Will the US Ever Lift Tariffs? Insights from Canada's Finance Minister

The recent comments from Canada’s Finance Minister, François-Philippe Champagne, suggest that Canada may have to accept a baseline tariff to maintain its trade relationship with the United States. This follows a series of statements from U.S. officials indicating that tariffs could become a primary revenue source for the U.S., as articulated by President Donald Trump during his State of the Union address. Champagne noted that while Canada is currently paying the lowest price for access to the U.S. market compared to other nations, the imposition of tariffs poses significant challenges for Canadian exporters.

Last updated: 27 October 2023 (BST)

What’s happening now

As trade tensions escalate, Canada is reassessing its approach to tariffs, especially in light of President Trump's recent remarks and the imposition of a new 10% global tariff. Champagne's statement indicates a willingness to accept some level of higher tariffs if it means gaining concessions from the U.S. in other areas, such as dairy market access. This reflects a significant shift in Canada’s trade strategy, as the nation grapples with the realities of U.S. trade policy under the Trump administration.

Key takeaways

Canada may face higher tariffs to maintain access to the U.S. market.
Trump's new 10% global tariff has raised concerns among Canadian exporters.
Canadian officials are open to negotiating tariffs in exchange for market access in other sectors.

Timeline: how we got here

The recent developments in U.S.-Canada trade relations can be traced back over the past few months:

April 2023: Trump implements sweeping tariffs, which are later deemed unlawful by the U.S. Supreme Court.
October 2023: U.S. Supreme Court rules against Trump's previous tariffs; Trump announces a new 10% global tariff.
October 2023: Champagne's remarks indicate Canada's potential acceptance of higher tariffs for market access.

What’s new vs what’s known

New today/this week

Champagne's comments mark a shift in Canada's trade posture, suggesting a readiness to negotiate on tariffs in exchange for favourable terms in other sectors. This reflects ongoing trade tensions exacerbated by Trump's recent announcements.

What was already established

Historically, Canada has enjoyed certain exemptions under the USMCA (United States-Mexico-Canada Agreement), yet it still faces tariffs on steel, aluminium, and softwood lumber. The U.S. has consistently been Canada's largest trading partner, accounting for approximately 75% of Canadian exports.

Impact for the UK

Consumers and households

Although the immediate impact of Canadian tariffs may not directly affect UK consumers, fluctuations in Canadian exports could influence global supply chains, potentially leading to increased prices for imported goods in the UK market.

Businesses and jobs

For UK businesses, particularly those involved in manufacturing and exports, the evolving tariff landscape could lead to indirect effects through changes in trade flows and costs. Companies relying on Canadian imports may face higher prices or supply chain disruptions.

Policy and regulation

The UK government may need to monitor these developments closely, as any significant shifts in U.S.-Canada trade policy could influence broader trade agreements and negotiations involving the UK and North American partners.

Numbers that matter

10%: The new global tariff imposed by the U.S. on goods, effective immediately.
75%: The percentage of Canadian exports that go to the U.S., highlighting the critical nature of this trade relationship.
150 days: The duration for which the new tariffs can remain in place before Congress must intervene.

Definitions and jargon buster

USMCA: United States-Mexico-Canada Agreement, a trade deal that governs trade between the three countries.
Section 122: A provision under the 1974 Trade Act that allows the U.S. president to impose tariffs for national security or economic reasons.

How to think about the next steps

Near term (0–4 weeks)

Watch for potential negotiations between Canada and the U.S. regarding tariffs and market access, particularly in the dairy sector, which could set the stage for future trade discussions.

Medium term (1–6 months)

Monitor how the new tariffs impact Canadian exporters and whether they lead to broader changes in trade policy or retaliatory measures from Canada.

Signals to watch

Statements from U.S. trade officials regarding tariff negotiations.
Canadian government responses to the new tariffs and any proposed trade agreements.
Trends in Canadian export numbers to the U.S. and other markets.

Practical guidance

Do

Stay informed about trade policy changes that could affect your business.
Engage with trade associations for updates on tariffs and export opportunities.

Don’t

Don’t underestimate the impact of tariffs on supply chains and pricing strategies.
Don’t ignore the potential for retaliatory measures from Canada.

Checklist

Review your supply chain for potential impacts from new tariffs.
Assess your pricing strategy in light of potential increases in costs.
Stay updated on negotiations between the U.S. and Canada.

Risks, caveats, and uncertainties

As negotiations unfold, there is significant uncertainty regarding the final outcomes of any trade talks. The potential for retaliatory tariffs from Canada remains a concern, and market conditions may shift rapidly based on political developments in the U.S. and Canada. Furthermore, with the ongoing presidential election cycle in the U.S., trade policies could be influenced by electoral considerations, adding another layer of unpredictability.

Bottom line

The evolving trade dynamics between Canada and the U.S. underscore the necessity for UK businesses to remain agile and informed. The potential for higher tariffs could alter the landscape of North American trade, impacting UK exports and imports indirectly. Companies should prepare for fluctuations and engage proactively with trade discussions as they develop.

FAQs

What is the significance of the new 10% global tariff imposed by Trump?

The new 10% global tariff reflects a shift in U.S. trade policy towards increased reliance on tariffs as a revenue source, potentially impacting international trade relations, including with Canada.

How might higher tariffs affect Canadian exports?

Higher tariffs could lead to increased costs for Canadian exporters, potentially making their goods less competitive in the U.S. market and affecting overall trade volumes.

What are the implications for UK businesses?

UK businesses may face indirect impacts from changing trade dynamics between Canada and the U.S., including potential supply chain disruptions and increased costs for imported goods.