Trump is flirting with a massive inflation shock

Tariffs on raw inputs are far more inflationary than tariffs on finished luxury goods — they can ripple through the entire supply chain, raising costs at every stage. Meanwhile, a 100% tariff is massive rather than marginal, doubling the price of the tariffed good at the border before any downstream effects. Finally, there’s broad consensus among economists that tariffs raise domestic prices.

All of which makes what happened this past Saturday extra notable — with President Donald Trump threatening to impose 100% tariffs on Canadian good if Prime Minister Mark Carney follows through on Canada's recently negotiated trade agreement with China.

The threat marks an escalation in tensions following Carney's speech at Davos last week, where he said that it’s time for Canada to diversify away from U.S. economic dominance. Carney argued that the U.S. has moved away from a system of mutual benefits as well as the larger “rule-based order,” and that continued integration with the U.S. leaves Canada vulnerable to economic coercion.

“Over the past two decades, a series of crises in finance, health, energy, and geopolitics have laid bare the risks of extreme global integration,” Carney said. “But more recently, great powers have begun using economic integration as weapons, tariffs as leverage, financial infrastructure as coercion, supply chains as vulnerabilities to be exploited.”

“You cannot live within the lie of mutual benefit through integration, when integration becomes the source of your subordination,” Carney went on to say, pointing to steps Canada has already taken to begin this larger strategy of diversification, including multiple trade and security agreements struck in the last six months. These include strategic partnerships with China and the E.U., alongside trade negotiations with India, ASEAN, and Mercosur.

Now Trump’s threat appears to bolster those exact arguments. “If Canadian Prime Minister Mark Carney thinks he is going to make Canada a 'Drop Off Port' for China to send goods and products into the United States, he is sorely mistaken,” Trump wrote on Truth Social. “If Canada makes a deal with China, it will immediately be hit with a 100% Tariff against all Canadian goods and products coming into the U.S.A. Thank you for your attention to this matter!”

Coming just days after Carney publicly explained why “middle powers” like Canada need to reduce their dependence on an increasingly unreliable United States, Trump threatened the exact policy that would validate Carney’s thesis. Whether he carries out the threat or not, the threat raises questions about where the economic pain would fall, and there is little question that Americans would find it painful indeed.

Why a 100% tariff on Canadian imports would amount to a massive cost-of-living shock for Americans

The scale of U.S.-Canada trade integration makes the potential impact hard to overstate.

Nearly $2.7 billion worth of goods and services cross the border daily. And unlike tariffs on finished luxury goods, which might affect whether someone buys a foreign car or handbag, tariffs on raw inputs across major household-budget categories would mean that Americans would likely see a dramatic rise in the cost of living.

Take energy, for starters. About 60% of U.S. crude oil imports come from Canada, and roughly 80% to 85% of U.S. electricity imports. Imposing large tariffs on energy imports alone would likely hit Americans immediately and directly. Gasoline prices would spike. Heating bills would jump, particularly in the northern and midwestern states that rely most on Canadian energy resources and Canadian electricity.

Canada is also the largest foreign supplier of steel, aluminum, uranium, and lumber to the U.S. The rise in prices across inputs would likely affect both U.S. industries and consumers at once.

First and most obviously, construction costs would likely soar. Canadian lumber is a key component in U.S. homebuilding. Steep tariffs on lumber would likely mean higher prices for new homes, repairs, renovations—any project involving wood. Steel and aluminum tariffs would flow through to everything from cars to appliances.

Manufacturing input costs would likely explode across multiple industries. Integrated supply chains mean parts and materials often cross borders multiple times during production, and each border crossing could compound the tariff impact, depending on how tariffs are applied.

Grocery prices would likely soar, too. Canada exports significant quantities of wheat, canola oil, pork, beef, and seafood to the U.S. A tariff that doubles the cost of these agricultural products gets passed directly to American consumers at the checkout. As an example, Canadian wheat is an ingredient in many baked goods and packaged foods sold in the U.S., from crackers to cakes, pasta, and cereal.

All this is before you get to the export side. Were Canada to retaliate—and threatened trading partners tend to—then millions of American farmers, manufacturers, and service providers could lose access to their largest foreign market. In recent years, more than half of U.S. states have counted Canada as their largest trading partner.

In short, extreme economic pain would very likely hit on both sides of the U.S.-Canada border. Even the threat may have the effect of raising prices as businesses model future costs and plan for different scenarios.

“Breathtaking and profoundly scary”

Trump’s threat comes as markets are already repricing U.S. assets amid what traders and analysts call the “debasement trade.”

Gold crossed $5,000 an ounce for the first time ever on Sunday and continued rising Monday, part of what Robin Brooks at the Brookings Institution describes as a “breathtaking and profoundly scary” rally driven, in part, by fears of a global debt crisis.

Other precious metals are seeing the lift, too. Silver has recently hit new records, extending an even more dramatic rally than gold, while the U.S. dollar has hit a four-month low.