No Deal For Canada - Now What?

Key Concepts

• Tariffs: Taxes imposed on imported goods.
• USMCA (CUSMA in Canada): United States-Mexico-Canada Agreement, a free trade agreement.
• KUSMA Compliance: Meeting the sourcing and labor requirements of the USMCA to qualify for tariff-free trade.
• Broad-based Tariffs: Tariffs applied to a wide range of goods.
• Sector-specific Tariffs: Tariffs applied to particular industries or products.
• Anti-dumping Tariffs: Tariffs imposed to counteract the practice of selling goods in a foreign market at a price below their cost of production or home market price.
• Countervailing Tariffs: Tariffs imposed to offset subsidies provided by a foreign government to its domestic producers.
• Transshipment Charge: A penalty tariff applied to goods rerouted through another country to avoid original tariffs.
• Most Favored Nation (MFN) Tariff: A tariff rate applied to imports from countries that are not part of a preferential trade agreement.
• GDP (Gross Domestic Product): The total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period.

Tariffs and US-Canada Trade Relations Post-August 1st Deadline

This video discusses the implications of the US passing Donald Trump's August 1st deadline for trade deals, leading to new tariffs on countries that did not reach an agreement. Mexico received a 90-day pause, while a 10% universal tariff was maintained for trade partners with a US surplus. A list of countries and their updated tariff rates was released, with Syria, Laos, and Switzerland facing approximately 40% rates. Canada, a major trade partner, was notably impacted, facing an increase in its broad-based tariff rate from 25% to 35% effective August 1st, a move attributed by Trump to drug flow and Canada's retaliatory tariffs.

Historical Context of US-Canada Trade Disputes

The video recaps the history of trade tensions, starting with Trump's initial 25% tariffs on most Canadian products in February 2025, with lower rates for energy, critical minerals, and potash due to concerns about illicit drug flow. The US made several claims, including Canada contributing to the opioid epidemic (despite low fentanyl seizure percentages), subsidizing Canada by $200 billion, and imposing high tariffs on US dairy farmers, which Canada disputed. Escalations included increased anti-dumping and countervailing tariffs on softwood lumber, and sector-specific tariffs on steel and aluminum (initially 25%, then raised to 50%) and auto parts (25%). Notably, recent copper tariffs have a limited impact on Canada as they target semi-finished products rather than the raw and refined copper Canada primarily exports.

Canada retaliated with its own tariffs: a 25% tariff on C$30 billion of goods on March 4th, followed by a 25% tariff on C$30 billion of steel and aluminum products on March 13th, and a 25% tariff on auto and auto parts on April 9th. Canada also scrapped its digital services tax after US pressure and faced US disapproval for its announcement to recognize a Hamas-free Palestinian state, which Trump stated would hinder trade deal progress.

The Nuance of Canada's Current Tariff Exposure

Despite the headline 35% tariff rate, the video argues that this does not represent the effective rate for most Canadian exporters. Canada has likely become one of the lowest tariff exporters to the US, with its forecasted effective tariff rate falling below the 10% minimum set by Trump. This is largely due to the USMCA (CUSMA) agreement.

The Role of USMCA (CUSMA) Compliance

Two days after the initial 25% tariffs were imposed in March, an amendment to Trump's executive order exempted goods trading under the USMCA from tariffs. This exemption, initially temporary, has been maintained and now appears to extend to the recent tariff hikes. This means a significant portion of Canadian products continue to enter the US tariff-free.

• Example: Alberta Premier Danielle Smith highlighted that the vast majority of the province's exports, including most of Canada's oil and gas, remain tariff-free. Energy is Canada's largest export category to the US.
• KUSMA Compliance Requirements: To be USMCA compliant, products must have their inputs and labor predominantly sourced from Canada, the US, or Mexico.
• RBC Estimate: Approximately 94% of Canadian exports meet USMCA requirements.
• Shift in Exporter Behavior: Previously, many exporters did not pursue USMCA compliance due to the low "most favored nation" tariff rates and the perceived administrative burden. However, with increased tariffs, there's a surge in exporters seeking USMCA compliance to benefit from exemptions.

Data and Forecasts on Effective Tariff Rates

• Bank of Canada: As of year-to-date, Canada has seen an average weighted tariff rate of around 5% on its exports to the US, even with the 25% tariffs in place since March.
• Budget Lab at Yale: Estimates Canada's current effective tariff rate at 13% after the recent announcement.
• RBC Forecast: Predicts that around 86% of Canadian exports to the US will fall under the USMCA agreement.
• Nova Scotia Bank Forecast: Estimates Canada's effective tariff rate will be only 6-7% following the recent hikes.

This suggests that Canada will face one of the lowest tariff rates among US trade partners, even those investing in the US.

Negative Impacts and Sector-Specific Headwinds

While Canada benefits from USMCA, the video acknowledges negative impacts:

• Export Decline: Canada experienced an 11% year-over-year decline in exports in April following the initial tariffs.
• GDP Contraction: Canada's GDP is estimated to have contracted by 1.5% in the second quarter year-over-year, contrasting with the US's 3% GDP jump.
• Challenges for SMEs: Small and medium-sized businesses may struggle to achieve USMCA compliance due to sourcing limitations or inadequate record-keeping.
• Sector-Specific Tariffs: Certain industries remain vulnerable regardless of USMCA compliance:
  • Steel and Aluminum: Face a 50% Section 232 tariff.
  • Softwood Lumber: Subject to anti-dumping tariffs.
  • Auto Parts: Only tariff-free under USMCA for US-sourced components.
• Export Values of Impacted Sectors (2024):
  • Softwood Lumber: $4.6 billion
  • Auto Parts: $15.6 billion
  • Steel and Aluminum: $16.5 billion
  • These combined represent 9% of Canada's exports and around 2% of its GDP, with significant impacts on specific provinces and communities.

Future Outlook and Negotiating Leeway

Despite the current situation, negotiations are likely to continue. Canada is a crucial supplier to the US for key categories like aluminum (half of US needs), softwood lumber (a quarter), potash (over 80%), and other resources. This reliance could lead to inflationary impacts for the US and provide Canada with negotiating leverage.

• Infrastructure Reliance: Canada's historical reliance on US infrastructure for trade diversification is a significant barrier. However, if Canada develops its infrastructure, it could reduce its dependence on the US.
• US Inflation: Companies are currently absorbing cost increases, but this is unsustainable if policies persist.
• Volatility: The situation is volatile, and the USMCA exemption, initially temporary, could be revoked. The agreement is also up for review in July 2026, potentially leading to further US concessions.

Canada's Potential Responses

Canada has historical experience with high US tariffs and has several potential levers:

• Provincial Initiatives: Provinces are looking to reduce internal trade barriers.
• Federal Trade Expansion: The federal government is pursuing trade expansion with other countries.
• Support Measures: Internal support programs for impacted industries and businesses, including employment insurance enhancements.

The long-term impact on inflation, GDP, and future geopolitical relations remains difficult to forecast, and the situation will ultimately depend on ongoing negotiations and policy developments.