The United States and Canada find themselves in a bitter trade war, after Washington imposed 50% tariffs on about $20 billion worth of Canadian goods and Ottawa vowed to retaliate “dollar for dollar”.While US tariffs kicked off on August 22, Canada’s will come into effect on September 8.The US Supreme Court had struck down much of Donald Trump’s earlier tariff programme in February. So how is the US imposing fresh tariffs now? Canadian Prime Minister Mark Carney is the first to walk out of trade talks nearing completion with Trump. What is the likely fallout? We explain.What did US want from Canada and did not get?While the full details are not clear yet, Washington said it was responding to Canadian discrimination against US businesses. The Trump administration said it had offered Canada cuts in tariffs on sensitive sectors including steel, autos and lumber, but the neighbour wanted additional concessions and backed away from commitments.US trade representative Jamieson Greer said on a Fox News chat show, “We’ve said enough and so we’ve taken countermeasures. Our interest is in protecting American workers and protecting American supply chains.”Trump posted on TruthSocial on August 23, “Canada wants the benefits of being a State, without being one!!! They have also charged our great farmers, for many years, massive amounts of Tariffs. No more!!!”Story continues below this adWhat did Canada want from the US and did not get?Canada, meanwhile, said it has been willing to make concessions on tariffs on US steel, aluminium and autos if Washington substantially reduced its own tariffs. Canada was also willing to encourage provinces to restore US alcohol sales, the administration said.But Carney said the US demands went too far. According to him, Washington’s final terms would have reduced tariff relief for Canadian-made vehicles and restricted Canada’s ability to strike trade deals with other countries. He also said Washington’s signature was at times “in pencil”, implying that the Trump administration wasn’t dependable.What will be the US-Canada tariff war impact?The immediate economic impact may be significant, but the political impact could be larger.The new US tariffs cover about 5% of Canada’s annual exports to the US, including products ranging from hockey equipment and wine to agricultural goods, clothing and furniture. Canada says its retaliation will target sectors including steel, dairy, appliances, agricultural equipment, pulp and paper and electronics.Story continues below this adThe two countries exchanged $880 billion worth of goods and services last year. For Canada, the stakes are especially high: about 72% of its goods exports went to the US last year.Tariffs are basically duties importers pays for goods they bring into the country. If the importer is paying more, she is likely to pass on the cost to customers. Hence, the failed trade talks are bad news for Americans too, already struggling with inflation amid the Iran war economic setbacks.The US and Canada have historically been close allies, but after Trump started talking about making Canada the 51st state of America, Carney came to power last year on the promise of standing up to the US President. For now, the country has closed ranks behind him.Carney is an economist, who has served as the head of Bank of Canada as well as the Bank of England. He has previously exhorted all middle powers to stand up to bigger powers when needed. At the World Economic Forum in Davos this January, he had said, “We know the old order is not coming back. We shouldn’t mourn it. Nostalgia is not a strategy…,”Story continues below this adHis decision to walk out of the deal and retaliate, thus, will be watched closely. Last year, when Trump was slapping tariffs on countries across the world, many had gone to great lengths to appease him.Weren’t those tariffs cancelled?In the February verdict, the US Supreme Court did not eliminate presidential tariff powers. It ruled that the President did not have the authority to impose sweeping import tariffs under a specific law called the International Emergency Economic Powers Act (IEEPA).Trump’s administration has since looked for other tariff routes. For the new Canadian tariffs, it has invoked Section 338 of the Tariff Act of 1930, part of the Depression-era Smoot-Hawley legislation. The provision allows the President to impose tariffs of up to 50% on countries deemed to discriminate against US businesses. This law has never previously been used to impose tariffs.On India and a host of other countries, tariffs were imposed last month under Section 301 of the US Trade Act, which is applicable to goods produced with forced labour.