We continue to follow the U.S.-Canada trade dispute and will update this post as required.
The most recent series of events began with the White House’s March 2, 2025 announcement that, effective 12:01 a.m. EST on Tuesday, March 4, 2025, the United States would start imposing 25 percent tariffs on almost all goods imported from Canada. A lower tariff of 10 percent would be applied on Canadian energy and resource products such as crude oil, natural gas, lease condensates, natural gas liquids, refined petroleum products, uranium, coal, biofuels, geothermal heat, the kinetic movement of flowing water, and certain critical minerals.
However, four days later, on March 6, 2025, another Executive Order was signed by the U.S. President “[i]n order to minimize disruption to the United States automotive industry and automotive workers” (the “March 6 U.S. Order”). The March 6 U.S. Order has the effect of removing all tariffs on goods that are imported into the U.S. free of duty as a good of Canada pursuant to the Agreement between the United States of America, United Mexican States, and Canada (“CUSMA”). The March 6 U.S. Order was effective with respect to goods entered for consumption, or withdrawn from warehouse for consumption, on or after 12:01 a.m. EST on March 7, 2025. The March 6 U.S. Order also announced that the additional rate of duty on Canadian potash (that is not imported duty-free under CUSMA) is be reduced to 10 percent in lieu of 25 percent.
Most recently, effective 12:01 a.m. EDT on March 12, 2025, two presidential executive orders have officially reinstated a 25 percent tariff on Canadian steel imports into the United States and also raised tariffs on Canadian aluminum products from 10 to 25 percent. These tariffs were immediately met with additional Canadian countermeasures on $29.8 billion of U.S. steel and aluminum products and other goods including computers, sports equipment and cast iron products, which take effect at 12:01 a.m. EDT on March 13, 2025. The goods affected by these countermeasures are among those that are listed to be targeted in the second phase of Canada’s response to the U.S. tariffs. The implementation of this second phase was delayed by Canada after the U.S. issued its March 6 U.S. Order that is discussed below (see “Earlier developments”).
Finally, after a day-and-a-half of escalation, Ontario Premier Doug Ford ultimately suspended his previously announced 25 percent surcharge on Ontario electricity exports after a call on March 11, 2025 with U.S. Secretary of Commerce Howard Lutnick. In return, the U.S. side agreed to a formal meeting about the renewal of the CUSMA, to be held within days (and well before the potential imposition of reciprocal tariffs on April 2). These events followed President Trump’s threat to double the tariffs on Canadian steel and aluminum imports as a direct response to Ford’s export charge but then backed off his plan.
Background
Earlier developments
The Executive Order that was originally signed by U.S. President Trump on February 1, 2025 (the “Original U.S. Order”), to officialise the imposition of the tariffs, cited the “sustained influx of illicit opioids and other drugs” coming from the Canadian border to justify the action. After being postponed for 30 days, purportedly to allow some form of negotiations between Canada and the United States with respect to border security, the tariffs finally came into effect on March 4, to be later partially reduced as of March 7.
In response to the entry into force of the Original U.S. Order, the Department of Finance Canada immediately enacted previously announced countermeasures and imposed 25 percent tariffs on $30 billion worth of goods to take effect on March 4. An additional $125 billion worth of tariffs were to follow within 21 days following a public consultation. However, the Canadian government has since put this second phase on hold in response to the partial lifting of the U.S. tariffs as announced in the March 6 U.S. Order.
The America First Trade Policy
The Original U.S. Order was signed by the U.S. President on February 1, 2025, officialising the imposition of the tariffs, and citing the “sustained influx of illicit opioids and other drugs” coming from the Canadian border to justify the action. However, as previously mentioned, after a promise made by Canada to upgrade its border security, the Original U.S. Order was delayed by 30 days. These tariffs officially came into effect at 12:01 a.m. EST on Tuesday, March 4, 2025.
The Original U.S. Order followed a previous Executive Order issued on January 20, 2025 (his first day in office) known as the America First Trade Policy (the “Policy”). The Policy sets out the U.S. administration’s desire for
“…a robust and reinvigorated trade policy that promotes investment and productivity, enhances [U.S.] industrial and technological advantages, defends [American] economic and national security, and – above all – benefits American workers, manufacturers, farmers, ranchers, entrepreneurs, and businesses.”
Additional tariffs could be imposed on April 2, pursuant to the preparation of a unified report coordinated by the U.S. Secretary of Commerce and scheduled to be delivered to the President on April 1, 2025. While some stakeholders believed that President Trump would wait to take into account recommendations in the report prior to implementing targeted and properly planned tariffs (or other trade measures) against Canada, it appears that acting to “stem the tide of illicit drugs” (a term used in Note 1 of the Policy) was considered sufficiently pressing to start the largest trade war between Canada and the United States in history.
In the remainder of this post, we look at:
- The updated U.S. tariffs on Canadian goods;
- Canada’s updated countermeasures; and
- The provisions of the Policy.
Updated U.S. Tariffs: Implementation and Implications
Background
Contrary to a widespread belief, this is not the first time that President Trump has imposed tariffs on Canadian goods exported to the U.S. During his first mandate, the U.S. administration ultimately imposed tariffs on imports of steel and aluminum products from Canada at rates of 25 percent and 10 percent, respectively (this followed proclamations signed by the President on March 8, 2018, imposing tariffs on all steel and aluminum products imported into the U.S.). Those tariffs took effect on June 1, 2018, upon the lifting of the temporary exemption that Canada had initially been granted.
Although Canada proceeded to impose retaliatory surtaxes on multiple U.S. products imported into Canada, it took almost a year to end this first real trade war with Canada’s largest commercial partner in the era of U.S.-Canada free trade (which dates to the 1989 Canada-U.S. Free Trade Agreement, which as followed by the 1994 North American Free Trade Agreement (NAFTA), and then by the 2020 Canada-United States-Mexico Agreement (CUSMA). Although narrower sectoral trade disputes between Canada and the United States are not uncommon (the softwood lumber dispute is a good example), the 2018-19 U.S. -Canada trade war was by far the broadest conflict – until 2025.
In this context, the entry into force of the Original U.S. Order on March 4, 2025 could be considered as a “declaration of war” in a second major trade dispute with Canada, the casus belli of which is that Canada (like Mexico) has allegedly failed to strengthen border security to deal with the opioid crisis. In previous declarations, the U.S. President has also stated, at various times, that illegal border crossings by migrants and what he believes to be a significant U.S. trade deficit vis-à-vis Canada are also important issues for the U.S. With Canada’s immediate reaction, this has become a full-out battle.
25 percent duty (products of Canada)
Section 2(a) of the Original U.S. Order provides that: “all articles that are products of Canada as defined by the Federal Register notice described in subsection (e) of this section (Federal Register notice), and except for [Canadian energy or energy resources], shall be, consistent with law, subject to an additional 25 percent ad valorem rate of duty.” The Notice published by the U.S. Customs and Border Protection (“U.S. CBP”) in the Federal Registernotes that the test to determine what goods constitute “products of Canada” include both goods of Canada under the CUSMA rules of origin as well as goods for which Canada was the last country of substantial transformation prior to importation into the U.S. (i.e., the “substantial transformation test”)..
The 25 percent tariffs apply with respect to products of Canada entered for consumption, or withdrawn from a U.S. warehouse for consumption, on or after 12:01 a.m. EST on March 4, 2025. Importantly, the Original U.S. Order was also amended to withdraw the exception for goods loaded onto a vessel at the port of loading or which were in transit on the final mode of transport prior to entry into the U.S.
U.S. CBP is responsible for collecting the 25 percent tariffs upon importation.
10 percent duty (energy and energy resources)
Section 2(b) of the Original U.S. Order further provides that:
“[w]ith respect to energy or energy resources, as defined in section 8 of Executive Order 14156 of January 20, 2025 (Declaring a National Energy Emergency), and as otherwise included in the Federal Register notice, such articles that are products of Canada as defined by the Federal Register notice shall be, consistent with law, subject to an additional 10 percent ad valorem rate of duty.”
Section 8 of Executive Order 14156 defines the term “energy” or “energy resources” as follows:
“crude oil, natural gas, lease condensates, natural gas liquids, refined petroleum products, uranium, coal, biofuels, geothermal heat, the kinetic movement of flowing water, and critical minerals, as defined by 30 U.S.C. 1606 (a)(3).”
As it is the case for other “products of Canada,” the 10 percent duty is applicable with respect to Canadian energy or energy resources imported on or after 12:01 a.m. EST on March 4, 2025. There is no exemption for goods loaded onto a vessel at the port of loading or which were in transit on the final mode of transport prior to entry into the U.S.
Again, the U.S. CBP is in charge of collecting the 10 percent tariffs.
Exemptions
We understand that narrow exceptions should include personal communications, certain donated articles, informational materials, and transactions ordinarily incident to travel.
There is also an exception for goods eligible for duty-free de minimis treatment under 19 U.S.C. 1321, i.e., shipments valued at less than $800. However, an amendment to the U.S. Order clarifies that such duty-free de minimis treatment shall cease to be available for eligible goods upon notification by the Secretary of Commerce to the President that adequate systems are in place to fully and expeditiously process and collect tariff revenue applicable to such goods. It is unclear if or when this is expected to happen.
Furthermore, although nothing has been made public yet, the U.S. may potentially grant certain targeted exemptions notably for goods of “strategic significance” to the U.S. Canadian businesses involved in the exportation of such goods into the U.S. should follow closely U.S. announcements about the exemption process, if any.
Additional tariffs
Section 2(d) of the Original U.S. Order provides that in the case of Canada’s retaliation against the U.S. tariffs, the President may then increase or expand in scope the tariffs imposed under such order.
The March 6 U.S. Order
The March 6 U.S. Order effectively removed all U.S. tariffs on products of Canada that satisfy the CUSMA rules of origin. The March 6 U.S. Order is effective with respect to all goods entered for consumption, or withdrawn from warehouse for consumption, on or after 12:01 a.m. eastern standard time on March 7, 2025.
The March 6 U.S. Order also provides for a reduced 10 percent tariff on Canadian potash imported from Canada that falls outside the CUSMA preferential treatment.
In practice, this means that, effective as of March 7, 2025, the U.S. CBP only collects additional tariffs on products of Canada that do not satisfy the CUSMA rules of origin (using a 25 percent rate for most products and a lower 10 percent tariff on energy products and potash).
Other U.S. Announcements
Section 232 Tariffs on Steel and Aluminum
In an apparent disavowal of the Joint Statement by Canada and the United States on Section 232 Duties on Steel and Aluminum entered into in May 2019, the U.S. President signed two executive orders on February 10 and 11 which cancelled all exemptions to section 232 tariffs on steel and aluminum imports, including previous exemptions granted to Canada. The two executive orders reinstated a 25 percent duty on all steel imports and also raised tariffs on aluminum from 10 to 25 percent. As mentioned above, these additional duties took effect at 12:01 a.m. EDT on March 12, 2025.
Reciprocal Trade and Tariffs
On February 13, 2025, the U.S. President signed a Presidential Memorandum requiring the implementation of a comprehensive plan for allegedly “restoring fairness in U.S. trade relationships and countering non-reciprocal trading arrangements”. Such plan, called the “Fair and Reciprocal Plan”, is designed to pursue two main objectives: (1) reducing the U.S. annual trade deficit in goods, and (2) addressing what are perceived as unfair and unbalanced aspects of U.S. trade with its foreign trading partners. Canada’s digital services tax imposed on American companies, the goods and services tax/harmonized sales tax imposed on importation of U.S. goods into Canada, as well as the large duties imposed on “supply-managed” products, such as dairy, have notably been cited as “unfair” Canadian measures against the U.S. Although the President also mentioned that Canadian softwood lumber could also be targeted, it is noteworthy that such Canadian products imported into the U.S. are already subject to a combined anti-dumping and countervailing duties of about 14.5 percent.
It is noteworthy that all countermeasures (covered below) to be imposed by Canada could also be subject to “reciprocal” U.S. measures as part of the Fair and Reciprocal Plan. “If they charge us, we charge them” is the motto of the new U.S. Administration.
April 2, 2025 has notably been mentioned as the effective date U.S. “reciprocal” tariffs would come into force. However, based on recent comments by the U.S. President, it is also possible that U.S. tariffs on Canadian dairy and lumber could be implemented prior to April 2. In all cases, it remains to be seen the exact measures the U.S. will enact in retaliation against what they perceive as unfair and non-reciprocal Canadian trade measures.
Section 232 Tariffs on Copper
In an Executive Order signed on February 25, 2025, the U.S. President asked the U.S. Secretary of Commerce to initiate an investigation under section 232 of the Trade Expansion Act to determine the effects on national security of imports of copper in all forms. Within 270 days of this order, the U.S. Secretary of Commerce will submit a report to the President, together with recommendations on actions to mitigate such threats, including potential tariffs.
Updated Canadian Countermeasures
First phase (Effective as of March 4, 2025)
The Canadian protective measures are designed to be implemented in two separate phases. The first phase includes 25 percent tariffs (also called surtax) on $30 billion in goods imported from the U.S. and is effective as of March 4, 2025. The list of targeted goods is quite broad and includes a variety of goods produced in the U.S. such as:
- orange juice,
- peanut butter,
- wine, spirits and beer,
- coffee,
- appliances,
- apparel and footwear,
- motorcycles,
- cosmetics, and
- pulp and paper.
The approach adopted by Canada is similar to the measures that were implemented by Canada during the 2018-19 trade war although the current list of targeted goods are broader.
According to the Backgrounder published by the Department of Finance, only goods “considered as those goods eligible to be marked as a good of the U.S. in accordance with the Determination of Country of Origin for the Purposes of Marking Goods (CUSMA Countries) Regulations” will be subject to the 25 percent tariffs. This means that only goods that would have been eligible for preferential tariff treatment pursuant to the CUSMA are meant to be subject to the countermeasures.
Second phase (currently paused)
The second phase of the Canadian countermeasures, if enacted, will include the imposition of 25 percent tariffs on other imported U.S. goods worth $125 billion. Although the second list of proposed targeted goods was published on March 4, the implementation of the second phase is now on pause as the U.S. decided to waive the tariffs on products of Canada that are originating under the CUSMA as per the March 6 U.S. Order. To the extent the Department of Finance reinstates the second phase, a 21-day public comment period shall be granted prior to entry into force. The second phase, if implemented as proposed, will target several U.S. products such as passenger vehicles and trucks (including electric vehicles), steel and aluminum products, certain fruits and vegetables, aerospace products, beef, pork, dairy, trucks and buses, recreational vehicles, and recreational boats.
Other Canadian countermeasures
As noted above, on March 12, 2025, Canada announced an additional $29.8 billion in countermeasures in response to the section 232 tariffs on Canada’s steel aluminum products that took effect on that date. Such countermeasures, which take effect at 12:01 a.m. on March 13, 2025, target U.S. steel and aluminum products as well as other U.S. goods including computers, sports equipment and cast iron products. These goods are among those targeted in the second phase of Canada’s tariff implementation, which was delayed in recognition of the March 6 U.S. Order, as discussed above.
Finally, all other U.S. measures to be imposed against Canadian goods (e.g., U.S. reciprocal tariffs, section 232 tariffs on copper, increased tariff rate(s), etc.) could be subject to immediate Canada’s retaliation, such as reciprocal Canadian tariffs, equivalent tariff countermeasures on other U.S. products, or the implementation of non-tariff barriers, as the case may be.
At the provincial level, various measures have been discussed or implemented. To date, the most significant provincial measure that has been announced is a proposed 25 percent export charge on Ontario electricity exports to the U.S., which would affect customers in New York, Michigan and Minnesota. This export charge was to take effect on March 11, 2025 but after the discussions with the U.S. Secretary of Commerce referred to above, it was suspended by Premier Ford.
Exemptions
Remission process
As it is also the case for the current Canadian tariffs imposed on certain goods from China, a process for requesting the remission of tariffs on U.S. imported goods has been implemented by the Department of Finance to mitigate the impact of such duties on Canadian workers and businesses.
The process for requesting remission of tariffs is available for all goods covered under the first phase. The same process will be available for goods covered under the second phase if necessary.
The duty relief could either be obtained prospectively or retrospectively, as the case may be. In the latter case, a refund of tariffs already paid would be obtained. According to the Department of Finance, the remission could be granted in the following instances:
- To address situations where goods used as inputs cannot be sourced domestically, either on a national or regional basis, or reasonably from non-U.S. sources.
- To address, on a case-by-case basis, other exceptional circumstances that could have severe adverse impacts on the Canadian economy.
Public consultations (second phase)
If necessary, businesses could use the 21-day public comment period to convince the Department of Finance to exclude goods from the proposed list of U.S. products that are targeted as part of the second phase of the overall countermeasures.
Impact of the Trade War
While it is to be hoped that all issues underlying the imposition of tariffs by both countries will soon be resolved, it is inevitable that the current trade war increases the time and expense of many types of business transactions involving U.S. and Canadian buyers and sellers.
Delays in transactions
The implementation of tariffs may reduce the volume of imports and exports and business transactions between Canada and the U.S. If a cycle of tariffs and countermeasures (or reciprocal threats) begins, the resulting uncertainty may, in and of itself, deter businesses from pursuing transactions or at least delay transactions while trade implications are considered, and tariff-specific closing contractual conditions are negotiated.
Transfer pricing
The new tariffs could also have an impact on transfer pricing for multinational groups. Related parties within a multinational group must set their transfer price by reference to similar transactions between unrelated parties. The transfer price, which includes the cost of tariffs to reflect market conditions, determines the allocation of taxable income between related parties. The burden of tariffs generally falls on the importer, whose income would consequently be reduced, unless the parties agree to allocate the cost differently. Take, for example, a transaction between related U.S. and Canadian entities in which the U.S. entity acquires goods subject to tariffs from the Canadian entity: while the U.S. entity (as the importer responsible to pay the tariffs) might argue that such extra costs should be shared between the parties, it is uncertain whether Canadian tax authorities would agree to shift the cost of such tariffs to Canadian entities through a downward transfer pricing adjustment.
Provisions of the America First Trade Policy
Broadly, the Policy directs certain U.S. government agencies to investigate the causes of the U.S.’s “large and persistent annual trade deficits in goods, as well as the economic and national security implications and risks resulting from such deficits.” Following this investigation, U.S. agencies are mandated to recommend appropriate measures, such as a global supplemental tariff or other policies.
Among other things, the Policy directs the agencies to:
- review trade agreements;
- assess the policies and practices of major trading partners with respect to currency exchange rates;
- review policies and regulations regarding the application of antidumping and countervailing duty laws; and
- assess the loss of tariff revenues and import risks resulting from the $800 or less duty-free de minimis exemption.
The government agencies are to make their recommendations to the President in reports due by April 1 or April 30, 2025, as the case may be.
The Policy also suggests the creation of a new “External Revenue Service” to collect tariffs, duties, and other foreign trade-related revenue.
Taking into account the recent developments, it is now unclear how the reports to be issued to the President will impact the current U.S. tariffs imposed on products of Canada and any future U.S. tariffs to be imposed on such products, if they are still in force as of April 1, 2025.
Future of the CUSMA
With respect to the CUSMA, the Policy calls for a public consultation to assess the impact of the free trade agreement on U.S. businesses in preparation for its scheduled July 2026 review. The U.S. Trade Representative is tasked with making recommendations regarding U.S. participation in CUSMA.
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