US / Canada Tariffs Ignite Cross-Border Trade Clash
U.S. President Donald Trump followed through on his months-long threat of imposing 25% tariffs on Canadian goods.
Trump signed an Executive Order – Imposing Duties to Address the Flow of Illicit Drugs Across Our Northern Border – includes the details for what will be covered and which authorities he will use for imposing these tariffs.
It applies 25% tariffs on all Canadian goods exported to the U.S., except for energy, which will be subject to a 10% tariff. These tariffs are to come into force on Tuesday February 4.
The Executive Order outlines that the U.S. sees Canada as not taking sufficient action to address its role in fentanyl supply chains:
“Canada has played a central role in these challenges, including by failing to devote sufficient attention and resources or meaningfully coordinate with the United States law enforcement partners to effectively stem the tide of illicit drugs.”
Tools & Procedures
To swiftly carry out such action without the need for lengthy investigations, Trump is using the International Emergency Economic Powers Act (IEEPA).
To implement the IEEPA, a “national emergency” must be declared to deal with an “unusual and extraordinary threat, which has its source in whole or substantial part outside the United States.”
The Executive Order expands the scope of the January 20 declaration of national emergency on the southern border to include the northern border. The President is also required to consult Congress before exercising these authorities and produce a report outlining circumstances and actions.
This second step has yet to been taken and is potentially behind the delayed implementation of these trade actions to Tuesday February 4.
Canada’s Response
An emergency First Ministers meeting was held to discuss Canada’s response to the announcement. Canada will retaliate with:
- 25% tariffs on $155 billion worth of goods, with $30 billion to be applied on February 4;
- the remaining $125 billion to be applied on February 25 in order to give Canadian businesses time to adjust; and,
- consideration of non-tariff measures that could impact critical minerals, energy, and other partnerships.
Premiers from Ontario, Alberta, Manitoba, Newfoundland, Quebec, and Nova Scotia responded with their own statements or signal specific actions that could be exercised at the provincial level. Pierre Poilievre, Leader of the Official Opposition, also posted a statement.
These unprecedented actions from the U.S. have unsurprisingly provoked a strong desire to retaliate, however as StrategyCorp’s Dr. Philippe Couillard and Jeff Mahon argued retaliation misses the point of this particular predicament.
To drive this home, the Executive Order also includes a retaliation clause that signals the U.S. does not see this as a trade war and that if Canada retaliates instead of addressing the issue, the U.S. will turn it into a trade war and escalate accordingly, including further increases to the tariffs.
UPDATE (2025-02-02): The full list of products on which Canada’s fist tranche of retaliatory tariffs will apply as of February 4, 2025.
Analysis of Canada’s response below.
A Potential Silver Lining in the Dark Clouds: The Negotiation Table is Set
These tariffs will immediately hurt Canadian exporters and lead to negative spillovers in the broader economy. Costs for businesses and consumers on both sides of the border will increase, though the extent of the economic damage on both sides of the border will likely depend on how long these tariffs are in place.
While there are good reasons to factor in other motivations that could be behind this economic attack on Canada, such as raising revenues or seeking to encourage business investment to move from Canada to the U.S., the Executive Order indicates that resolution is contingent on the “Government of Canada [taking] adequate steps to alleviate this public health crisis through cooperative enforcement actions.”
Regardless of the true motivations, the U.S. is expecting concrete actions for eliminating Canada’s role in the fentanyl supply chain.
Trump loves to negotiate and this action signals that he is now ready for a serious negotiation. While this seems crass from the Canadian perspective, the Trump team has made clear that it does not believe Canadian plans to date are sufficient.
Actual tariffs will force Canada to bring to the table a stronger plan, and it enables Trump to take unequivocal credit for it when it comes.
A tough stance on Canada also has broader geopolitical value for Trump. It demonstrates to the rest of the world that Trump’s threats are credible and need to be taken seriously.
Trump has an ambitious agenda for shaking up America’s relationships with other countries and this strengthens his hand for future battles.
Analysis of Canada’s Initial Retaliatory Tariff Response
Finance Canada released a list of goods imported from the U.S. into Canada that will be subject to a surtax (tariffs) that will come into effect on February 4.
It aims to target $30 billion of goods in a first phase of retaliatory tariffs. Another list itemizing $125 billion worth of targeted goods is expected to follow later in February. It covers a wide swath of goods ranging from meat, food products, consumer goods (e.g. clothing, footwear, durables, etc.), building products, tools, farm equipment, motorcycles, drones, firearms and more.
The list is includes some products that are undoubtedly meant to target “red states” – for example orange juice from Florida. However, some products also reflect areas where goods from the U.S. is not booming (e.g. dairy products, clothing and footwear).
Goods imported into Canada from the U.S., 2023
Source: The International Trade Explorer
What’s Canada’s Angle?
While Canada’s approach to delay the bigger $125 billion target for three weeks is nominally to give Canadian importers some time to adjust and find new suppliers, what’s really going on is likely a strategic move.
Slapping 25% tariffs on $30 billion worth of goods increases the cost to only $7.5 billion. This is the immediate impact on U.S. exporters. This will matter to individual sellers, but in the grand scheme its miniscule.
The U.S. tariffs slap 25% on all goods except for energy. According to Statistics Canada, total Canadian exports to the U.S. in 2023 were valued at $594 billion of which $166 billion were in energy products. This means that at 25% tax on goods minus energy is valued at an additional $107 billion.
The 10% tax on energy is valued at an additional $41.5 billion.
In other words, for the first few weeks there is, to paraphrase President Trump, a “huuuge” difference in punitive magnitude.
So, what gives?
The U.S. economic attack on Canada has provoked calls to retaliate and the political level is compelled to respond. But at the same time, they do not want to escalate and are no doubt seeking a speedy resolution to this crisis.
Hiding tiny tariffs behind matching the “sticker” percentage is one way to feed the public’s desire for revenge while hoping to limit stoking Trump’s ire and potentially keeping the door open for backroom negotiations over the next few weeks.
Even if Canada is forced to go with its Phase II of retaliatory tariffs targeting $125 billion in additional goods, this will be valued at roughly only $31 billion. Canada has left out a good chunk of the roughly $374 billion in total imports from the U.S.
Beyond Retaliation
Once the initial shock wears off, look for growing calls from Canadian politicians and businesses to meet the U.S. on its nominal terms, which is addressing the fentanyl situation.
Many Canadians are genuinely concerned that there is something more sinister behind these tariffs. Who knows. But for now, Canada has no choice but to take the official documents at face value and try to find measures that appease the Trump Administration.