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U.S. President Donald Trump is increasing his threat to levy 25-per-cent tariffs on car and truck imports, a move that would devastate Canada’s auto industry and unleash the country’s most serious trade war in recent memory.

And the renegotiation of the North American free-trade agreement is stalled, with the sides at an impasse over some of the Trump administration’s toughest protectionist demands.

Auto levies represent the most immediate threat to Canada. The U.S. government is currently undertaking an “investigation” ordered by Mr. Trump to determine whether foreign vehicle imports represent a threat to “national security.”

Tariffs would pummel $80-billion in Canadian exports, hitting a sector that employs more than 120,000 people. By comparison, the Canadian steel and aluminium sectors currently facing U.S. tariffs are roughly one-quarter the size.

Already locked in a trade battle with the U.S. over Mr. Trump’s steel and aluminium tariffs, Canada is facing a mounting threat of severe economic pain inflicted by its closest ally as the relationship between the Trudeau government and the Trump administration plummeted to new lows following the weekend G7 Summit.

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The President upped the ante in a Twitter barrage aimed at Mr. Trudeau after the summit, threatening “Tariffs on automobiles flooding the U.S. Market!”

Flavio Volpe, the head of Canada’s auto-parts industry group, said the pain of the tariffs would first be felt by American drivers and auto sellers, because it would take time for auto plants to relocate from Canada to the United States. Ironically, he pointed out, most Canadian-made vehicles are manufactured by branch plants of American corporations using U.S. content.

Also uncertain is the future of NAFTA. Foreign Minister Chrystia Freeland met with Mr. Trump’s trade chief, Robert Lighthizer, at the G7 to discuss the pact and is scheduled to see him again in Washington this week.

Negotiators have not been meeting regularly for weeks and have no plans to resume regular talks, said sources with knowledge of the bargaining. One source said a Mexican delegation, including some government officials and industry representatives, is expected in the U.S. capital next week to try to determine whether there is a path forward on a deal.

Late last month, Canadian officials told the Trump administration there were two U.S. demands they would never agree to in NAFTA: a sunset clause that would automatically terminate the deal in five years and the abolition of the Chapter 19 dispute resolution panels, one source said. Ottawa is willing to negotiate on every other contentious area, including automotive content rules, government procurement and Canada’s protectionist supply-management system for dairy.

Daniel Ujczo, an Ohio-based trade lawyer with Dickinson Wright, said the two countries could use a “cooling-off period” from the heated rhetoric of the last few days. After that, they could end the current trade war by agreeing to a guaranteed percentage of North American steel and aluminium in NAFTA’s auto-content rules, he said.

The trouble, however, is that Mr. Trump has now made it harder for Mr. Trudeau to compromise at the bargaining table without appearing to have submitted to the President.

“Americans are more used to people screaming at each other; I’m not sure if our Canadian brothers and sisters can get past it so easily,” he said. “The politics for the Prime Minister just got a lot more complicated.”

Mr. Ujczo said there is also a good chance Mr. Trump will roll out his proposed auto tariffs before the U.S. midterms in the fall. The move, however, would be so extreme that he argued congressional Republicans would rebel and force him to back down.

Bruce Heyman, a former U.S. ambassador to Canada, said he feared that Mr. Trump is deliberately setting the stage to start the process of pulling the United States out of NAFTA by “setting up a narrative” that Canada is cheating America. Under NAFTA, any country can withdraw after giving six months’ notice.

Mr. Heyman said there is no basis for Mr. Trump’s attitude toward Canada: The nearly $900-billion in annual trade is relatively balanced between the two countries – with a slight surplus in the United States’ favour.

“Canada is our closest ally, our best friend, our best trading partner in the world,” he said. “This is misplaced ire and fire by the President.”

With a report from Robert Fife in Quebec