Stocks fell on the news on Thursday, as investors worried Trump would enact stiffer trade barriers around the world's largest consumer market.
The S&P 500 finished the day more than 10 per cent below its record high reached last month, confirming the benchmark index for US stocks is in a correction.
Trump's threat came in response to a European Union plan to impose tariffs on American whiskey and other products next month - which itself is a reaction to Trump's 25 per cent tariffs on steel and aluminum imports that took effect on Wednesday.
Canada, a neighbour and close ally that is the biggest aluminium provider to the US, has also announced countermeasures to Trump's metals tariffs and has taken the dispute to the World Trade Organisation.
Trump has threatened to impose an array of trade penalties since returning to the White House in January, though he has postponed action on many of them.
At an Oval Office meeting with NATO Secretary-General Mark Rutte later on Thursday, he said he would not back off from reciprocal tariffs he has vowed to impose on all trading partners on April 2.
"We've been ripped off for years, and we're not going to be ripped off," he said.
Alcohol is shaping up to be a key friction point in the brewing trade war.
Some Canadian retailers have pulled American bourbon from their shelves as relations between the two countries have frayed and Trump has threatened to annex that country.
US Commerce Secretary Howard Lutnick told Fox News he was meeting with Canadian Finance Minister Dominic LeBlanc and Ontario Premier Doug Ford on Thursday to discuss the tariffs, and the US was looking for some concessions from Canada.
"You have to remember, Canada exists, leaning on our economy," he said. "Why are we doing all this business in Canada if they're not respectful, if they're not thankful, and they don't want to do it?"
Following his meeting with Lutnick, Ford told reporters in Washington: "We had a very, very productive meeting ... we feel the temperature is being lowered, and we've also agreed that we're going to have another meeting next week."
Many of the EU's proposed countermeasures, worth 26 billion euros ($A45 billion) in all, would apply to products that have little more than symbolic value, such as dental floss and bathrobes.
But the proposed 50 per cent duty on US bourbon would be a significant hit for the industry, which has seen exports grow steadily since the United States lifted tariffs Trump imposed during his 2017-2021 term in office.
The EU accounted for roughly 40 per cent of all spirits exports in 2023, according to the Distilled Spirits Council of the United States, a trade group.
Likewise, the United States accounts for 31 per cent of EU wine and spirits exports, according to Eurostat.
Trump's proposed 200 per cent tax on European alcohol would create further headwinds for producers like Pernod Ricard, which has already cut its sales outlook due to Chinese duties imposed last year.
Industry officials on both sides of the Atlantic urged their leaders to de-escalate.
"This cycle of tit-for-tat retaliation must end now!" said spiritsEurope, an industry trade group.
Trump says tariffs are a crucial tool to revitalise US industries that have withered due to decades of globalisation, and he has stacked his administration with officials who agree with those views.
Trump's barrage of threats has spooked investors, businesses and consumers. Producers of jets, coffee, clothing, autos and packaged foods are among the many businesses scrambling to assess their operations as Trump's actions threaten international supply chains.
Even Tesla, owned by Trump adviser Elon Musk, argued in a letter to US trade officials that the trade war could make it a target for retaliatory tariffs against the US.
