Imports From USMCA Partner Canada Face Crippling 35% Tariffs Tomorrow

Forbes

3 days ago

Canada faces steep 35% tariffs on almost 60% of its imports to the United States if President Trump follows through on his Aug. 1 deadline for imposing the extraordinary duty.
That's because just 19.1% of Canada's $168.54 billion in imports this year have been categorized as eligible for duty-free entry under the USMCA agreement. In addition to that 19.1%, Trump has indicated oil would, like USMCA-compliant imports, remain duty free. It accounts for 22% of the value of all U.S. imports from Canada.
It's also a nod to U.S. dependence on Canadian oil and the havoc a 35% tariff would create. Canada is the longtime No. 1 supplier of oil imports to this country, accounting for 61.5% this year.
There have been only murmurs about Canada cutting off or limiting its oil exports to the United States in retaliation.
Canada is the No. 2-ranked source of U.S. imports and overall trade, trailing only Mexico.
Trump gave Mexico a 90-day pause on 30% tariffs on Thursday, one day before similarly extreme tariffs would have gone into place. But even that pause does not appear absolute.
As is the case with so many of Trump's announcements, the details tend to drip out slowly and often change the narrative, sometimes from the White House and sometimes from the other country.
It's possible that U.S. imports of passenger vehicles from Mexico will still face a 25% tariff. Only 55.9% of those imports from Mexico are qualifying for USMCA duty-free status, according to U.S. Census Bureau data I analyzed, down from 82.5% last year.
Nevertheless, Trump kicked the can down the road with Mexico, as he has done repeatedly since announcing the 'Liberation Day' tariffs on the world on April 2, an effort to decrease the U.S. merchandise trade deficit, which is still increasing.
Trump indicated Wednesday that Canada's signaling that it supported the creation of a Palestinian state, following the lead of France and the United Kingdom, would make any deal with the United States northern neighbor difficult.
As was the case with Mexico, Trump is playing with fire. The two countries are not only the top two trade partners and top two importers into the United States, they are also the top two U.S. export markets – opening up the possibility of retaliatory tariffs.
While Canada accounts for 15.7% of all U.S. exports to the world by value this year, it ranked first in more than half of all the categories used to describe the products, when I last wrote about the topic.
Further, it ranked either first, second or third for 79.29% of all U.S. export categories. This is important because the impact of any retaliatory tariffs would be widespread and not concentrated on a few key U.S. exports.
The list included everything from passenger vehicles, commercial vehicles, motor vehicle engines, tractors, transmission shafts, catalytic converters, and oil and air filters – all part of the highly intertwined automotive trade among Canada, the United States and Mexico – but also strawberries and blueberries.
The 19.1% of U.S. imports from Canada that is eligible for USMCA duty-free entry is down from 37.9%. That seemingly low percentage is almost certainly because, prior to the possibility of 35% tariffs, the tariff rate on most U.S. imports from Canada (and many other countries) was in the low single digits, as I addressed previously.
Nevertheless, a 35% tariff would be punishing. Here are a few examples where U.S. imports from Canada appear particularly vulnerable:
There is apparently ongoing discussion about U.S. imports of aluminum after Ford indicating it is already getting hit hard by tariffs despite the fact that it is making vehicles in the United States.
Two points are in order, covered in some detail in my post earlier today.
First, the 19.7% that fits into the category of Census Bureau data that includes USMCA-compliance is significantly lower than recent years but the percentage has been dropping.
Prior to 2017, U.S. imports from Canada were eligible to enter duty free sometimes slightly more than 50% of the time and sometimes slightly less. It first dipped below 40% in 2018 and has stayed there – until this year, when it dropped not only below 30% but also 20%, to 19.7%.
The second point is the reason for the drop. It's supposition but also the most plausible explanation for the sharp decline for both Canada and Mexico: Heightened enforcement by U.S. Customs and Border Protection – and the fear of heightened enforcement, since it can be retroactive.
The bottom line is that, should the tariffs on Canada go through, they would be more punishing than any tariffs currently in place, given the size of the relationship. And that punishment would not only be directed at U.S. imports from Canada but, quite possibly, would also affect U.S. exports to Canada.