Mark Carney must beware an all-out trade war His latest tariff threats are proportionate. But the situation could get out of hand Aug 27th 2026 When Donald Trump first ordered tariffs on Canadian goods in February 2025, he said they were needed to force Canada to stop drugs and migrants crossing America’s northern border. He soon dropped that justification only to spew out a litany of other grievances: the trade deficit, national security, Canada’s dairy industry, a Canadian tax, a television advertisement, Canada’s trade with China, wildfire smoke. He repeatedly mused, with a mob boss’s ambiguity, about annexing Canada and making it America’s “cherished” 51st state. The caprice of the world’s most powerful man has now taken Mark Carney, Canada’s prime minister, to the brink of a disastrous trade war. On August
25th Canada announced $20bn-worth of dollar-for-dollar retaliatory tariffs on American goods. The trouble is that America’s economy is 13 times larger than Canada’s and far better equipped to cope. The new tariffs are due to go into effect on September 8th. Mr Carney has until then to find a way to defuse a grave threat to his country’s economy. It will take all his guile. The trigger for the latest hostilities was Mr Carney’s decision on August 21st to walk away from a trade deal that seemed on the verge of being sealed. The prime minister thinks Canada had little choice—though the Americans blame the Canadians. The Americans, he says, added late demands that Canadian truck factories remain subject to high tariffs, and that Canada curb its trade deals with other countries and weaken its protections for French culture and language—a red rag to separatists in Quebec. Stabilising economic relations with the United States is essential to Mr Carney’s efforts to attract the investment needed to diversify Canada’s economy away from its neighbour. In the past the prime minister has played for time, avoided aggression and sought to keep negotiations alive. He repealed a tax, removed retaliatory tariffs inherited from his predecessor and resisted calls to cut energy exports to the United States. This time, however, America’s demands were too much. It is a dangerous moment. America’s tariffs went into force shortly after the talks collapsed. Mr Trump has said he will slap further duties of 50% on Canadian cars, trucks and auto parts from January 1st. Canada’s $2.5trn economy is not only punier than America’s $32trn one, it is also more exposed to its southern neighbour than vice versa. About two-thirds of its exported goods are sold there and most of these are integrated into American supply chains, making it hard to find alternative buyers quickly. Canada’s retaliation would deepen the pain. So, having made his point, Mr Carney should seek to walk back his retaliatory tariffs. If that is politically unfeasible, they should at least be made targeted and reversible—by, say, focusing on the swing states in the midterm elections that trade most with Canada, and whose politicians may have sway with Mr Trump. Some are already grumbling about the needless harm to American interests from picking a fight with a close ally.
Both countries’ officials should remember the costs they are imposing by escalating. The existing American tariffs will be hard to unwind. Another reason the talks failed is that protected industries in the United States lobbied the Trump administration hard against lowering tariffs that shield them from Canadian competition. Only Mr Trump has the power to end his illogical crusade against Canada. He has shown no inclination to do so. Mr Carney has previously demonstrated that a moderate response to Mr Trump need not be politically ruinous. Now he has two weeks to pull off something much harder. He needs a deal that is better for Canada than America’s latest offer. But to get that, he also needs to rebuff America’s intemperate president without triggering a cycle of escalation that will harm Canada disproportionately, and in which it cannot prevail. ■ This article was downloaded by zlibrary from https://www.economist.com/leaders/2026/08/25/mark-carney-must-beware-an-all-out- trade-war
America will regret Scott Bessent’s bond-market misadventures But expect them to continue, so long as government debt stays high Aug 27th 2026 The background music of Donald Trump’s second term has been the sound of norms breaking. On economic policy alone, the president has used tariffs to usurp Congress’s taxing powers and launched attack after attack on the independence of the Federal Reserve, which he accuses of keeping interest rates too high. A year and a half into Mr Trump’s second administration, it is tempting to tune the noise out. However, the latest transgression deserves to echo far and wide. On August 19th Scott Bessent, the treasury secretary, unexpectedly announced that the government would increase the amount of long-dated debt it buys back. The stated reason—to ensure liquidity in the market for
long-term Treasury bonds that looked perfectly liquid as things stood— never sounded plausible. From the start the real one appeared to be to keep Mr Trump happy by raising Treasuries’ price and thus lowering their yields, which determine how much Americans pay for a mortgage. Ahead of midterm elections where voters seem poised to punish the president’s Republican Party for stubbornly rising prices, it also looks like politicisation of the world’s most important asset market. Worse, Mr Bessent may not be finished with his meddling. Bond yields have been creeping up lately, and not just in America. The reasons are not mysterious. Inflation is sticky, budget deficits are widening and government debts are piling up. The day Mr Bessent waded into the bond market America’s total public debt exceeded $40trn, equivalent to more than 120% of GDP. As the rich world’s central bankers arrive in Jackson Hole on August 27th for their annual retreat, they will commiserate with one another. If Mr Bessent were serious about lowering yields, he would start by tackling this debt bomb, as he and Mr Trump have repeatedly promised. Instead, his department is reportedly weighing whether to use cash from its $1trn general checking account to fund more bond buy-backs. When asked about Mr Bessent’s market interventions, Mr Trump suggested, apparently not in jest, unleashing American troops on the bond vigilantes. Traders have little to fear from SEAL Team Six. But Mr Bessent’s sortie into the Treasury market does risk bloodying America’s financial credibility, even if it keeps yields a little lower for a little while (as it appears to be doing). Many investors are already feeling nervous. After the surprise buy- back, the dollar weakened and assets that rise with worries about the global reserve currency’s “debasement”, such as gold and bitcoin, surged. A combination of lower yields and a weaker dollar would stoke inflation (unless the Fed acts against Mr Bessent—and angers Mr Trump—by raising short-term interest rates). And the secretary’s purchases could backfire if the market starts demanding extra compensation for holding an asset whose price is seen as reflecting political whim as well as economic reality. Regrettably, in Mr Trump’s America and elsewhere, politicians and their voters are in no mood for the tax rises and spending cuts that would begin to
balance government budgets. Mr Bessent’s stop-gaps look more appealing. Even if his bond purchases do not prevent yields from rising eventually, they may be enough to kick the debt can a little bit further down the road and into the hands of the next administration. In the Wall Street Journal Mr Bessent’s mentor from his years as a hedge-fund trader, Stanley Druckenmiller, called every one-hundredth of a percentage point of yield suppression “a subsidy to procrastination”. The last time America managed to chip away at unsustainable debt, in the decades after the second world war, it also meddled even as it tightened its belt. The government kept yields low first through an explicit ceiling, then with subtler sorts of financial repression such as Regulation Q, which capped the interest banks could pay to depositors. Meanwhile, bursts of inflation ate away at the real value of government debt. Mr Bessent knows his economic history well; for several years he taught a course on it at Yale University. He surely understands that, sooner or later, the past will catch up with him. ■ This article was downloaded by zlibrary from https://www.economist.com/leaders/2026/08/26/america-will-regret-scott-bessents- bond-market-misadventures
America’s new sanctions are unlikely to topple Iran’s regime But that may not be the aim Aug 27th 2026 THE WARNINGS were apocalyptic. An “economic D-Day” was looming for Iran, blustered Donald Trump. It would be “the single greatest financial offensive ever marshalled against an adversary”, declared Scott Bessent, America’s treasury secretary. Having failed to fell the Iranian regime with military might, America was turning to economic weapons. Yet Operation Economic Outcast, announced on August 24th, looks unlikely to bring about the fall of the regime. Nearly 60 individuals, entities and ships will come under fresh sanctions, as will five sectors of Iran’s economy, from digital assets to shipping. But America has so far only threatened to use its most potent economic weapon: secondary sanctions, on countries that trade
with Iran or help its regime move money around. There is good reason to think it may never fire that weapon at full blast. Mr Bessent himself suggested that doing so might “blow up the global financial system”. He may well be right. The biggest risk comes from China, which despite sanctions buys around 90% of Iranian crude exports, at a discount. Forcing Chinese financial institutions to choose between the dollar and Iranian oil would be a dramatic escalation in America’s confrontation with the world’s second-biggest economy. Investors would worry about the consequences for trade and finance. The prospect of such a fallout curbed the administration last year after China threatened to withhold the supply of rare earths—one reason Mr Trump is seeking warmer relations with China today. And Iran’s leaders are unlikely to crumble as a result of this half-baked new offensive. Their country has already endured the “maximum pressure” campaign of Mr Trump’s first term and the bombing campaigns of his second. Sanctions and America’s blockade of the Strait of Hormuz are making life miserable for ordinary Iranians. But the regime and its elite defenders in the Islamic Revolutionary Guard Corps (IRGC) will be the last to suffer. Indeed, the IRGC gets its cash from smuggling and making things