On Canada and Tariffs
Turnabout is fair play
On Saturday, 1 February, 2025, President Trump enacted significant tariffs on Canada, Mexico and China. There has been much hew and cry in the mainstream media, with all of the pundits coming out like boobs at a strip club. The righteous indignation by these pundits, and the mainstream media, would leave one to conclude that President Trump is a power hungry asshole who just wants to punish Canada for being liberal (maybe even more liberal that the state of California).
But rather than just ingest the story of what our trade relations look like and how they will be damaged, I think it's important to understand the context, the landscape of what has existed between the US and Canada for the past thirty years.
Implementation of NAFTA
The North American Free Trade Agreement (NAFTA) was implemented on January 1, 1994, between the United States, Canada, and Mexico with the aim of eliminating trade barriers, creating a large free-trade zone while promoting investment and economic growth.
It significantly reduced or eliminated tariffs on a vast majority of goods traded between the three countries and, by the end of its implementation schedule, nearly all tariffs on industrial products were removed and many agricultural tariffs were either eliminated or phased out over time. There were exceptions for sensitive sectors like dairy in Canada (where high tariffs were maintained under a supply management system).This allowed for easier access to each other’s markets, which boosted agriculture, automotive manufacturing and energy.
NAFTA has often been credited with significantly increasing trade among the member countries. U.S.-Canada trade but also faced substantial criticism, including job displacement, income inequality, and environmental and labor standards.
Success and Impact:
In short, NAFTA was a mixed bag of achieving economic integration and trade volume perspective, but was considered a failure in terms of economic growth, labor rights, and environment protection.
The United States-Mexico-Canada Agreement (USMCA)
The United States-Mexico-Canada Agreement (USMCA), which replaced NAFTA, came into effect on July 1, 2020, with the some of the following key points relevant to U.S.-Canada trade:
Tariffs: As with NAFTA, USMCA largely maintained tariff-free trade for goods among the three countries, continuing the framework of duty-free access for most products.
Automotive Industry: The North American content requirement for vehicles was raised from 62.5% under NAFTA to 75% under USMCA, and carried specific requirements for labor-intensive parts like engines. It also set standards as to minimum wages to be paid to auto workers.
Agricultural Provisions: Canada agreed to increase dairy imports, addressing long-standing U.S. complaints about Canada's supply management system. However, high tariffs outside these quotas remain.
Digital Trade: The USMCA added provisions to prevent duties on electronic transmissions, protect consumer privacy, and prohibit data localization requirements, reflecting the increasing importance of digital trade.
Success and Impact:
While the USMCA was intended to modernize trade rules to better reflect current economic realities, protect workers, and address criticisms of NAFTA by aiming to balance trade benefits with considerations for labor, environment, and intellectual property rights. However, at this time, there is not a real and determinatively accurate measure of its success; thus a mixed bag.
New Tariffs in 2025
Whilst campaigning for the Presidency, Donald Trump cited the use of tariffs as a reliable means to address what he perceived as unfair trade practices, as well as to address immigration and security issues. Specifically, the import of Fentanyl, and other illegal drugs, through what he viewed as a porous northern border.
In addition, he expressed dissatisfaction with various aspects of the USMCA, suggesting it did not go far enough in addressing U.S. trade deficits and protecting American industries. Citing our ongoing trade deficit with Canada having grown (rather than shrinking), the lack of adherence to labor and environmental standards (including routing Chines goods through Canada), remaining dairy and agricultural trade imbalances, as well as the fact that the very terms of the USMCA being up for review in 2026.
As President, Trump has justified the imposition of a 25% tariff on imports from Canada, along with a 10% tariff on Canadian energy resources, by citing several critical issues. The primary stated root cause for these tariffs is the flow of illegal drugs, particularly fentanyl, and undocumented immigrants across the U.S.-Canada border. President Trump has characterized these tariffs as a response to an “emergency situation”, where the influx of illegal aliens and drugs has constituted a national security and public health crisis.
The anticipated results from these tariffs have several key expectations. Firstly, Canada must tighten its shared border with the United States, especially in joint efforts to combat drug trafficking across our shared border. Economically speaking, the tariffs are intended to apply pressure on attaining concessions from Canada with respect to market access for US goods in sectors where Canada still has protectionist trade policies.
Observations
That’s a lot of information to take in, but this writer believes it helps set the stage for why these tariffs are reasonable. I think all of the words above may make sense from a history and current state of affairs perspective, but nothing demonstrates the trade imbalance more than the table below
TRQs (Tariff-Rate Quotas) allow a certain amount of goods to be imported at a low or zero tariff, with higher tariffs only applied to quantities exceeding the quota.
Although the structure under USMCA/NAFTA largely eliminates tariffs on most goods, but exceptions exist for protectionism or in response to trade disputes.
In reviewing this information, it’s abundantly clear that the US has put itself in a position of deference to two lesser economies. The GDP of the USA is $27.2 trillion, Canada is $2.14 trillion, and Mexico is $1.79 trillion. This means that COMBINED, the GDP of Canada and Mexico is $3.93 trillion, so 14% of the US GDP.
Which means, at least to the non-economist brain that I have, that the American citizens are subsidizing both markets, and American citizens are paying for this attempt to “level the playing field”, which I disagree with. We need to focus on our own priorities and problems in this country, and stop subsidizing the world. And when I say we’re subsidizing the world, or, in this case, Canada, a simple perusal of the table above will show you how much US businesses and, consequently, individuals are impacted by these efforts. This is nothing more than if Canada and Mexico have the right (and duty) to engage in protectionist tax schemes for their greatest industries, then so should the US be allowed to do so.
Based on these numbers above, again, I am not an economist, but my “common sense” brain tells met that if there IS a trade war between our 3 nations, Canada and Mexico will lose. They need our economy and goods far, far more than we need theirs. Yes, there will some pain Americans experience in the initial stages of this war, but, in the end, neither alone nor combined, can Canada and Mexico withstand a protracted and just trade war.