Canada Responds to U.S. Tariffs – What Businesses Need to Know
This is the second post in a series of client alerts regarding trade actions taken by the U.S. and Canada in the second term of President Donald Trump. Our original client alert in this series, A (very temporary) reprieve – what businesses should do as the new Trump administration’s threat of tariffs continues to loom large, was published on January 22, 2025.
UPDATE Feb 3 at 4:45pm: After a call between President Trump and Prime Minister Trudeau, Prime Minister Trudeau announced that the tariffs and countermeasures have been suspended for at least 30 days.
February 1, 2025, President Trump signed an executive order (the “Executive Order”) that, in blatant contravention of the Canada-United States-Mexico Agreement signed during his first term, applies tariffs of 25% on all goods originating in Canada and imported into the U.S. except “energy and energy resources”, which will instead be subject to a 10% tariff. These tariffs will go into effect at 12:01am on Tuesday, February 4. President Trump also signed a second Executive Order that placed a 25% tariff on all goods originating from Mexico, including all energy and energy resources, however the implementation of those tariffs have been delayed by at least a month. As discussed in our prior client alert, these measures follow the announcement by President Trump on inauguration day that tariffs would be imposed on Canada and Mexico on February 1st.
The Canadian government has proposed retaliatory measures in response to these tariffs that will be implemented in two phases to both respond immediately and allow Canadian businesses some time to adjust their supply chains to minimize the impact on Canadian businesses and consumers. The first phase (“Phase 1”) will target goods accounting for approximately $30 billion in annual volume of imports from the U.S., to which 25% tariffs will be applied starting on Tuesday February 4. It will be followed by a second phase (“Phase 2”) that will target goods accounting for approximately $125 billion in annual volume of imports from the U.S. In addition to these measures announced by the federal government, provincial governments across Canada have also responded to the U.S. tariffs, in some cases introducing their own retaliatory measures.
Below we provide an overview of the U.S. tariffs as well as the Canadian federal and provincial responses. We note that this situation is extremely fluid – the information presented herein is accurate as of February 2, 2025.
1. U.S. Tariffs
(a) Executive Order
The Executive Order first characterizes alleged "illegal migration" and flow of illicit drugs, such as fentanyl, from Canada (as well as Mexico and China) as being a national emergency under the National Emergencies Act and International Emergency Economic Powers Act. We note that, according to this Congressional Research Service Study, prior to the Executive Order no President has used the International Emergency Economic Powers Act to impose tariffs on imported goods, and the use of this statute in this manner may be open to legal challenge.
The Executive Order proceeds to impose a 25% tariff on all goods originating in Canada (except energy and energy resources, as noted below), alleging that this is a measure intended to use the United States’ economic leverage to compel Canada to address “illegal migration” and the drug crisis. Similar tariffs have been imposed on Mexico, while China faces only an additional 10% tariff on its goods.
It is proposed that a lower tariff rate of 10% will be applied to energy and energy resources from Canada. For the definition of energy and energy resources, the Executive Order refers to the prior executive order President Trump signed declaring a national energy emergency. This executive order defined energy and energy resources to include crude oil, natural gas, lease condensates, natural gas liquids, refined petroleum products, uranium, coal, biofuels, geothermal heat, hydropower, and critical minerals.
Importantly, the Executive Order also removes the applicability of the de minimis exemption for goods being imported into the U.S. from Canada. This exemption had permitted goods valued at $800 or less to avoid duties and taxes. Further, these shipments are generally subject to less scrutiny when they traverse the border, which may pose issues, for example, in tracing and stopping the flow of illicit substances into the U.S., an issue that is raised in the Executive Order.
The Executive Order will apply to all "goods entered for consumption, or withdrawn from warehouse for consumption, on or after 12:01 a.m. eastern time on February 4, 2025" but provides a small exemption for all such goods that were "loaded onto a vessel at the port of loading or in transit on the final mode of transport prior to entry into the United States before 12:01 a.m. eastern time on February 1, 2025".
The Executive Order also states that, if Canada should retaliate against the United States in response to these actions such as through the imposition of import duties on United States exports to Canada (or other similar measures), as is often done in response to the unilateral imposition of tariffs by a state, the U.S. tariffs may be increased or expanded.
(b) Cited Rationale for Tariffs
A White House briefing note justifying the tariffs on Canada cited the United States' trade deficit with Canada, as well the United States' spending on territorial defense via the North American Aerospace Defense Command, as reasons for the tariffs, with "fentanyl/border" closing out the list.
Border security has often been cited as the primary driver of tariff threats. In response to these ostensible concerns, the Government of Canada announced a $1.3 billion border package that would allow more personnel and enhanced technology to increase border security. Despite repeated references to the flow of fentanyl from Canadian sources, figures from U.S. Customs and Border Protection show the agency seized just 19.5 kilograms of fentanyl at the northern border last year, compared to the 9,570 kilograms seized at the southwestern one. The federal government nonetheless launched a new regulatory process to increase the control and oversight of the precursor chemicals used to produce synthetic opioids like fentanyl.
It is unclear whether concerns about the alleged flow of drugs and migrants from Canada to the U.S. constitute the real reason for the imposition of these tariffs. In a post directly from President Trump, in which he also claims that the United States pays billions of dollars to "subsidize Canada", he focuses on a hypothetical annexation of Canada's as the 51st state, rather than the resolution of the fentanyl crisis, as a means of bringing an end to the tariffs. This was followed by the aforementioned briefing note setting out the rationale for the tariffs. Given that the vast majority of the United States trade deficit with Canada is caused by the import of energy and energy resources, and given that these form a vital input for the US economy, it is difficult to envision a clear path forward to address this matter, barring a significant change in approach by President Trump.
2. Canada’s Federal Response
(a) Phase 1 and Phase 2
In response to the Executive Order, Canada announced a two-phase implementation of reciprocal measures.
As noted above, Phase 1 applies a 25% tariff to goods that account for approximately $30 billion in annual imports from the U.S. effective February 4, 2025. This measure, as set out in the order-in-council implementing Phase 1 (the “Order in Council”), is being implemented as a surtax pursuant to subsection 53(2) of the Customs Tariff, which allows the government to impose surtaxes (among other measures) “for the purpose of enforcing Canada’s rights under a trade agreement in relation to a country or of responding to acts, policies or practices of the government of a country that adversely affect, or lead directly or indirectly to adverse effects on, trade in goods or services of Canada”.
The Order in Council identifies 1,256 tariff codes on which the surtax will be imposed, and the press release announcing Canada’s reciprocal measures (the “Press Release”) identifies these tariff lines as including “orange juice, peanut butter, wine, spirits, beer, coffee, appliances, apparel, footwear, motorcycles, cosmetics, and pulp and paper”. However, the actual list of tariff codes indicates that Phase 1 is significantly broader in scope, covering a wide swath of products from a large number of different industries, including poultry, dairy, grains, cocoa products, plastic products, precious gems and minerals, furniture and tools. Details on all of the tariff codes for these products (with descriptions) are available on the Department of Finance’s Backgrounder. The Order in Council also notes that the surtax will not apply to goods that are in transit to Canada on the day that the Order in Council comes into force (likely February 4th, though it is possible under the Order in Council for the implementation of Phase 1 to be delayed)
With regards to Phase 2, the Press Release notes that these will target U.S. goods that account for approximately $125 billion in annual imports into Canada. A full list of items to be targeted has not yet been released, but the Press Release notes that they will include “passenger vehicles and trucks, including electric vehicles, steel and aluminum products, certain fruits and vegetables, aerospace products, beef, pork, dairy, trucks and buses, recreational vehicles, and recreational boats”. Once the full list is released, there will be a 21 day consultation period for the public to comment on the list.
(b) Availability of Tariff Relief
The Press Release also notes that a remission process will be established to consider requests for relief from the Phase 1 and Phase 2 tariffs in exceptional circumstances. These remissions could allow for importers of goods subject to Phase 1 or Phase 2 tariffs (or other future tariffs) to be given relief from the payment of tariffs or refund of tariffs where already paid. The Department of Finance has released an overview of the process to seek remissions (the “Remissions Overview”). The Remissions Overview notes that:
“[T]he Government will consider requests for remission 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.”
The Remissions Overview also notes that remissions will only be considered where they are required to “address exceptional and compelling circumstances that, from a public policy perspective, are found to outweigh the primary rationale behind the application of the tariffs.”
The Remissions Overview provides a template which identifies specific questions that should be addressed in any remission application. These questions request significant information on the company, the relevant goods that are subject to surtaxes, whether there are Canadian alternatives to sourcing these goods and how the goods are used by the company.
We note that, in our experience with previous remission programs, remissions are only provided for in exceptional circumstances. The remission applications also take a significant time to review, in part because Finance consults with relevant Canadian industry stakeholders for their views on the remission. While remission may ultimately be helpful to certain Canadian businesses, it will not “undo” the effects of tariffs or provide a comprehensive fix. Generally, the simple fact that a Canadian or third country alternative may be significantly (but not prohibitively) more expensive is not a justification for granting a remission.
3. Provincial Responses
Provincial governments have also taken action in response to the Executive Order. The table below summarizes the actions that have been announced thus far by the provinces.
Response by Province
Province | Measure/Action Taken as of February 2 |
As a first step in response to the tariffs, Premier Eby announced immediate measures, including:
| |
No specific measures announced yet – Premier Danielle Smith posted to social media to say the province “will do everything in its power” to convince the U.S. to reverse the “mutually destructive policy.” | |
No specific announcement yet – Premier Scott Moe has stated that he's supportive of targeted retaliatory measures in response to the tariffs, but that they shouldn't be seen as long-term solutions. | |
Manitoba Liquor and Lotteries Corporation will stop selling products imported from the United States. More measures forthcoming over the coming days. | |
Ontario Premier Doug Ford has ordered the LCBO to remove American products from its shelves and to remove American products from its catalogue so other Ontario-based restaurants and retailers cannot order or restock U.S. products. Ontario has also announced that U.S. companies will be barred from government procurement, and Premier Doug Ford has further indicated that the contract with Starlink (owned by Elon Musk, a key figure in the Trump administration) will be terminated. | |
Quebec government announced that it will ask the Société des alcools du Québec (SAQ) to remove all American products from its shelves by Tuesday. The request applies to all alcoholic beverages sold in stores and online. The government will also direct SAQ to stop supplying American alcoholic beverages to grocery stores, agencies, bars and restaurants. | |
No specific measures have been announced yet – Premier Susan Holt has stated they will release a full response plan soon. | |
Premier Dennis King stated that he has met with his ministers and is working on a strong, coordinated response. It has also been reported that the Liquor Control Commission of PEI will be taking all American products off of its shelves. | |
Nova Scotia Liquor Corporation will be directed to remove all U.S. alcohol from store shelves effective this Tuesday. Nova Scotia will also be limiting procurement for American businesses (cancelling contracts and rejecting new ones outright), will also double tolls for US commercial drivers on the Cobequid Pass. | |
Newfoundland and Labrador Premier Andrew Furey said in a statement that U.S. products will be pulled from liquor stores across the province by Tuesday. |
***
As noted above, this situation is extremely fluid and we expect new information on tariffs and countermeasures to come out of both Canada and the U.S. on a daily basis. As we discussed in our last client alert, there are actions that Canadian businesses can take to mitigate the damage caused by these tariffs. McCarthy Tétrault’s International Trade and Investment Law Group has advised, and continues to advise, a large number of clients in a variety of industries on how to navigate the uncertainty caused by the U.S. tariffs and the Canadian countermeasures. We will continue to monitor and report on any further developments in this space and expect the next client alert will provide more details on how these measures can impact supply chains and what strategies could be used to address these impacts.