On November 25, 2024, President-elect Donald Trump announced his intention to impose 25% tariffs on all products entering the US from Canada and Mexico until both countries take actions to stop the flow of illegal drugs and migrants.
Given that Canada has a highly trade-dependent economy and that the US is Canada’s most important trading partner, this announcement has generated considerable concern and raised numerous questions, including:
- Does the President-elect have the power to impose these tariffs?
- Would the tariffs violate the Canada-United States-Mexico Agreement (CUSMA)?
- Why would he impose tariffs on Canada?
- How might Canada respond?
- How should Canadian businesses prepare?
We answer these questions below.
Does the President-Elect Have the Power to Impose 25% Tariffs?
President-elect Trump will face few immediate legal barriers to implementing tariffs. The President has broad powers to implement tariffs owing to powers delegated to the Office of the President by Congress. For example, during the first Trump administration, the US imposed tariffs on Canadian steel and aluminum under the Trade Expansion Act of 1962. President-elect Trump will also have the Trade Act of 1974, Balance-of-Payments Authority and the Tariff Act of 1930 at his disposal.
Some of these statutes require procedural steps that would make it difficult to impose tariffs immediately, leading to speculation that President-elect Trump is likely to use the International Emergency Economic Powers Act (IEEPA). The IEEPA gives the President broad powers to regulate international trade during a “national emergency”. Though it has never been used to impose tariffs, the first Trump administration threatened to use the IEEPA to impose tariffs on Mexico in 2019.
Importers may launch legal challenges to these tariffs, but such challenges are likely to proceed slowly and US courts have tended to give deference to the exercise of executive foreign affairs and tariff powers.
What About the CUSMA?
The CUSMA provides for the duty free exchange of originating goods within North America as well as a mechanism for parties to settle their trade disputes. Although the unilateral imposition of tariffs would be contrary to the commitments in the CUSMA to allow duty free entry of certain goods, the agreement does provide an ‘essential security’ exemption that allows signatories to take any measures that otherwise violate these commitments where they consider such measures necessary for the protection of their essential security interests.
However, it is unlikely that the Trump administration would attempt to justify the tariffs on the essential security interest exemption as it would raise difficult legal questions including whether: (i) general tariffs on all Canadian products are rationally connected to US security interests let alone its “essential” security interests; and (ii) it is proportionate to any claimed threat to US essential security interests. Even if the Trump administration did invoke the exemption, it would be impractical for Canada to challenge its legality under the arbitration mechanism of the CUSMA given the slow speed of proceedings.
Why Impose Tariffs on Canada?
The close economic ties between Canada and the US masks a growing list of American grievances with its trading relationship with Canada, including concerns about:
- Canada’s supply management system, which restricts market access for US dairy producers.
- The new Digital Services Tax, which targets American social media and technology firms.
- The interpretation of automobile rules of origin under the CUSMA.
- Canada’s lax enforcement concerning the importation of goods produced through forced labour.
Additionally, there are other non-trade related tensions, including Canada’s anemic defence spending and border security.
President-elect Trump’s announcement marks the return of a more assertive and disruptive “America first” trade policy and a willingness to use trade measures to push forward US goals that may not be strictly connected to trade.
How Might Canada Respond?
While President-elect Trump’s proposed tariffs would vastly exceed those that he imposed on Canada in 2018, it is highly possible that any Canadian response would again include retaliatory tariffs. For example, in response to the 2018 tariffs, Canada imposed retaliatory “dollar-for-dollar” tariffs on a diverse array of goods produced in Republican-leaning states, including beer kegs, whiskey, and ketchup. This led to a mutual agreement by Canada and the US to remove their respective tariffs and address US concerns through other means.
How Should Companies be Preparing for the Tariffs?
While many Canadian businesses are likely to be impacted by any “trade war”, particularly the longer it carries on, Canadian businesses can take a number of steps to mitigate risks including by:
- Mapping their supply chains to know where all inputs originate and to identify vulnerabilities.
- Revising contracts to allocate potential liabilities for increased duties or to allow for early termination without penalty if retaliatory tariffs make US inputs prohibitively expensive.
- Identifying potential alternative markets (for exporters) or suppliers (for importers).
- Trying to move as much product across the border in advance of the January 20th inauguration.
