Fears of a Canadian trade war are overblown. So far, it’s more of a skirmish
Listening to most of the media and Canada’s prime minister, you’d think the U.S. and its northern neighbor were in a full-blown trade war after new tariffs were announced days ago. Au contraire: Anyone who checks the numbers can see this is merely a skirmish.
On Aug. 22, the administration's Section 338 tariffs took effect, at 50% on roughly $20 billion of Canadian goods, or about 5% of what Canada sells the U.S. Ottawa's answer, effective Sept. 8, will be varying tariffs on roughly $20 billion of American exports to Canada, about 6% of what Canada buys from the U.S.
While tariffs on $40 billion aren’t chump change, they’re a small portion of the roughly $900 billion in products and services that are exchanged across the U.S.-Canadian border annually. Roughly 95% of transactions are proceeding exactly as they did in July.
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People should be much more focused on January, because that’s when 50% tariffs hit many more Canadian exports, including cars, trucks and auto parts. Throw in potential Canadian retaliation, and we’re looking at higher tariffs on well over $100 billion of trade between the two countries.
When the artillery joins in like that, we go from a skirmish to a war. However, that doesn’t mean we can brush off these recent developments as insignificant. The current skirmish feels eerily similar to Union and Confederate reconnaissance units encountering each other outside Gettysburg.
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What makes this time different is the United States-Mexico-Canada Agreement (USMCA). Other tariffs had carveouts for USMCA-compliant products. This was extremely important because businesses invested billions of dollars over several years to create supply chains in North America, and they shouldn’t be punished for playing by the rules.
That principle was violated, though not for the first time, with the recent implementation of these Section 338 tariffs, which apply regardless of USMCA qualification and which stack on top of the ordinary rate. Companies that played by the rules are now being punished for complying with a trade agreement that was heralded as "the new gold standard."
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This is pulling the rug out from under firms that acted in good faith, and on a large scale. The share of imports from Canada and Mexico claiming USMCA preference climbed from roughly 45% in late 2024 to 86% by February. Federal Reserve economists priced this regulatory compliance at $39 billion to $71 billion per year in manufacturing.
Ironically, some firms that spent years moving some of their production and assembly plants to Ontario now face higher effective tariff rates than some firms that stayed in Shenzhen, China. Certain tariffs that are supposed to serve as leverage for benefiting American production are instead hamstringing it.
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Consider that an American appliance manufacturer buying Canadian steel pays 50% on that input. The foreign competitor builds the finished washing machine overseas and typically ships it in at a lower rate. Because of how the current tariff regime has been thrown together, an appliance that’s USMCA-compliant can be hit with a tariff higher than an appliance made entirely in China.
If a trade deal is not reached by January, the situation will get even worse. An American automotive assembly plant will pay 50% on Canadian components, while a finished Korean car will enter at a lower rate.
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President Donald Trump has threatened to take auto parts from no tariff to 50%, slap higher tariffs on medium- and heavy-duty trucks and their components and effectively double the tariff rate on finished cars and light-duty trucks. If that happens, and Canada follows through with its threat to retaliate, then we’ll be in a full-fledged trade war.
That very expensive fate can be avoided, however, if both sides agree to reduce trade barriers and open their respective consumer markets to the other nation’s producers. That’ll reduce manufacturing costs and consumer prices alike through increased efficiency and more competition.
Unfortunately, that’s a tall order because of certain protectionist lobbies in both the U.S. and Canada, especially Ottawa’s notorious dairy lobby, which has an outsized influence on its nation’s trade policy. Canada’s cozying up to China and permitting it to abuse country-of-origin provisions are also not helping negotiations.
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It’s important that a deal is reached soon because no one wins in a trade war. Yet not everyone loses equally. Hopefully, Canada realizes it has more to lose than the U.S. and backs down before both sides incur more casualties.
Even if a deal is reached, the U.S. still needs to rationalize its remaining slapdash tariff schedule. Under no circumstances should American-made products face higher effective tariff rates than foreign-made competition. There’s no need to wait on Canada to address that particular issue.