It’s become a common refrain when Canadian politicians are asked about retaliatory measures or negotiations in the ongoing trade war: 85 per cent of Canada’s trade with the U.S. is “tariff-free.”
Prime Minister Mark Carney said as much on Tuesday and again on Friday, when pressed for information about his next salvo in the dispute with the U.S. after President Donald Trump imposed 35 per cent tariffs on Canadian goods that aren’t compliant with the Canada-U.S.-Mexico Agreement (CUSMA).
“We’re in a situation right now where 85 per cent of our trade with the United States is tariff-free,” Carney told reporters at a news conference in Trenton, Ont., on Friday.
But “85 per cent” only roughly describes Canada’s exports to the U.S. which have the potential to qualify for exemptions under CUSMA — not the proportion of exports that is actually spared from Trump’s tariffs.
Citing that percentage alone understates the costs Canadian businesses are facing as Trump imposes more tariffs, argues Tyler Meredith, founding partner of the policy-based public affairs firm Meredith Boessenkool & Phillips.
U.S. Census Bureau data shows that last year, only about 38 per cent of U.S. imports from Canada were traded under CUSMA provisions.
Data on how many Canadian companies are CUSMA-compliant is not readily available. An analysis of the effect of tariffs by the Yale Budget Lab published on Thursday assumed that 50 per cent of Canada’s exports to the U.S. are now certified.
Meredith says applying for CUSMA exemptions can be a daunting process for small businesses. But he said that faced with higher tariffs, they may be considering either taking on the costs of certification — or looking at markets beyond the U.S.
“We are one of the most trade-dependent on the United States of any developed country,” said Meredith, a former economic adviser to the Trudeau government.
“If the consequence is that trade overall falls, as we are seeing now in the data, that’s going to be a cost that we disproportionately bear relative to other countries.”
Prior to Trump’s tariffs, Canadian exporters could trade with the U.S. under Most Favoured Nation (MFN) status. That allowed them to trade with very low tariffs — or none at all — without registering for preferential treatment under CUSMA.
All World Trade Organization (WTO) members, such as Canada, have MFN status when trading with each other.
How do Canadian goods get preferential treatment?
Products are certified CUSMA-compliant if they meet the agreement’s rules of origin. Their eligibility is determined on a case-by-case basis since they must meet product-specific requirements.
A certain amount of the product needs to be made in Canada with Canadian inputs to qualify for an exemption.
Steve Mallia, owner of Starfield Optics, a Toronto-based manufacturer of telescopes and accessories, said registering his small business for CUSMA benefits “wasn’t a priority” until Trump began threatening Canada’s sovereignty and economy in January.
“We saw our orders dry up literally overnight so we knew we had to make a change,” said Mallia, who runs the business with his wife Natalie.
His only other employees are a part-time bookkeeper and a chartered accountant, he said.
In the past eight months, Mallia has been researching the process for claiming preferential treatment under CUSMA — without the same legal resources as a large corporation.
The experience has made him feel that “the little guy” is being forgotten by the Canadian government during the trade war, he said.
“This is the part that takes up a lot of time and costs money,” Mallia said.
“The last thing I want is to ship something and then, you know, customs gets ahold of [the product] and they go, ‘You know what? He didn’t use the right colour ink.'”
Since March, more Canadian exporters reported that they would absorb tariff costs or raise prices than apply for relief through Canada’s remission program, according to a report published in July by the Canadian Federation of Independent Business (CFIB). In exceptional circumstances, the federal program grants companies relief from the payment of tariffs applied as of March 4 on products from the U.S. or issues refunds for tariffs already paid.
The federation, which advocates for the interests of small businesses, surveyed its members about the actions they have taken to mitigate risks during the trade war.
Why not fire back with more counter-tariffs?
Carney was asked on Tuesday whether he would retaliate against the U.S. with a new tariff rate, days after failing to reach a deal by the Aug. 1 deadline.
“We’ve always said we will apply tariffs where they had the maximum impact on the United States and minimum impact in Canada,” he said.
Unlike most countries subjected to Trump’s tariffs, Canada has a comprehensive trade agreement with the United States in CUSMA.
More than 60 countries were hit with U.S. President Donald Trump’s latest wave of tariffs on Thursday. Despite global backlash and signs his own economy is taking a hit, Trump continues to promise even steeper tariffs ahead.
The country is also one of few to have retaliated against the U.S. in response to Trump’s economic disruption, a step Canada took before the U.S. targeted virtually all of its global trade.
Wednesday, Trump threatened to hit goods imported from India with a total of 50 per cent tariffs, citing New Delhi’s continued purchases of Russian oil.
And Trump imposed tariffs on dozens of countries’ exports last week through an executive order. Tariffs now vary between 10 per cent for the U.K. and 41 per cent on war-torn Syria. That same order brought the total tariff rate of Brazil — Latin America’s largest economy — to a staggering 50 per cent.
Canada remains the second-largest trading partner of the United States and its top export market, which is why Carney must navigate displaying strength by restricting U.S. consumers’ access to Canadian goods while preserving a relationship with the country.
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