Canada-U.S. Trade War? Canada Retaliates with New Tariffs on U.S. Goods

June 29, 2018 | Imran Ahmad, Katherine Barbacki

On June 29, 2018, the Canadian Government announced that it would implement countermeasures in response to what it called “unjustified tariffs on Canadian steel and aluminum products.” These countermeasures are in direct response to the United States imposing tariffs on Canadian aluminum and steel goods being imported into the United States, under the pretext that they pose national security concerns. In the short term, Canadian importers and exporters will need to carefully navigate an increasingly difficult trade regime between Canada and the United States.

Background

The tariffs imposed by the United States on certain Canadian aluminum and steel goods were the result of President Trump instructing the U.S. Department of Commerce, pursuant to Section 232 of the Trade Expansion Act of 1962, to investigate whether steel imports pose a threat to U.S. national security. The investigation concluded that the level of importation of these products was weakening the internal economy of the U.S. and threatening to impair national security.

Accordingly, effective June 1, 2018, the temporary exemption from U.S. tariffs on steel and aluminum that Canada, Mexico and the European Union benefitted from, expired on the alleged basis that it posed a threat to U.S. national security. The tariffs — 10% on aluminum and 25% on steel — are  imposed on Canadian steel and aluminum products being imported into the United States.

The Canadian government was swift to respond with a set of proposed countermeasures. The Minister of Finance invited stakeholders to submit their views on the proposed Canadian countermeasures by June 15. Further, the House of Commons Standing Committee subsequently confirmed overwhelming support for the proposed countermeasures by representatives of various industries, which the Department of Finance announced would come into effect on July 1, 2018.

Canadian Response

As of July 1, 2018, Canadian tariffs on C$16 billion-worth (a dollar-for-dollar matching of the U.S. tariffs imposed on Canadian goods on June 1) of steel, aluminum, and other product imported from the United States will apply “until the U.S. eliminates trade-restrictive measures against Canadian steel and aluminum products”- a pointed retaliatory attack in this growing trade war. It is noteworthy that the countermeasures will not apply to U.S. goods that are in transit to Canada on the day on which these countermeasures came into force.

Apart from steel and aluminum products, which will be subject to tariffs of 25% and 10%, respectively, a broad spectrum of U.S. goods (ranging from food products, household items, and construction materials, to motorboats, lawn mowers, and ball point pens) will be subject to a 10% tariff. Many of these goods are produced in home states of prominent members of Congress or states who strongly support the trend in U.S. protectionism. A complete list of goods that a subject to Canadian tariffs can be viewed here.

Members of the House of Commons have been unequivocal in their response to the U.S. measures, which demonstrate a total disregard for the North American Free Trade Agreement and World Trade Organization rules. The countermeasures are a welcome response, given that the Canadian aluminum and steel producers and workers are under direct threat (particularly in Ontario, Quebec, and Saskatchewan where the majority of the market is located), and are negatively affected every day the U.S. tariffs continue to be levied.

Recognizing that the U.S. tariffs will have a negative impact on Canadian businesses, the Canadian government will make available up to $2 billion to protect the interests of Canadian workers and businesses in the steel, aluminum and manufacturing industries. These include:

  • Extending the duration of work-sharing agreements by 38 additional weeks under the Employment Insurance program to help employers retain their skilled workforce and avoid layoffs during challenging times.
  • Increasing funding to the provinces and territories to increase the capacity of the job and training programs available to workers affected by the U.S. measures.
  • Providing liquidity support to affected businesses.
  • Offering up to $250 million in new support through the Strategic Innovation Fund to help bolster the competitiveness of Canadian manufacturers and better integrate the Canadian supply chain of steel and aluminum.
  • Investing $50 million over five years to help Canadian companies diversify their exports to take advantage of new trade agreements, such as the Canada-European Union Comprehensive Economic Trade Agreement (CETA) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Working in partnership with business associations, this will include new “export readiness” grants.

The proposed measures are designed to offer support to Canadian businesses and workers affected by U.S. tariffs by leveraging existing structures (such as the Business Development Bank of Canada, the Export Development Bank of Canada and the Strategic Innovation Fund) and international trade treaties (such as CETA and CPTPP) and committing to additional support, as needed.

Recommended Next Steps

It is imperative that Canadian importers and exporters immediately review their supply chain and determine what the exact impact will be on their operations, especially given that the final version of the countermeasures are slightly different than those that were initially announced by the Canadian government.

Businesses should also develop or update their short and near-term strategies on how to deal with these new tariffs from an import and export perspective, since the Trump Administration  does not appear willing to change its position – at least not prior to the mid-term U.S. elections scheduled for November 2018.

Businesses should also consider how best to avail themselves of the support offered by the Canadian government, especially in light of the $2 billion which was earmarked to this effect.

We continue to monitor developments in this area very closely and will be providing regular updates to ensure that Canadian businesses can respond quickly and effectively.

The authors would like to thank summer student Elissa Brock for her assistance in preparing this post.

Disclaimer

This publication is provided as an information service and may include items reported from other sources. We do not warrant its accuracy. This information is not meant as legal opinion or advice.

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