US Tariffs on Canadian and Mexican Goods: A Closer Look
The recent imposition of tariffs by the United States on Canadian and Mexican goods has sparked a lot of discussion. While President Donald Trump raised the tariffs on Canadian products to 35%, a key exemption under the United States-Mexico-Canada Agreement (USMCA) ensures that most goods are still shielded from these high duties. This agreement, which replaced NAFTA in 2020, is a comprehensive trade deal designed to regulate the flow of goods and services among the three countries.
Understanding the USMCA
The USMCA includes provisions that strengthen labor and environmental standards, enhance intellectual property protections, and establish mechanisms for resolving disputes between the member nations. The agreement allows for tariff-free trade on most goods that meet specific rules of origin. These rules require that certain products be either entirely made in Canada or Mexico or have the majority of their components produced within those countries. This ensures that goods are not simply imported from third-party nations like the EU and then resold in the US.
Impact on Canadian Exports
According to Canada’s central bank, 100% of energy exports and 95% of other exports comply with the USMCA. Additionally, the Royal Bank estimates that nearly 90% of Canadian exports accessed the US market duty-free in April. Canadian Prime Minister Mark Carney emphasized that the commitment to the USMCA means the average US tariff rate on Canadian goods remains one of the lowest, with over 85% of Canada-US trade being tariff-free.
Flavio Volpe, president of the Automotive Parts Manufacturers’ Association, noted that while the 35% tariff headline is significant, it is somewhat targeted. He explained that this arrangement allows the US access to necessary goods from Canada, placing Canada in a relatively better position compared to other trading partners.
Tariff Implications for Mexican Trade
Similarly, Mexican companies can benefit from preferential treatment under the USMCA. Although Trump announced a 90-day negotiation period with Mexico, the current 25% tariff remains in place, down from the previously threatened 30%. However, this 25% tariff only applies to a small fraction of Mexico’s trade with the US that isn’t covered by the USMCA. According to Economy Secretary Marcelo Ebrard, more than 84% of Mexico’s trade with the US is tariff-free under the agreement.
President Claudia Sheinbaum highlighted that Mexico remains well-positioned due to its free trade agreement with the US. She noted that while certain sectors like autos, steel, and aluminum face tariffs, the majority of trade remains unaffected.
Economic Resilience and Uncertainty
Despite the economic uncertainty, Canada’s economy has shown resilience. John Manley, a former Canadian industry minister, stated that the Canadian economy has performed better than expected. He emphasized that there are no tariffs on energy exports, which is a significant advantage.
Manley also pointed out that the risk to the USMCA is high depending on how the trade war unfolds. He warned that uncertainty in business could hinder decision-making and investment.
Charging for Access
Carney mentioned that America is effectively charging for access to its economy through various agreements. For Canada, the investment thesis remains strong, given its natural resources, skilled workforce, and open immigration policies. However, maintaining access to the US market, the world’s largest economy, is crucial.
Trump’s sector-specific tariffs, such as the 50% on steel and aluminium imports and the 25% on auto imports, have had an impact. While there is a carve-out for Canadian and Mexican-made cars, certain industries like autos, steel, and semiconductors are facing challenges.
Carney acknowledged that Canada cannot fully rely on its traditional trading relationship with the US and emphasized the need to redevelop the investment thesis to attract investment. Despite these challenges, Canada continues to navigate the complexities of international trade with resilience and strategic planning.