U.S. Tariff Policies: Impact on Canadian and Mexican Trade

TORONTO (AP) — Recently, U.S. President Donald Trump increased tariffs on Canadian goods to 35%. However, a critical exemption for Canada and Mexico protects the vast majority of goods from these taxing duties.

Goods that meet the standards outlined in the 2020 United States-Mexico-Canada Agreement (USMCA), which Trump negotiated during his first term, are exempt from these tariffs. This agreement plays a significant role in defining trade relationships between the U.S., Canada, and Mexico.

Canada: Relatively Favorable Trade Conditions

According to Canada’s central bank, 100% of energy exports and 95% of other exports are compliant with the USMCA. The Royal Bank reported that nearly 90% of Canadian exports accessed the U.S. market duty-free in April.

Canadian Prime Minister Mark Carney stated that the consistent commitment from the U.S. to the core components of the USMCA means that the average tariff rate on Canadian goods remains low, with over 85% of Canada-U.S. trade continuing to be tariff-free.

“Canada is in a better position compared to other trading partners right now because the U.S. appears to be relying predominantly on the USMCA,” explained Flavio Volpe, president of the Automotive Parts Manufacturers’ Association. “This gives the U.S. a strong tariff headline but allows for necessary access to goods from Canada.”

Both Canadian and Mexican companies can enjoy preferential treatment under the USMCA based on the origin of their products. “Although the headline news is a 35% tariff, it’s effectively targeted,” said John Manley, former finance and foreign affairs minister of Canada. He emphasized that Canada’s economy is displaying resilience despite ongoing economic uncertainty.

Mexican Goods: Targeted Tariffs and Negotiations

Trump recently announced a 90-day negotiation period with Mexico, one of America’s largest trading partners. The current 25% tariffs, previously threatened to increase to 30%, now apply only to a small fraction of Mexico’s trade with the U.S. not covered by the USMCA.

President Claudia Sheinbaum affirmed that within the purview of the USMCA, Mexico is in a favorable position, stating, “What’s inside this treaty has no tariffs, excluding known exceptions like autos, steel, and aluminum.”

Economy Secretary Marcelo Ebrard noted that over 84% of Mexico’s trade with the U.S. incurs no tariffs under the USMCA. Despite the ongoing challenges, most imports from both Canada and Mexico remain protected by this trade agreement.

The Future of USMCA and Its Implications

The USMCA is set for review next year, crucial for both Canada and Mexico. “Losing the agreement could lead to significant disruptions in trade, especially if tariffs impose rates of 30%, 25%, or even 20%,” warned Manley. 

As more than 75% of Canada’s exports and over 80% of Mexico’s exports head to the U.S., the risk concerning the USMCA remains high. “Uncertainty in business is the enemy of decision-making,” said Manley, highlighting the potential fallout from possible tariff changes.

Access and Investment Challenges

Carney pointed out that through recent agreements with other countries, the U.S. is effectively charging for access to its economy. Manley elaborated that Canada continues to have advantages due to its rich natural resources, skilled labor force, and immigration openness. Yet, the importance of maintaining unrestricted access to the U.S. market remains paramount.

Trump’s sector-specific tariffs, known as 232 tariffs, include a 50% duty on steel and aluminum imports and a 25% tariff on automotive imports, with exemptions for Canadian and Mexican manufacturers.

“Despite Canada’s advantages, certain major industries are facing significant setbacks due to U.S. trade decisions, particularly in sectors like autos, steel, aluminum, copper, pharmaceuticals, semiconductors, and softwood lumber,” Carney stated on Tuesday while announcing an aid package for the lumber industry in response to rising duties.

“Clearly, we cannot rely solely on what has traditionally been our most valued trading relationship for our long-term prosperity,” he added.