Canada's Trade Relationship with the US: A Turbulent Future

Strategic Insights -

Canada's trade relationship with the United States is facing unprecedented challenges due to the US's new, higher tariffs imposed last Thursday evening. While the immediate effects are minimal, the long-term implications could be significant. Since the 1988 Canada-US Free Trade Agreement, the relationship has been characterized by steadily decreasing trade barriers and increased ease of goods and services movement across the border. However, under President Donald Trump, the US is reversing this trend, with a sharp increase in tariff rates. The average US tariff on imports from all countries was 17.3% on August 1, a seven-fold increase from the start of the year, according to the Budget Lab at Yale.

Key Takeaways:

  • The US has effectively conditioned public opinion and foreign governments to accept previously unimaginable high tariff walls, resulting in a sharp increase in average tariff rates from 2.3% to 17.3% since the start of the year.
  • Only two countries, China and Canada, have retaliated against the US's new tariff policy, with Canada's Prime Minister Mark Carney attempting to preserve the free-trade relationship while laying the groundwork for a future where Canada trades less with the US.
  • The Trump administration is seeking to force other countries to sell less to the US, believing it will lead to more domestic US production, with Japan, South Korea, the EU, and Britain effectively agreeing to this by accepting 15-per-cent tariffs on their exports.
  • Canada's ace in the hole is the United States-Mexico-Canada Agreement (USMCA), which provides protections for 100% of Canadian energy exports and 95% of other exports, limiting the impact of the 35-per-cent tariff on less than 5% of Canadian exports.
  • The USMCA has given Canada breathing room, allowing Ottawa to "rag the puck" and avoid caving in to Washington's demands as quickly as other trading partners.
  • However, the USMCA is up for renegotiation next year, and Trump could walk away from the agreement with six months' notice, raising significant uncertainty for the Canadian economy.

Statistics:

  • Average US tariff on imports from all countries was 17.3% on August 1, a seven-fold increase from the start of the year (Budget Lab at Yale).
  • Only two countries, China and Canada, have retaliated against the US's new tariff policy.
  • Japan, South Korea, the EU, and Britain have accepted 15-per-cent tariffs on their exports to the US.
  • Less than 5% of Canadian exports are subject to the 35-per-cent tariff under the USMCA.
  • Canada's USMCA protections cover 100% of energy exports and 95% of other exports.

Sources:

  • Budget Lab at Yale
  • "I am going to cut your arm. Please do not, please, please Ok, I shall be generous, and just cut your thumb. Thank you, thank you. You are so generous." (Olivier Blanchard, former chief economist of the International Monetary Fund)
  • "Trump Always Chickens Out" (Trump opponents' slogan)
  • United States-Mexico-Canada Agreement (USMCA)
  • Bank of Canada
  • BBC News