Effective as of 12:01 a.m. EST, Tuesday, March 4, 2025, the United States imposes 25 per cent tariffs on almost all goods imported from Canada. A lower tariff of 10 per cent is imposed on Canadian energy and resource products such as crude oil, natural gas, lease condensates, natural gas liquids, refined petroleum products, uranium, coal, biofuels, geothermal heat, the kinetic movement of flowing water, and certain critical minerals.
The Executive Order that was originally signed by the U.S. President Donald Trump on February 1, 2025 (the “U.S. Order”) to officialise the imposition of the tariffs, cited a “sustained influx of illicit opioids and other drugs” coming from the Canadian border to justify the action. After being postponed for 30 days, purportedly to allow some form of negotiations between Canada and the United States with respect to border security, the tariffs finally came into effect on March 4.
In response to the entry into force of the U.S. Order, the Department of Finance Canada immediately enacted previously announced countermeasures that impose 25 per cent tariffs on $155 billion worth of goods imported from the U.S. This includes 25 per cent tariffs on $30 billion worth of goods to take effect on March 4 with $125 billion worth of tariffs to follow within 21 days following a public consultation.
Background: The America First Trade Policy
The U.S. Order was originally signed by the U.S. President Donald Trump on February 1, 2025, officialising the imposition of the tariffs, and citing a “sustained influx of illicit opioids and other drugs” as noted above. However, after a promise made by Canada to upgrade its border security, the U.S. Order was delayed by 30 days, coming into effect at 12:01 a.m. EST on Tuesday, March 4, 2025 as noted above.
The U.S. Order followed a previous Executive Order issued by President Trump on January 20, 2025 (his first day in office) known as the America First Trade Policy (“Policy”). The Policy sets out the U.S. administration’s desire for
“…a robust and reinvigorated trade policy that promotes investment and productivity, enhances [U.S.] industrial and technological advantages, defends [American] economic and national security, and – above all – benefits American workers, manufacturers, farmers, ranchers, entrepreneurs, and businesses.”
Additional tariffs could be imposed in a second phase pursuant to the preparation of a unified report coordinated by the U.S. Secretary of Commerce and scheduled to be delivered to the President on April 1, 2025. While some stakeholders believed that President Trump would wait to take into account recommendations in the report prior to implementing targeted and properly planned tariffs (or other trade measures) against Canada, it appears that acting to “stem the tide of illicit drugs” (a term used in Note 1 of the Policy) was pressing enough to start the largest trade war between Canada and the United States in history.
In this post, we look at:
- The new U.S. tariffs on Canadian goods;
- Canada’s countermeasures; and
- The provisions of the Policy.
The New U.S. Tariffs: Implementation and Implications
Background
Contrary to a widespread belief, this is not the first time President Trump has imposed tariffs on Canadian goods exported to the U.S. During his first mandate, the U.S. administration ultimately imposed tariffs on imports of steel and aluminum products from Canada at rates of 25 per cent and 10 per cent, respectively (this followed proclamations signed by the President on March 8, 2018, imposing tariffs on all steel and aluminum products imported into the U.S.). Such tariffs took effect on June 1, 2018, upon the lifting of the temporary exemption that Canada had initially been granted.
Although Canada proceeded to impose retaliatory surtaxes on multiple U.S. products imported into Canada, it took almost a year to end this first real trade war with Canada’s largest commercial partner in the era of U.S.-Canada free trade (which dates to the 1989 Canada-U.S. Free Trade Agreement, which as followed by the 1994 North American Free Trade Agreement (NAFTA), and then by the 2020 Canada-United States-Mexico Agreement (CUSMA). Although narrower sectoral trade disputes between Canada and the United States are not uncommon (the softwood lumber dispute is a good example), the 2018-19 U.S. -Canada trade war was by far the broadest conflict – until 2025.
In this context, the recent U.S. Presidential Action could be considered as a “declaration of war” in a second trade war with Canada, the casus belli of which is that Canada (like Mexico) has allegedly failed to strengthen border security to deal with the opioid crisis. In previous declarations, President Trump has also stated, at various times, that illegal border crossings by migrants and what he believes to be a significant U.S. trade deficit vis-à-vis Canada are also important issues for the U.S. With Canada’s immediate reaction, this “economic warfare” is now a full-out battle.
25 per cent duty (products of Canada)
Section 2(a) of the U.S. Order provides that: “all articles that are products of Canada as defined by the Federal Register notice described in subsection (e) of this section (Federal Register notice), and except for [Canadian energy or energy resources], shall be, consistent with law, subject to an additional 25 percent ad valorem rate of duty.” The Federal Register notice set to be published on March 6 notes that the test to determine what goods constitute “products of Canada” will be based on the “substantial transformation test”.
The 25 per cent tariffs will apply with respect to products of Canada entered for consumption, or withdrawn from a U.S. warehouse for consumption, on or after 12:01 a.m. EST on March 4, 2025. Importantly, the U.S. Order was amended to withdraw the exception for goods loaded onto a vessel at the port of loading or which were in transit on the final mode of transport prior to entry into the U.S..
The U.S. Customs and Border Protection (“U.S. CBP”) will be responsible for collecting the 25 per cent tariffs upon importation.
10 per cent duty (energy and energy resources)
Section 2(b) of the U.S. Order further provides that:
“[w]ith respect to energy or energy resources, as defined in section 8 of Executive Order 14156 of January 20, 2025 (Declaring a National Energy Emergency), and as otherwise included in the Federal Register notice, such articles that are products of Canada as defined by the Federal Register notice shall be, consistent with law, subject to an additional 10 percent ad valorem rate of duty.”
Section 8 of Executive Order 14156 defines the term "energy" or "energy resources" as follows:
“crude oil, natural gas, lease condensates, natural gas liquids, refined petroleum products, uranium, coal, biofuels, geothermal heat, the kinetic movement of flowing water, and critical minerals, as defined by 30 U.S.C. 1606 (a)(3).”
As it is the case for other “products of Canada,” the 10 per cent duty will apply with respect to Canadian energy or energy resources imported on or after 12:01 a.m. EST on March 4, 2025. There is no exemption for goods loaded onto a vessel at the port of loading or which were in transit on the final mode of transport prior to entry into the U.S..
Again, the U.S. CBP will be in charge of collecting the 10 per cent tariffs.
Exemptions
We understand that narrow exceptions should include personal communications, certain donated articles, informational materials, and transactions ordinarily incident to travel.
There is also an exception for goods eligible for duty-free de minimis treatment under 19 U.S.C. 1321, i.e., shipments valued at less than $800. However, an amendment to the U.S. Order clarifies that such duty free de minimis treatment shall cease to be available for eligible good upon notification by the Secretary of Commerce to U.S. President Trump that adequate systems are in place to fully and expeditiously process and collect tariff revenue applicable to such goods. It is unclear if or when this is expected to happen.
Furthermore, although nothing has been made public yet, the U.S. may possibly grant certain targeted exemptions notably for goods of “strategic significance” to the U.S. Canadian businesses involved in the exportation of such goods into the U.S. should follow closely U.S. announcements about the exemption process, if any.
Additional tariffs
Section 2(d) of the U.S. Order provides that in the case of Canada’s retaliation against the U.S. tariffs, President Trump may then increase or expand in scope the tariffs imposed under such order.
Canadian Response: Tariffs on Targeted U.S. Goods
First phase (March 4, 2025)
The Canadian protective measures will be implemented in two separate phases. The first phase includes 25 per cent surtaxes (tariffs) on $30 billion in goods imported from the U.S., also effective as of March 4, 2025, to match the entry into force of the U.S tariffs. The list of targeted goods is quite broad and includes a variety of goods produced in the U.S. such as:
- orange juice,
- peanut butter,
- wine, spirits and beer,
- coffee,
- appliances,
- apparel and footwear,
- motorcycles,
- cosmetics, and
- pulp and paper.
The approach adopted by Canada is similar to the measures that were implemented by Canada during the 2018-19 trade war although the current list of targeted goods are broader.
According to the Backgrounder published by the Department of Finance, only goods “considered as those goods eligible to be marked as a good of the U.S. in accordance with the Determination of Country of Origin for the Purposes of Marking Goods (CUSMA Countries) Regulations” will be subject to the 25 per cent surtaxes. This means that only goods that would have been eligible for preferential tariff treatment pursuant to the CUSMA are meant to be subject to the countermeasures.
Second phase (Date TBD)
The second phase of the Canadian countermeasures will include the imposition of 25% surtaxes on other imported U.S. goods worth $125 billion. A proposed list of goods will be published, and the Department of Finance intends to give a 21-day public comment period prior to implementation. Such second phase should target U.S. products such as passenger vehicles and trucks (including electric vehicles), as well as steel and aluminum products, certain fruits and vegetables, aerospace products, beef, pork, dairy, trucks and buses, recreational vehicles, and recreational boats.
Exemptions
Remission process
As it is also the case for the current surtaxes imposed on certain goods from China, a process for requesting the remission of surtaxes on U.S. imported goods has been implemented by the Department of Finance to mitigate the impact of such surtaxes on Canadian workers and businesses.
The process for requesting remission of the surtaxes is immediately available for goods covered under the first phase and should also be available for goods covered under the second phase with details to follow in due time.
The duty relief could either be obtained prospectively or retrospectively, as the case may be. In the latter case, a refund of surtaxes already paid would be obtained. According to the Department of Finance, the remission could be granted in the following instances:
- To address situations where goods used as inputs cannot be sourced domestically, either on a national or regional basis, or reasonably from non-U.S. sources.
- To address, on a case-by-case basis, other exceptional circumstances that could have severe adverse impacts on the Canadian economy.
Public consultations (second phase)
Businesses could also use the 21-day public comment period to convince the Department of Finance to exclude goods from the proposed list of U.S. products to be targeted during the second phase of the countermeasures.
Impact of the Trade War
While it is to be hoped that issues underlying the imposition of tariffs by both countries will soon be resolved, it is inevitable that the current trade war will, at least initially, increase the time and expense of many types of business transaction involving U.S. and Canadian buyers and sellers.
Delays in transactions
The implementation of tariffs may reduce the volume of imports and exports and business transactions between Canada and the U.S. If a cycle of tariffs and counter-tariffs begins, the resulting uncertainty may, in and of itself, deter businesses from pursuing transactions or at least delay transactions while trade implications are considered, and tariff-specific closing contractual conditions are negotiated.
Transfer pricing
The new tariffs could also have an impact on transfer pricing for multinational groups. Related parties within a multinational group must set their transfer price by reference to similar transactions between unrelated parties. The transfer price, which includes the cost of tariffs to reflect market conditions, determines the allocation of taxable income between related parties. The burden of tariffs generally falls on the importer, whose income would consequently be reduced, unless the parties agree to allocate the cost differently. Take, for example, a transaction between related U.S. and Canadian entities in which the U.S. entity acquires goods subject to tariffs from the Canadian entity: while the U.S. entity (as the importer responsible to pay the tariffs) might argue that such extra costs should be shared between the parties, it is uncertain whether Canadian tax authorities would agree to shift the cost of such tariffs to Canadian entities through a downward transfer pricing adjustment.
Provisions of the America First Trade Policy
Broadly, the Policy directs certain U.S. government agencies to investigate the causes of the U.S.’s “large and persistent annual trade deficits in goods, as well as the economic and national security implications and risks resulting from such deficits.” Following this investigation, the agencies are mandated to recommend appropriate measures, such as a global supplemental tariff or other policies.
Among other things, the Policy directs the agencies to:
- review trade agreements;
- assess the policies and practices of major trading partners with respect to currency exchange rates;
- review policies and regulations regarding the application of antidumping and countervailing duty laws; and
- assess the loss of tariff revenues and import risks resulting from the $800 or less duty-free de minimis exemption.
The government agencies are to make their recommendations in reports due to President Trump by April 1 and April 30, 2025, as the case may be.
The Policy also suggests the creation of a new External Revenue Service to collect tariffs, duties, and other foreign trade-related revenue.
Taking into account the recent developments, it is now unclear how the reports to be issued to the U.S. President will impact the new tariffs announced in the U.S. Order, if they are still in force as of April 1, 2025.
Future of the CUSMA
With respect to the CUSMA, the Policy calls for a public consultation to assess the impact of the free trade agreement on U.S. businesses in preparation for its scheduled July 2026 review. The U.S. Trade Representative is tasked with making recommendations regarding U.S. participation in CUSMA.
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