Nearly four years after the coming into force of the Canada-United States-Mexico Agreement (“CUSMA” or the “Agreement”), U.S. President-elect Donald Trump announced on November 25 that he intends to implement a 25% tariff on all products entering the United States from Canada and Mexico, starting on the first day of his presidency, January 20. Donald Trump indicated that this tariff will remain in place until Canada and Mexico bolster their border policies, which he believes are responsible for the increase in illegal immigration and the trafficking of devastating drugs in the United States. As a reminder, CUSMA currently provides for tariff-free access to U.S. markets as far as most Canadian and Quebec products are concerned.
Hence, although these still remain speculations, and no details were provided by the president-elect concerning this aspect in his announcement, several legislative authorities appear to exist on which his future administration could rely to implement such a measure. It could, among other things, invoke the essential security interests exception in CUSMA, which allows a party to the Agreement to apply any measure that it considers necessary with respect to the protection of its own essential security interests, the national security exception contained in the Trade Expansion Act of 1962, on which President Trump’s first administration had based itself in 2018 to introduce tariffs on U.S. imports of certain steel and aluminum products, or the provisions of the National Emergencies Act.
The announcement sent shockwaves through the political and business communities in Canada and Quebec — and understandably so, given the close commercial ties the United States has with Canada, including Quebec.
Indeed, alone in the first quarter of 2024, Quebec’s merchandise exports to the United States totalled C$21.2 billion, representing nearly 74.6% of the province’s international merchandise exports, making the United States Quebec’s main trading partner worldwide. Thus, the imposition of a 25% tariff would have a considerable impact on our businesses, which depend heavily on the U.S. market to export their products, which products would be made less competitive on that market. Such a measure could be particularly detrimental to the Canadian forestry industry, softwood lumber already being hit hard by tariffs of nearly 15% as it is.
The impact of this protectionist tariff on the U.S. economy would also be considerable. While in the short term it could benefit certain domestic manufacturers and producers, in the longer term it would be likely to harm the U.S. economy as a whole due to higher input costs for many U.S. manufacturers and the disruption of established supply chains, notably in the automotive and steel industries. Hence, to maintain their profitability, many U.S. businesses could be forced to pass on these additional costs to their end consumers by raising the price of their products, which would undeniably lead to another wave of inflation, not to mention the potential retaliatory measures that the Canadian government might want to put in place in response to such a tariff and which could affect certain spheres of the U.S. economy.
Although dispute resolution mechanisms are provided for in CUSMA, they are unlikely in the short term to lessen the potential impact of the measures being considered by the Trump administration, as a final decision under these mechanisms can take a long time. The November 25 announcement could also serve as a lever for the new U.S. administration in future negotiations on the renewal of CUSMA, for which preparatory discussions will begin next year, or in negotiations for a separate free trade agreement between the United States and Canada that would exclude Mexico. Canadian businesses would also be well advised to encourage the various trade associations they are members of to undertake lobbying efforts both with U.S. decision-makers and with their corporate customers in the United States in order to expose the adverse impacts that the announced tariff is likely to have on U.S. businesses.
Pending a more detailed announcement, including as concerns any specific tariff exemptions, businesses should pay extra attention to their choice of future trading partners. In an increasingly protectionist global economic context, a trading partner diversification strategy is the best defence a business can have to mitigate the risks associated with a particular country’s tariff policies. The Comprehensive Economic and Trade Agreement signed by Canada and the European Union in 2017 — in the negotiation of which our firm was involved — may prove an interesting solution in this regard.
Our team of professionals in commercial and tax law is available to help you navigate the issues raised by this announcement. We will put our expertise at your service to support you in your commercial negotiations and develop strategies designed to mitigate the impact that the announced tariff increase could have on your business.