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Steel workers return to work after a two-year idle at U.S. Steel Granite City Works in Granite City, Ill., last Thursday.


The Trump administration is planning to impose hefty tariffs on Canadian steel and aluminum imports as soon as Thursday – a move that threatens to spark a trade war and blow up already tense negotiations over the North American free-trade agreement.

Canada has crafted a retaliation plan that would involve U.S. steel and aluminum and other politically sensitive products, sources briefed on Ottawa’s strategy said.

U.S. President Donald Trump’s decision to hit Canada – as well as Mexico and the European Union – was reported by the Washington Post on Wednesday, and confirmed to The Globe and Mail by a senior Canadian official and a U.S. industry source. The official cautioned that the President could change his mind before an official announcement.

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The tariffs would impose levies on imports of 25 per cent on steel and 10 per cent on aluminum. Canada is the biggest supplier of both metals to the United States, with the value of shipments close to $20-billion annually.

Related: EU prepares for a trade brawl as Trump’s tariff deadline looms

NAFTA’s saga so far: A guide to trade, the talks and Trump

The move would be the latest trade attack on Canada from its largest trading partner: Mr. Trump has accused the country of “taking advantage” of the United States under NAFTA and wants the pact overhauled. And last week, he ordered an investigation into auto imports to the United States that could lead to 25-per-cent tariffs on cars and trucks, which would disproportionately hit Canada; about 80 per cent of Canadian-made vehicles are for the U.S. market.

Two sources said Canada has prepared detailed options for retaliation, including an investigation into steel dumping from several countries, including the United States, with the possibility of imposing its own tariffs. Canada is also considering imposing levies on high-profile U.S.-made consumer goods and luxury items, with the goal of hurting the United States in a visible way without damaging Canada’s economy by restricting necessary imports.

“I would like to absolutely assure Canadians, particularly those who work in the steel and aluminium industries, that the government is absolutely prepared to and will defend Canadian industries and Canadian jobs,” Foreign Minister Chrystia Freeland said earlier on Wednesday. “We will respond. And we will respond appropriately.”

Mr. Trump brought in tariffs on all steel and aluminum imports earlier this year, claiming they were necessary to ensure “national security” by building U.S. capacity to construct its own tanks and warships. The President granted temporary exemptions to a handful of countries, giving them time to negotiate permanent exclusions in exchange for accepting restrictions on how much of the metals they could sell to the United States.

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The tariff exemptions for Canada, Mexico and the EU expire on Friday.

The Trump administration used the threat of tariffs in NAFTA talks, saying Canada and Mexico would receive a permanent pass only as part of a renegotiated deal. NAFTA negotiations are deadlocked over tough protectionist demands from the United States.

Canada and Mexico have proposed NAFTA deals over the past month, said sources with knowledge of the closed-door talks – offering to agree to U.S. demands on content rules in the auto sector if the Trump administration drops its other proposals. The United States rejected the offers.

On Tuesday, Ms. Freeland met with Mr. Trump’s trade chief, Robert Lighthizer, in Washington for two hours in an effort to get a permanent exemption on tariffs. She spoke with him again later by telephone, but left the U.S. capital on Wednesday morning empty-handed.

Negotiations on a further exemption for Canada had focused on agreeing to U.S. demands that NAFTA force auto makers to use more North American-made steel, the sources said. The Americans also pressed for a quota on the amount of steel and aluminium Canada could ship to the United States.

One source close to the NAFTA negotiations said Ms. Freeland informed Mr. Lighthizer that ending Canada’s exemption on steel and aluminum tariffs would be a clear signal that the Americans are not that interested in reaching a NAFTA deal.

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Flavio Volpe, president of the Automotive Parts Manufacturers’ Association of Canada, echoed Ms. Freeland.

“It makes it really difficult to believe that deliberations are in good faith if you’re taking capricious actions like this that really hurt the other parties,” he said. “How do you sit at the centre of the global economy and behave this way?”

Prime Minister Justin Trudeau lobbied Mr. Trump directly by telephone last week, and contacted Vice-President Mike Pence on Tuesday.

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