President Donald Trump on Wednesday warned he would impose tariffs on the European Union or cease trade with the bloc entirely if it moves forward with its plan to make Canada its first-ever “associate member.”

“I think it’s laughable … Canada has been a terrible trade partner,” Trump told reporters after arriving in North Carolina. He tied his threat to the intentions of European leaders, stating that “if I think it’s at all a hostile act, I will put very serious tariffs or stop trading with Europe on many things.”

Trump’s comments followed European Commission President Ursula von der Leyen’s announcement that the EU is considering opening the door for Canada to become the first associate member of the 27-nation bloc.

Associate membership is not currently a formal category under EU treaties, and any such arrangement would need to be established and approved by member states.

The proposal emerged as Brussels and Ottawa work to deepen ties, indicating a notable shift in the EU, which had previously shown lukewarm interest in Germany’s May proposal to grant an associate membership to Ukraine.

In her annual state of the EU address in Strasbourg, France, the EU chief stated the bloc aims to bring its relationship with Canada “to the highest level possible.”

Canadian Prime Minister Mark Carney, who attended the address, has previously said Ottawa is keen to pursue a “unique security and economic alliance” with Europe, but not full membership.

Canada has sought to diversify away from the U.S. following months of escalating trade tensions and as bilateral trade talks have collapsed. Trump has imposed a 50% tariff on Canadian goods and plans to ban the country’s dairy, alcohol and auto imports later this month, drawing retaliation from Ottawa.

“Washington and Ottawa may find an off-ramp from the current trade war, but Canada will continue to reduce its vulnerability to U.S. economic pressure,” said James Lindsay, a senior fellow at Council on Foreign Relations.

Von der Leyen’s pitch to Canada includes joint work on manufacturing, integration of defense-industrial bases, a tech alliance, energy, artificial intelligence and cooperation in the Arctic.

Canada is already the only non-European country in the EU’s SAFE instrument — an initiative that provides Canadian firms with preferential access to defense procurement — and has a free-trade agreement with the bloc, eliminating tariffs on roughly 99% of goods, though that deal still requires ratification by 10 EU states.

Any fresh U.S. tariffs on the EU would test the trade framework Washington and Brussels struck last year, which set a 15% tariff ceiling on most EU exports to the U.S.

Brussels has not said whether it will proceed with the associate-member proposal in the face of Trump’s threat. EU member states — several of which were reportedly blindsided by the announcement — are yet to respond to Trump’s threat.

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Hello, this is Priyanka Salve, writing to you from Mumbai.

Welcome to the latest edition of “Inside India” — your one-stop destination for stories and developments from the world’s fastest-growing large economy.

The world’s largest payments system by volumes, India’s unified payment interface, popularized cashless transactions in the country by offering free services for all. That’s about to change. Starting next month, merchants will need to pay a fee of 0.4% for accepting payments higher than $20.

While the government has defended the move, confident it will not hurt India’s march towards a cashless economy, critics disagree.

Any thoughts on today’s newsletter? Share them with the team.

The big story

The Indian government’s decision to charge a fee to merchants using its globally lauded real-time digital payment system, UPI, that undercuts the usage of Visa and Mastercard, has sparked an intense debate in the country.

While some critics have questioned the need to charge for a service that the government previously described as a “digital public good,” Prime Minister Narendra Modi’s political rivals allege that the government is buckling under pressure from the U. S.

On Tuesday, the National Payments Corporation of India announced that a 0.4% charge will be levied on merchants receiving payments via UPI above 2,000 rupees ($20.84). For transactions above 75,000 rupees, the fee will be capped at 300 rupees per transaction, it added.

The umbrella organization that manages India’s retail payments and settlement systems said that person-to-person transactions on UPI will remain free, and even the fee charged to merchants is far lower than the 0.9% on debit card transactions and 1.5%-2.5% on credit cards.

Bouquets and brickbats

Fintech companies have welcomed the move to charge a fee to merchants.

“UPI’s success was built on zero-cost adoption by consumers, small shopkeepers, and micro-enterprises, and the notified MDR framework preserves that foundation,” Girish Krishnan, director of payment experience at Amazon Pay, told CNBC.

Head of Meta’s WhatsApp Pay Kunal Shah called it a “great move forward.” Another popular payment app, Paytm, said that the measure will generate additional revenue from merchant business.

In 2020, the Indian government cut the merchant discount rate, the fee incurred by merchants for accepting payments via UPI, to zero to promote digital transactions in the country. Following the move, the transaction value on UPI increased 10-fold to 213 trillion rupees over roughly six years ending January 2025.

“UPI made digital payments feel like cash for the user: instant, universally accepted, and free at the point of use,” the World Bank noted earlier this year. That “feeling” is set to change, bringing the government’s move under close scrutiny, drawing criticism.

Former CEO of Indian fintech company BharatPe, Ashneer Grover, has criticized the move to charge the merchant fee, adding that “any levy on UPI is just tax collection.”

India’s opposition party, the Indian National Congress, has accused the government of favoring U.S. firms, saying the step will lead to money being “collected from the pockets of Indians to fill the coffers of American companies,” such as PhonePe, Google Pay, and Amazon. Some commentators have said the move will encourage people to return to transacting in cash.

Level playing field

The UPI payment system on average processes more than 1.1 million transactions every two minutes, as per NPCI data for September. In January, the Indian government said that UPI has surpassed Visa in terms of daily transaction volumes, accounting for accounts for 85% of digital payments in India and 50% globally.

Those figures caught the attention of the U.S. Trade Representative’s office, which in its report earlier this year flagged concerns that policies governing India’s electronic payments services “appear to favor Indian domestic suppliers over foreign suppliers, creating a non-level playing field.”

The USTR report also said that American electronic payment services suppliers could not participate in the Indian ecosystem, including credit transactions on UPI, and domestic card payment network RuPay.

Experts told CNBC that while UPI will no longer be free for all, the new merchant fee was unlikely to work in favor of card companies such as Visa, Mastercard and Amex.

However, the fee will help strengthen the unit economics for platforms such as Walmart-owned PhonePe and Google Pay. The two payment apps together account for nearly 85% of UPI transactions by value and 81% by volume, as per a report by Indian brokerage Ambit Capital.

“A 0.4% rate severely undercuts credit cards at 1.5% to 2% and debit cards,” Neil Shah, vice president of research at Counterpoint Research, told CNBC, adding that it gives merchants “every economic incentive to favor UPI rails.”

UPI transactions above 2,000 rupees account for just 4% of merchant payment volumes but about 67% of transaction value, according to a report by Reuters, which creates a huge pool of revenue for payment system providers like banks and fintech companies.

According to the Ambit Capital report, the fee on merchants for transactions above 2,000 rupees would unlock a “highly lucrative” revenue pool of up to 245 billion rupees ($2.5 billion) for the sector.

“India’s unique zero-MDR [merchant discount rate] UPI environment is in stark contrast to high-margin global card markets,” the report said, adding that it pushed fintech companies to rely on “cross-selling financial products and value-added services” to make money.

Need to know

India’s retail inflation hits 4.8% in August, rises for 10th straight month

India’s headline rose to 4.82% in August from 4.45% in July, adding to pressure on the country’s central bank to raise key benchmark rates. Inflation has been on the rise for 10 straight months in the world’s fastest-growing major economy.

Indian Prime Minister Modi says border peace is key to India-China ties

Indian Prime Minister Narendra Modi on Saturday said that “peace and tranquility” in the border areas is essential for developing bilateral relations with its neighbor China. Ties between the two countries, which had deteriorated sharply following a deadly border skirmish in 2020, have been thawing for more than a year.

Coming up

Sept. 17: National Stock Exchange IPO opens.

Sept. 23: HSBC Flash PMI for September.

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Hello, this is Hui Jie writing to you from Singapore. Welcome to another edition of CNBC’s Daily Open.

The U.S. Federal Reserve finally raised interest rates — for the first time in three years — but it may not be done.

The move is the first in a string of major central bank decisions this week, with the Bank of England up next, and followed by the Bank of Japan on Friday.

Elsewhere, Europe is looking at the possibility of Canada becoming its first “associate member,” which, as you might expect, prompted a strong reaction from U.S. President Donald Trump.

What you need to know today

The Federal Reserve waited three years to raise interest rates, but it may not wait nearly as long to do so again.

The rate hike puts the Fed Funds rate at 3.75% to 4%, and policy makers voted 12-0 in favor of the increase as Fed Chairman Kevin Warsh said that inflation “is too high and has been for too long.”

The decision prompted stock markets to sink and Treasury yields to rise, with all three major U.S. indexes ending their session lower and the benchmark 10 year yield climbing above 5% again.

Expectedly, the Fed’s move also drew strong backlash from U.S. President Donald Trump, who demanded the Fed slash interest rates to 1% “or less” after the decision, adding “because we are the Best Credit in the World — BY FAR.”

The Fed’s decision is the first in a run of central bank decisions expected to come out this week, with the Bank of England expected to hold on Thursday and the Bank of Japan forecast to hike rates on Friday.

But one source of inflation anxiety did ease on Wednesday: oil.

Crude oil prices dropped as U.S. Energy Secretary Chris Wright said the damage to Saudi Arabia’s damaged East-West pipeline was temporary and that it would restart operations in days.

U.S. West Texas Intermediate futures shed 3.2% to close at $102.43 per barrel on Wednesday and Brent crude, the international benchmark, lost 2.7% to settle at $105.83 per barrel. Oil futures were also marginally down in early Asia trade.

But independent analysts warned the pipeline could remain down for weeks, based on satellite images showing significant damage to a pumping station.

EU-Canada ties

Elsewhere, the European Union opened the door to a major deepening of its relationship with Canada, with European Commission President Ursula von der Leyen inviting Ottawa to be the first “associate member” of the 27-member bloc.

This comes after Canadian Prime Minister Mark Carney had previously said that his country was keen to pursue a “unique security and economic alliance” with Europe, but not full membership.

Von der Leyen said the EU and Canada “see the world with the same eyes” and pledged to work together on issues such as artificial intelligence, climate change, geopolitics and Arctic security.

But while it was warm feelings between Brussels and Ottawa, U.S. President Donald Trump was less than enthusiastic, telling reporters that the idea was “laughable.”

He labeled Canada as a “terrible trade partner,” adding that “if I think it’s at all a hostile act, I will put very serious tariffs or stop trading with Europe on many things.”

And finally…

The tech industry has been “tone deaf” in explaining AI and properly informing the public about real risks, Reddit co-founder Alexis Ohanian told CNBC on Wednesday.

Ohanian said the debate around AI should focus on substantive risks rather than issues that can be used to score political points, arguing that an informed public is essential to navigating the technology.

He acknowledged that the tech industry has contributed to the problem by doing a “pretty tone deaf job” of explaining AI, while suggesting that its risks are more mundane than the “Terminator and Skynet” scenarios some fear.

— Elsa Olhen

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