Trump raises tariffs on Canada to 35%, keeps USMCA exemption

by Brian Platt, Randy Thanthong-Knight and Thomas Seal 

President Donald Trump said the US will put a 35% tariff on some imports from Canada, escalating the tensions between two countries that have impaired one of the world’s largest trading relationships.  

The new rate represents an increase from the 25% tariffs Trump imposed in early March under an emergency law.  

“Canada has failed to cooperate in curbing the ongoing flood of fentanyl and other illicit drugs, and it has retaliated against the United States” for Trump’s earlier tariffs, the White House said in a fact sheet published Thursday evening.  

But the US administration kept in place an exemption for goods traded under the rules of the US-Mexico-Canada trade agreement. US automakers and other companies with integrated North American supply chains had pushed for that carve-out, which has allowed US importers to continue bringing in the bulk of Mexican and Canadian products without duties. 

Because of the USMCA exemption, the effective tariff rate on US imports of Canadian goods was around 5%, according to estimates published July 30 by the Bank of Canada. That will now rise slightly. Economists at Bank of Nova Scotia estimated recently that the effective tariff rate would be between 6% and 7%.   

“We still have a buffer against the latest round of tariffs,” said Fen Hampson, an international affairs professor at Carleton University in Ottawa.  

The Canadian dollar dropped as low as C$1.3871 per US dollar but quickly pared those losses. 

Trump’s move turns up the volume on a trade war between longstanding allies that until this year had enjoyed mostly tariff-free trade since the 1980s. The US bought around $475 billion of goods and services from Canada last year, while exporting more than $440 billion to Canada, led by vehicles, auto parts and consumer products, according to data from the US Commerce Department and Statistics Canada.  

Canadian Prime Minister Mark Carney has warned in recent days that the talks were difficult and it might not be possible to finish a deal with Trump by Aug. 1. The Canadian leader said in a statement that the government was disappointed with situation, but because of the USMCA the US rate on Canadian goods “remains one of its lowest for all of its trading partners.” The government will act to support heavily impacted sectors and jobs not covered by that trade agreement, he added.  

Trump signaled in an interview with NBC News Thursday that he would be open to further talks with Carney, saying that it’s possible the two would speak as soon as later in the evening Washington time. However he said there wouldn’t be a new deal inked before president’s self-imposed deadline. 

Negotiating setbacks 

Since Trump won last year’s election, the Canadian government has committed to spending C$1.3 billion ($938 million) on bolstering border security, including to hire more officers and add patrol helicopters and other equipment. The government also tapped a former senior cop from the Royal Canadian Mounted Police as the country’s “fentanyl czar” to fight trafficking, a nod to Trump’s frequent citations of that as a key cause for tariffs. 

Carney, 60, also won an election in April, and since then has made a number of concessions to the president’s demands. His government announced a sharp increase in military spending and agreed to eliminate a digital services tax that would have cost US technology companies billions of dollars over time. 

But on July 10, Trump sent Carney a letter threatening the 35% tariff rate, citing a range of irritants, including fentanyl trafficking and barriers to exports from US dairy farmers. 

“As far as a negotiating strategy, I don’t know that there is one that’s going to work,” said Lori Turnbull, a professor at Dalhousie University’s faculty of management who previously worked in the Canadian civil service. “Because I don’t think Donald Trump ever intended to make a deal with Canada that was going to be fair to Canada.”  

Fentanyl is one example often cited by Canadian detractors who question Trump’s stated rationale for the levies. The amount of the deadly drug intercepted at the northern US border is a small fraction of the amount seized at the frontier with Mexico. Since October, 74 pounds of fentanyl have been seized at or near the US-Canada border, versus 8,800 pounds at the US-Mexico border, according to data from US Customs and Border Protection. 

Yet earlier on Thursday, hours before raising Canada’s tariffs, Trump agreed to extend current tariffs on Mexico for 90 days. 

‘Canada needs a deal’ 

The USMCA carve-out has softened the economic blow of the trade war considerably. New forecasts from Canada’s central bank suggest that the Canadian economy might avoid a recession even if US tariffs stayed in place, provided that exemption remained.  

Still, economic growth remains weak and unemployment is 6.9%, higher than at the start of the year. 

 “This time Canada needs a deal, because it needs to provide stability and predictability to its investment climate,” said Eric Miller, president of Rideau Potomac Strategy Group, a consultancy focused on trade, supply chains and regulation. “And what you’ve seen are a lot of people sitting on the sidelines, not knowing where and how they want to invest.”  

Carlo Dade, international policy director at the University of Calgary’s School of Public Policy, said he thinks there’s a possibility that Canada will eventually lose the USMCA exemption and paying “some sort of baseline tariffs,” broadly applied to most exports, like dozens of other US trading partners. 

The 35% rate is separate from Trump’s sectoral tariffs. Some Canadian industries that are designed to export to the US are already bleeding as a result of those — including steel, where products face a 50% import tax, and automotive, where the tariff rate varies but profit margins are relatively thin.  

The US also has a 50% tariff on aluminum, as well as duties on softwood lumber that are the result of a protracted trade dispute that existed before Trump came to power. 

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