A (very temporary) reprieve – what businesses should do as the new Trump administration’s threat of tariffs continues to loom large
On January 20, 2025, President Trump was inaugurated and began his second term as U.S. President. Although he had previously promised to immediately enact 25% tariffs on all imports from Canada on the day of his inauguration, this did not come to pass. Instead, President Trump issued an executive order (the “Executive Order”) which launched a series of initiatives to address perceived issues in the U.S.’s trading relationship with other countries. Later that day, he indicated that he was continuing to consider applying tariffs of 25% to all goods from Canada and Mexico as of February 1, 2025.
In this client alert, we provide an overview of the Executive Order as well as President Trump’s continued threat of 25% tariffs on Canadian goods and Canada’s possible response. We then discuss the actions businesses should be considering to address any trade actions taken against Canadian exports to the United States and the retaliatory measures that will be imposed by Canada.
The Executive Order
The Executive Order, titled “America First Trade Policy”, is a memorandum that covers a large number of initiatives related to foreign policy and trade. Several of the initiatives announced by the Executive Order may have significant impacts on Canadian businesses, including:
- an investigation into the United States’ “large and persistent annual trade deficits in goods, as well as the economic and national security implications and risks resulting from such deficits, and recommend appropriate measures, such as a global supplemental tariff or other policies, to remedy such deficits”;
- an investigation into “the feasibility of establishing and recommend the best methods for designing, building, and implementing an External Revenue Service (ERS) to collect tariffs, duties, and other foreign trade-related revenues”;
- a review to identify “any unfair trade practices by other countries” and recommend appropriate actions to remedy such practices;
- the launch of public consultations with respect of the review of the Canada-U.S.-Mexico agreement, which is scheduled for July 2026;
- an assessment into the “loss of tariff revenues and the risks from importing counterfeit products and contraband drugs, e.g., fentanyl” that results from the existing de minimis exemption from duties, where imports to the U.S. valued at less than $800 are not subject to duties;
- “a full economic and security review of the United States’ industrial and manufacturing base to assess whether it is necessary to initiate investigations to adjust imports that threaten the national security of the United States”;
- a review and assessment of “the effectiveness of the exclusions, exemptions, and other import adjustment measures on steel and aluminum” in responding to the threats to national security;
- a review of the U.S. export control regime with a view to enhancing the United States’ technological edge and eliminating loopholes that “enable the transfer of strategic goods, software, services, and technology to countries to strategic rivals and their proxies”; and
- an assessment of “unlawful migration and fentanyl flows from Canada, Mexico, [China], and any other relevant jurisdictions” and recommendations as to appropriate measures, including trade measures, to resolve these issues.
The Executive Order requires that reports on these investigations and assessments be provided to President Trump on April 1, 2025.
Continued threat of tariffs and Canada’s possible response
While signing various executive orders in the Oval Office on January 20, President Trump also stated the following:
“We’re thinking in terms of 25 per cent on Mexico and Canada because they’re allowing vast numbers of people, Canada is a very bad abuser also, vast numbers of people to come in and fentanyl to come in”
In response to a follow-up question regarding when these measures would be enacted, President Trump responded “I think we’ll do it February 1st”.
Given the impromptu nature of these comments and their apparent misalignment with the initiatives set out in the Executive Order, it is unclear how well-developed this potential tariff may be.
In response to the comments from President Trump, Prime Minister Trudeau stated that he supported “the principle of dollar-for-dollar matching tariffs”. These comments follow reports which indicated that, had President Trump pursued a 25% tariff on Canadian goods on his first day in office, the Canadian response would have included tariffs on $37 billion in U.S. goods as an initial step, and the possibility of announcing consultations regarding the imposition of tariffs on an addition $110 billion in U.S. goods.
There has been little indication from the Canadian government as to what goods might be targeted by these reciprocal tariffs. However, many of the products that were targeted in Canada’s retaliation to tariffs on steel and aluminum imposed by President Trump in his first administration could be included. As discussed in our client alert from that time, Canada’s retaliation targeted a wide array of goods, including Florida orange juice and washing machines and included goods that did not originate from the U.S. but were passing through the U.S. on the way to Canada. Canada may also target goods that are from politically sensitive areas, as was the case in 2020 when Canada’s response to the U.S. surtax on certain aluminum goods targeted goods that were sourced primarily from states like Michigan, Wisconsin and Pennsylvania in the lead up to the 2020 U.S. election. Unlike in the past, Canadian officials have also discussed the possibility that export taxes and restrictions may be employed on goods being exported from Canada that the U.S. may be reliant on, including on energy products.
The provincial response
The majority of provinces have also already signaled a willingness to implement — or plans for implementing — a retaliatory response. On January 15, 2020 the Council of the Federation, comprised of Canada’s provincial and territorial premiers, issued a joint statement with the Government of Canada noting that the First Ministers were committed to continue united advocacy efforts to emphasize the negative impacts of and prevent the implementation of U.S. tariffs but emphasizing they were “committed to continuing to work together on a full range of measures to ensure a robust response to possible U.S. tariffs, including supports for sectors, businesses, and individuals.” The Government of Alberta did not approve the joint statement. Premier Danielle Smith has repeatedly stated that she opposes the potential imposition of export restrictions or tariffs on oil and gas from Alberta.
Ontario Premier Doug Ford has been an outspoken advocate for strong retaliatory measures. He has stated that, should the United States implement the threatened tariffs, the government of Ontario will direct the Liquor Control Board of Ontario (the province’s liquor retailer) to remove all U.S. products from its shelves, a move that may be replicated by other provinces and may cause supply chain disruptions for American spirits manufacturers selling into the Canadian market. It remains to be seen if such refusal to distribute would cover only alcohol that is produced in the United States, or if it would include any alcohol produced by an entity owned and controlled by an American parent.
Premier Ford has indicated in the past that he is open to exploring restrictions on the export of Ontario electricity to the United States. Quebec premier Francois Legault has warned that tariffs on electricity and aluminum products, both of which exported in significant volume from Quebec and relied upon by American businesses, will injure the American economy and has indicated his readiness to support retaliatory tariffs.
What businesses should do in light of the uncertainty
Given the significant near term uncertainty in the Canadian-U.S. trading relationship, it can be difficult for businesses that rely on the U.S. and Canadian markets for both sourcing and sales to determine what actions they should take. In general, it would be prudent for Canadian businesses to:
- conduct a supply chain review to examine the scope of your business’s exposure to cross-border trade, in terms of direct and indirect imports and exports in the North American market;
- identify goods that are at a higher risk of being targeted by the United States or included in any Canadian retaliatory measures, including those that can be readily supplied by domestic sources in the market of the country imposing the tariff or retaliatory measure or were targeted by Canada or the U.S. by tariffs or retaliatory measures in the past, as described above;
- if you are an importer, carefully review the key elements that drive the assessment of tariffs on your products, including tariff classification (which could be a factor in determining whether your product is within scope of any tariff or retaliatory measure) as well as the value for duty and origin of the goods being imported;
- determine whether opportunities may exist to engage in final assembly of high value goods in the target market based upon components in the other, rather than shipment of the finished good, in order to minimize the value of goods that are subject to duties;
- review your contractual arrangements with partners with whom you engage in cross-border trade of goods to determine which contracting party may be responsible for the additional costs caused by these tariffs, and what possibility there is for contract termination or renegotiation based on your existing terms;
- consider engaging in proactive negotiations with key partners to address the potential risk of tariffs being applied to ensure there is some clarity as to how these tariffs would be addressed;
- consider any remission or duty drawback mechanisms that may be available to reduce or eliminate the impact of the tariffs or retaliatory measures - for example, in the case of Canadian retaliatory measures imposed in 2018, Canada’s Department of Finance implemented a process by which businesses could seek the remission of duties that were paid in cases where, for example, there was short supply domestically of the relevant product;
- work with trade and tax advisors to consider how your supply chains can be structured to minimize the impact of tariffs; and
- over the long term, undertake a strategic exercise to diversify your trading base, which should include an examination of how your business could leverage Canada’s trade and investment agreements with other countries, such as through the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) or the Canada-European Union Comprehensive Economic and Trade Agreement (CETA).
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 second Trump Presidency and these threats of tariffs. We will continue to monitor and report on any further developments in this space.