Canada to drop many counter-tariffs in olive branch to Trump

[OTTAWA] Canada will remove its retaliatory tariffs on a long list of US products that comply with the existing North American trade deal, seeking to lower tensions with the White House.

Prime Minister Mark Carney announced the decision on Friday after a meeting with his cabinet, confirming an earlier report from Bloomberg News.

The government is changing its tariff policy to align more closely with US measures. That means a broad range of US-made consumer products will no longer face a 25 per cent tariff when imported into Canada, as at Sep 1, as long as they are shipped in compliance with the provisions of the US-Mexico-Canada Agreement (USMCA).

But Canada is keeping 25 per cent import taxes on US steel and aluminium, as well as tariffs on US cars and trucks. US President Donald Trump has imposed levies on all of those sectors.

Carney indicated the move is meant to prepare the ground for the review of USMCA, which is expected to begin in the coming months.

It’s a major policy shift for Canada, which was one of the only countries to swiftly retaliate against US protectionism, something that irritated Trump and Commerce Secretary Howard Lutnick. It comes a day after Carney and Trump spoke by phone, their first publicly acknowledged conversation in weeks.

Trump welcomed Carney’s move and said that the two leaders plan to speak again soon.

“We are working on something, we want to be very good to Canada,” Trump told reporters in the White House, adding that he likes Carney “a lot”.

Lutnick, who is one of the administration’s trade negotiators, told the Canadians that the counter-tariffs were a barrier to full talks and that it left them in a poor negotiating position, a source familiar with the discussions said, speaking on condition of anonymity. Lutnick pressed the Canadians to drop the tariffs to clear the way for negotiations. The US gave nothing in return, the source said.

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The Canadian dollar extended gains on the Bloomberg News report of the prime minister’s decision and was trading at C$1.382 per US dollar as of 2.20 pm in Toronto.

Consumer tariffs

Canada’s first round of counter-tariffs in early March placed a 25 per cent tax on about C$30 billion (S$28 billion) of US goods that included orange juice, wine, clothing, motorcycles, the list was hundreds of pages long. Those will now be lifted, as long as the imports comply with USMCA.

The second round came in response to Trump’s decision to put tariffs on foreign steel and aluminium. Then-Prime Minister Justin Trudeau opted for tariffs against US metals products, including tools, as well as other consumer goods such as sports equipment, hitting an additional C$30 billion in annual US shipments. Those were implemented right before Carney took over.

“Canada and the United States have re-established free trade for the vast majority of our goods,” Carney said at a news conference in Ottawa. “Canada will retain our tariffs on steel, aluminium and autos as we work intensively with the US to resolve the issues there.”

The move should reduce inflationary pressures, and “further opens the door for the Bank of Canada to resume its rate-cutting cycle”, Royce Mendes, head of macro strategy at Desjardins, said.

Carney campaigned and won a national election by promising an aggressive approach that would inflict “maximum pain” on the US, and in the midst of that election, he retaliated against Trump’s automotive tariffs with similar levies on US-manufactured vehicles. But as head of the government, he has taken a more sceptical view of counter-tariffs than Trudeau did.

In April, his finance minister carved out a series of exemptions, allowing businesses to bring in certain items from the US tariff-free, and announced that for automakers such as General Motors and Stellantis would be able to apply for tariff relief if they keep their manufacturing and investment in Canada.

When the White House doubled tariffs on steel and aluminium to 50 per cent, Carney threatened to retaliate, but never did. Canada also did not change its counter-tariffs when the White House increased its so-called fentanyl tariffs on Canada to 35 per cent from 25 per cent on Aug 1.

At that time, the White House also maintained a USMCA exemption that allows a majority of Canadian exports to the US to escape tariffs. Economists at the Bank of Nova Scotia have estimated that the effective US tariff rate on Canadian goods is less than 7 per cent.

Carney said the average tariff rate on Canadian goods is a little more than 5.5 per cent. “It’s not what we used to have,” he said. “Nobody has a deal with the United States that they used to have.”

Counter-tariffs have not caused significant inflation problems in Canada. Statistics Canada said this week the consumer price index rose 1.7 per cent in July from a year earlier, below the Bank of Canada’s 2 per cent inflation target.

“The retaliatory tariffs haven’t added much to Canadian inflation, or deterred the Trump administration from imposing tariffs on Canada, but we could benefit by dropping them if that helps win some concessions on US tariffs on Canada,” Avery Shenfeld, chief economist with Canadian Imperial Bank of Commerce, said.

The economic stakes of a trade deal with the US are higher for Canada than for most other countries. Last year, three-quarters of Canada’s merchandise exports went to the US, led by oil and gas. Exports represent about a third of gross domestic product.

At the same time, the northern nation is a large market for US exporters, about US$440 billion in US goods and services last year, more than any other country. Excluding energy products, the US has a trade surplus with Canada. BLOOMBERG