:30 GMT, while US gold futures fell by 0.5 percent to $4,416 per ounce.

The dollar remained weak, making metals denominated in the US currency less expensive for holders of other currencies.

Kelvin Wong, chief market analyst at OANDA, said that in the short term, the gold market is witnessing “a tug of war between optimists and pessimists,” expecting this type of movement to continue until the end of the week, when the US consumer price index data is released.

He added that expectations of the Federal Reserve following a tighter monetary policy are putting pressure on gold, while bets on the decline in the value of the dollar and fears related to the fiscal deficit remain supportive factors for prices.

Markets are awaiting the release of the US Producer Price Index data on Thursday, followed by the Consumer Price Index data on Friday, which are data of great importance in determining interest rate expectations.

The intensity of the war in the Middle East escalated with the Iranian-backed Houthis in Yemen launching attacks on a number of Saudi cities, which led to a greater involvement of a US ally in the conflict. American forces also targeted a number of Iranian oil tankers, while Iran attacked an American base in Jordan.

Meanwhile, Brent crude prices rose for the fourth consecutive session. An increase in oil prices usually puts upward pressure on inflation, with higher energy costs being transmitted to various sectors of the economy.

According to the CME Group's Fed Watch tool, traders see a probability of about 60 percent for the Federal Reserve to raise interest rates at its next meeting.

Although gold is widely viewed as an inflation hedge, rising interest rates reduce the appeal of the non-yielding metal.

“Precious metals face a test in the near term, but another major sell-off is unlikely,” said Kelly Shaw, commodities strategist at Alpine Macro.

She added that the scarcity of supply in physical markets remains a major issue, while structural imbalances between supply and demand may continue in the long term, in light of the limited flexibility of mine production and the continued demand related to electricity, electronics, and artificial intelligence infrastructure, which provides basic support for silver prices in the long term.

In other precious metals markets, silver rose in spot transactions by 0.4 percent to $66 per ounce, platinum rose by 1 percent to $1,831.76, while palladium fell by 0.3 percent to $1,344.69 per ounce.