Key exemption allows most Canadian, Mexican goods to enter US tariff-free

Business Standard

a day ago

US President Donald Trump raised the tariffs on Canadian goods to 35 per cent last week, but a key exemption for Canada and Mexico shields the vast majority of goods from the punishing duties.
Goods that comply with the 2020 United States-Mexico-Canada Agreement trade pact that Trump negotiated during his first term are excluded from the tariffs.
Here is a look at Trump's tariffs on the two countries and their exemptions:
Most Canadian exports reaching the US duty free
Canada's central bank says 100 per cent of energy exports and 95 per cent of other exports are USMCA compliant. The Royal Bank estimated that almost 90 per cent of Canadian exports appear to have accessed the US market duty free in April.
Canadian Prime Minister Mark Carney said the commitment of the United States to the core of USMCA, reaffirmed again last week, means the US average tariff rate on Canadian goods remains one of its lowest, and over 85 per cent of Canada-US trade continues to be tariff free.
"Canada is better off than any of the trading partners right now because the Americans appear to be relying as a default on USMCA," said Flavio Volpe, president of the Automotive Parts Manufacturers' Association. "That gives them the tough tariff headline but also allows them the access to the stuff they need from us. Because of that we are in a relatively better position." Canadian and Mexican companies can claim preferential treatment under the USMCA based on where the products are made.
"The headline news is 35 per cent tariffs but it is somewhat targeted," said John Manley, Canada's former industry minister, finance minister, foreign affairs minister and deputy prime minister.
Manley said Canada is doing okay despite the economic uncertainty.
"There is a lot of resilience I would say. The Canadian economy has done relatively well, better than most of us expected, and remember that there is no tariffs on any of our energy exports," he said.
25 per cent tariffs on Mexican goods target a small slice of trade
Trump said last week he would enter into a 90-day negotiating period with Mexico, also one of America's largest trading partners. The current 25 per cent tariff rates are staying in place, down from the 30 per cent he had threatened earlier.
But that 25 per cent only applies to the fraction of Mexico's trade with the US that is not covered by the USMCA. Shortly after speaking with Trump on Thursday, President Claudia Sheinbaum said that within the "new commercial world order", Mexico was still the best positioned nation because of the free trade agreement.
"What is within (USMCA) has no tariff, with the exception of what we already know: autos, steel and aluminum; and what is outside the treaty has 25 per cent," Sheinbaum said.
But Economy Secretary Marcelo Ebrard pointed out that under the USMCA, no tariffs were paid on more than 84 per cent of Mexico's trade with the United States.
Most imports from Canada and Mexico are still protected by the USMCA, but the deal is up for review next year. US Commerce Secretary Howard Lutnick said last month: "I think the president is absolutely going to renegotiate USMCA." Preserving the free trade pact will be critical for Canada and Mexico.
"It would be an incredible disruption to lose it, especially if you lost it to the levels of tariffs Trump is imposing, 30 per cent, 25 per cent or even 20 per cent. You can absorb a single-digit tariff level across the board but you cannot adjust that kind of increase," Manley said.
More than 75 per cent of Canada's exports go to the US while more than 80 per cent of Mexico's exports go there.
Manley said that depending on how the trade war plays out, the risk to the USMCA is very high. "Uncertainty in business is the enemy of decision making," he said.
Charging for access
Carney said in a series of recent agreements with other countries that America is, in effect, charging for access to its economy.
Manley said the investment thesis for Canada is pretty straightforward as Canada is rich in natural resources, has a skilled labour force, is open to immigration and has unfettered access to the US market, the largest economy in the world.
"If that latter point is no longer the case, we have still got all the others, but we have got to really redevelop the investment thesis for attracting investment to Canada," Manley said.
Trump has some sector-specific tariffs, known as 232 tariffs, that are having an impact. There is a 50% per cent tariff on steel and aluminum imports and a 25 per cent tariff on auto imports, though there is a carve-out for Canadian and Mexican-made cars.
"Despite our advantages, certain major Canadian industries are being severely impacted by US trade actions. These strategic sectors include autos, steel, aluminum, copper, pharmaceuticals, semiconductors, and of course, softwood lumber," Carney said on Tuesday. "It is clear we cannot count or fully rely on what has been our most valued trading relationship for our prosperity.