Front lines of the trade war: what’s exempt, what’s to come

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Tariff threats have been lobbed back and forth across the border ever since United States President Donald Trump issued his first executive order under the Emergency Economic Powers Act in February. Here, the Financial Post answers some common questions about the escalating trade war. 

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Trump delayed tariffs on certain goods until April 2. But what qualifies?

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On March 6, the U.S. delayed tariffs on goods that “claim and qualify” for preference under the Canada-United States-Mexico Agreement (CUSMA), the free trade agreement signed in 2018 that allows certain products to move tariff-free between the three countries.

A product qualifies for CUSMA preference if it is obtained or produced in the U.S., Canada or Mexico. For manufactured goods, a certain percentage of the product’s value must be sourced or produced within one of the three countries. It’s up to the importer, exporter or producer of the good to calculate its regional value content, the threshold for which varies depending on the specific product and calculation method.

To claim preferential tariff treatment, the importer, exporter or producer of the good must fill out a “certification of origin” that validates the shipment as an “originating good.” There is no prescribed format, but it does need to include data such as a description of the product and a tariff classification number.

The March 6 decision means that products that don’t qualify for CUSMA preference are subject to a 25 per cent tariff, while non-CUSMA energy products and non-CUSMA potash are tariffed at a rate of 10 per cent.

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Why don’t all exporters take advantage of CUSMA?

Estimates from the White House suggest that only 38 per cent of imports from Canada received CUSMA preference last year, something an RBC Economics report attributed to the fact that “other general non-CUSMA tariff rates were already zero.” Another 57 per cent of Canadian exports are not under CUSMA but could be, according to the report.

Some Canadian exporters may choose not to seek preferential CUSMA treatment because the process involves extra administrative work and documentation and it’s easier to qualify for low- or zero-tariff rates under the World Trade Organization’s (WTO) “most favoured nation” (MFN) rule, which requires WTO member countries to charge all trading partners the same tariff rate for goods and services.

”If you’re a Canadian company exporting to the U.S. (and your good qualifies for a zero per cent MFN tariff), you may not bother going through the hassle of certifying CUSMA origin,” said Matthew Kronby, a partner at the law firm Osler, Hoskin & Harcourt LLP who specializes in competition, trade and foreign investment. ”But for other goods where there is a meaningful tariff rate, you probably would.”

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CUSMA’s rules of origin requirements can be “technical and complex,” according to Export Development Canada, and claiming CUSMA preference can be complicated for products that contain several different elements. Companies may need to shell out extra money to receive guidance from a trade lawyer or compliance firm or hire a licensed customs brokerage to handle the paperwork.

“If it’s a large, sophisticated company, they can undertake it in-house,” said Kronby. “But many companies are going to look to the assistance of custom brokers and or trade lawyers, depending on the degree of complexity that we’re talking about.”

Do energy and potash qualify for CUSMA preference?

A good is considered originating if it is “wholly obtained or produced entirely in the territory of one or more of” Canada, Mexico or the U.S. For example, “a mineral good or other naturally occurring substance extracted or taken from there.”

Canadian potash exports “are considered CUSMA-compliant goods and are not currently subject to tariffs,” according to a statement from the Saskatchewan Mining Association, which represents the province’s mining and mineral exploration industry. Over 80 per cent of potash used by American farmers is produced in Saskatchewan.

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CUSMA also includes special provisions for energy. For example, crude oil is often mixed with diluent, “a petroleum-based liquid that is added to crude oil to ensure that it flows properly through pipelines,” according to CUSMA’s energy provisions summary. CUSMA includes a rule of origin amendment that allows “up to 40 per cent of non-originating diluent in pipelines when moving crude oil, a longstanding Canadian industry request.”

What retaliatory measures has Canada implemented?

On March 4, the federal government announced its plan to apply retaliatory tariffs on a total of $155 billion in U.S. goods.

The first phase introduced on March 4 includes 25 per cent tariffs on $30 billion worth of U.S. goods. The long list of items includes orange juice, peanut butter, wine, spirits, beer, coffee, appliances, apparel, footwear, motorcycles, cosmetics and some pulp and paper products.

On March 13, the Canadian government followed up with a second round of “dollar-for-dollar” tariffs on an additional $29.8 billion worth of U.S. goods, including steel, aluminum, computers, sports equipment and cast-iron products.

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Prime Minister Mark Carney has pledged to keep Canada’s retaliatory tariffs in place.

So far, Ontario is the only province to issue — and later suspend — its own retaliatory charges. On March 10, Ontario Premier Doug Ford implemented a 25 per cent surcharge on electricity exports to New York, Minnesota and Michigan, but withdrew it one day later after speaking with U.S. Commerce Secretary Howard Lutnick.

Why is China imposing tariffs?

China’s retaliatory 100 per cent tariffs on Canadian canola oil and canola products and 25 per cent tariffs on pork and seafood are push-back against Canada for imposing a 100 per cent levy on Chinese electric vehicles and a 25 per cent levy on steel and aluminum last October.

Canada’s move followed decisions by the U.S. and European Union to impose tariffs on Chinese-made EVs and other products. The Canadian government said China’s EV sector benefits from “unfair competition” because it receives “extensive state subsidies” to promote sales and growth, undermining Canada’s long-term economic prosperity.

In response to Canada’s tariffs, China announced an anti-dumping investigation into Canadian canola seed. The investigation is ongoing. The Canola Council of Canada says China is a “highly valued market” and the second-largest export destination for Canadian canola oil and canola products, with exports totalling nearly $5 billion in 2024.

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Why is Trump targeting the auto sector?

The president has been clear about his goal: to repatriate all auto manufacturing back to the U.S. After Ontario briefly imposed its electricity surcharge on March 10, Trump threatened on social media to “substantially increase” the auto tariffs planned to come into effect on April 2, which he claimed would “permanently shut down the automobile manufacturing business in Canada.”

As the Windsor Star reported, reshoring the American auto industry and rebuilding supply chains in the U.S. would take years and tens of billions of dollars, stretching long after Trump’s presidency. About 20 per cent of parts used in U.S. auto manufacturing come from Canada and the U.S. doesn’t have enough workers to replace their Canadian counterparts. That may slow his ambition to repatriate jobs, but he can still do plenty of damage to Canada’s auto sector in the process — some have predicted the industry could shut down within days if 25 per cent tariffs are implemented.

When is CUSMA being renegotiated? 

CUSMA expires on June 30, 2036. The agreement’s first joint review is scheduled for 2026 and gives Canada, Mexico and the U.S. the opportunity to submit revisions and indicate if they want to renew the agreement in 2036.  

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Even before his re-election, Trump didn’t mince words about wanting to renegotiate CUSMA.  

“Upon taking office, I will formally notify Mexico and Canada of my intention to invoke the six-year renegotiation provisions of the USMCA that I put in,” Trump said in remarks at the Detroit Economic Club in October. 

Given the heightened rhetoric, it seems possible that more fundamental changes to the deal could be coming sooner. This week, Prime Minister Mark Carney told reporters during a visit to Iqaluit on March 18 that the trade war has “called into the question the validity” of CUSMA and that Canada needs to have a “broader conversation about our commercial relationship” with the U.S.

CUSMA includes a provision that a country can withdraw from the agreement by providing written notice to the other parties. The withdrawal takes effect six months after the written notice, but CUSMA would remain in force for the remaining parties.

—With files from Yvonne Lau

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