U.S. Reciprocal Tariffs and Canada

What Happened 

On April 2, President Donald Trump unambiguously ushered in a new era of U.S. trade policy with his “Make America Wealthy Again” announcement. The U.S. is introducing “reciprocal tariffs,” which aim to address perceived imbalances in market openness (i.e., tariffs or non-tariff barriers on U.S. imports).  The U.S. has made its own calculations to determine the value of these imbalances and will introduce new tariffs to “rebalance global trade flows.” The tariffs applied vary country to country, with a minimum baseline tariff of 10% for all countries, except for Canada and Mexico.  

As outlined in the Executive Order, Trump used the International Emergency Economic Powers Act to grant him the relevant authorities (i.e., to bypass congress) to implement these tariffs. Trump declared: 

“Underlying conditions, including a lack of reciprocity in our bilateral trade relationships, disparate tariff rates and non-tariff barriers, and U.S. trading partners’ economic policies that suppress domestic wages and consumption, as indicated by large and persistent annual U.S. goods trade deficits, constitute an unusual and extraordinary threat to the national security and economy of the United States.” 

This is the same legislative tool that was used to justify Trump’s original fentanyl tariffs that were imposed on Canada in February. It was the first time the Emergency Economic Powers Act had been used in such an aggressive manner and perhaps served as a test-case for today’s policy turn. 

Implications for Canada 

Section 3(d) of the Executive Order outlines that Canada will be exempt from the reciprocal tariffs, instead the previous 25% fentanyl and border tariffs which applies to non-CUSMA compliant goods will apply. CUSMA compliant goods will “continue to be eligible to enter the U.S. market under these preferential terms” of that agreement. Should the national emergency regarding fentanyl and border crisis be cancelled, then non-CUSMA compliant goods “shall be subject to an ad valorem rate of duty of 12 percent.” 

Section 3(b) outlines that the tariffs announced in this Executive Order do not apply to other previously announced tariffs, such as steel and aluminum and now automobiles and other forthcoming tariffs in other sectors such as “copper, pharmaceuticals, semiconductors, lumber articles, certain critical minerals, and energy and energy products.” This means that those existing and potential future tariffs will not be compounded by these additional tariffs. However, it also means that the impact of those tariffs will still implicate Canada.   

Canada’s Response  

Prime Minister Mark Carney spoke to reporters after Trump’s announcement to indicate that Canada “will fight back with countermeasures, protect workers, and build the strongest economy in the G7.” He also noted that while Canada was spared these reciprocal tariffs which “preserve elements of the commercial relationship,” the fentanyl, steel, aluminum, automobile tariffs remain and that more tariffs in “strategic sectors” are likely forthcoming.  

Carney will convene with his Canada-US Cabinet Committee this evening and with the premiers tomorrow. After that Canada will make further statements, and perhaps announcements, on next steps. 

What’s Behind the Tariffs  

While the Trump Administration has been all over the map when it comes to tariffs and their rationale, there has been some consistency in the intention outlined in official documents. According to The President’s 2025 Trade Policy Agenda, Trump “has built a new consensus that tariffs are a legitimate tool of public policy” which shows “the United States has leverage and can negotiate aggressively to open markets for Made in America exports.” 

Trump believes that U.S. has been taken advantage of in trade, and this has undermined “a robust middle class earning high wages and a strong national defense [base].” He wants the U.S. to be “an economy focused on production … [that] is more than an economy that merely moves money around.” Tariffs are a key tool for the U.S. to ensure “that trade policy favors a production economy [that] will help the President Make America Great Again.” 

During the tariff announcement, Trump also stated that a major tax cut is forthcoming, but that it will not implicate important social programs. He also noted (somewhat accurately) that up until the early 1900s the U.S. federal revenues were primarily generated through tariffs. This diatribe indicates that these tariffs also have intentions beyond production to include revenue generation, as per his previous statements about an “External Revenue Agency.” 

Trump’s tariff scheme can be understood as falling into three categories, (1) those that aim to reshore production, (2) those that are targeting revenue generation, and (3) those that are designed for bargaining purposes.  

Production oriented tariffs will be targeting specific industries or sectors. These tariffs will be high enough to alter consumer purchasing and production investment decisions. These tariffs will be durable and unlikely subject to negotiation. The goal here is to bring back manufacturing to the U.S. and shore up key industrial sectors, especially those that could impact the defence production base. This is where the steel, aluminum and auto tariffs fall. 

Revenue generation tariffs are the lower broad-base tariffs. At 10% these will unlikely be enough to influence major investment decisions. In many cases, exporters or importers will absorb the costs. Duties collected from these tariffs will fill government coffers and to support Trump’s tax cuts and social spending plans. 

The reciprocal tariffs announced at higher-than-10% levels will primarily serve as bargaining chips for the U.S. to extract market access concessions from affected countries.