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March 07, 2025 | 13:44
Canada: Trade Alternatives amid American Tariffs
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Canada: Trade Alternatives amid American TariffsGiven Canada’s enormous exposure to U.S. trade it’s very difficult to offset even bits of the economic hit from tariffs. |
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The Trump Administration levied a 25% tariff on all goods imports from Canada, with 10% on energy and critical minerals, effective March 4. Three days later, most of these were rolled back until April 2. Regardless of the fate of these ‘February’ tariffs, Canada is destined to face others in the months ahead. On March 12, the Administration said it will levy a 25% tariff on all steel and aluminum imports, including those from Canada. And these would be ‘stacked’ on existing tariffs. Then, on April 1, the President will have received the three reports requested on Inauguration Day from the Commerce Department, the Department of the Treasury, and the Office of the U.S. Trade Representative which will likely make cases for even more tariffs. The Administration appears to be leaning to a suite of sectoral and reciprocal tariffs instead of a ‘global supplementary tariff’. Already, ‘national security’ trade investigations have been launched for copper and lumber, likely resulting in formal tariff recommendations. The latter is particularly stinging for Canada, with lumber companies already facing various countervailing duties and the ‘February’ tariffs up in the air. With a review of the CUSMA/USMCA slated for mid-next year, it’s looking like a full-blown re-negotiation is going to be pulled forward well into this year, with these and prospective other U.S. tariffs potentially being used as bargaining chips. The alarmingly escalating risks to Canada-U.S. trade and, thus, Canada’s economic prospects are prompting Canadian governments and businesses to pursue alternatives to U.S. trade, such as with Europe and the Asia-Pacific region, along with boosting internal trade among the provinces and territories. Conveniently, there are free trade agreements covering all three pursuits, which we discuss briefly below. Canadian Free Trade Agreement (CFTA)Unencumbered movement of goods, services, labour, and capital has long been the goal of Canada’s federal, provincial, and territorial governments. While efforts at liberalizing have resulted in past agreements, the CFTA was different in its approach. It came into effect July 1, 2017, and unlike previous deals, it asserted that all flows of goods, services, labour, and capital must be unencumbered unless a jurisdiction claims specific exceptions. More than 45% of the CFTA (based on online pages) is made up of these exceptions. Often-mentioned examples include procurement along with regulations on trucking, professional licensing and the distribution of alcoholic beverages. |
It was assumed that these exceptions would be pared down over time. Indeed, the CFTA’s First Protocol of Amendments (December 2019) made it easier for governments to remove them. In recent years, the concept of ‘mutual recognition’ (in which provinces and territories would recognize each other’s standards) has been gaining traction. A September 2022 study by the Macdonald-Laurier Institute estimated that mutual recognition could boost the economy by $110-to-$200 billion over the long term. Interestingly, the CFTA’s Second Protocol of Amendments (January 2024) increased exceptions as authorities moved to regulate sales and distribution of newly legalized cannabis. The potential for economically debilitating U.S. tariffs appears to have expedited the exceptions-paring process. For example, on February 21, the federal government announced it would remove an additional 20 of its remaining 39 exceptions. Back in July, Ottawa removed (or narrowed) 17 of its original 56 exceptions (most of the 17 were related to procurement). On February 25, Nova Scotia announced it would drop its 19 exceptions for any province or territory that did the same. Ontario said it’s eyeing a similar move. And most provinces have now agreed to remove their barriers to alcohol trade. Interprovincial exports of goods and services (including the territories) amounted to more than $530 billion in 2023 (the latest data), or 18.1% of GDP (Chart 1). Unlike international trade, services are more dominant in interprovincial trade. Exports of goods alone amounted to above $230 billion, or 7.9% of GDP. To put these into context, goods and services exports to the U.S. amounted to $700 billion or 23.9% of GDP, with the goods only part at $593 billion or 20.2%, in 2023. Canada-European Union Comprehensive Economic and Trade Agreement (CETA)Canada and the EU signed the CETA in October 2016. After being approved by the European and Canadian parliaments in February and May 2017, respectively, it came into effect, provisionally, on September 21, 2017. ‘Provisional’ meant that all parts of the agreement came into force except for some investment rules. To come into full effect, each of the 27 member states in the EU must approve the trade deal. According to Carleton University’s CETA Ratification Tracker, 17 countries have since approved the deal. For the record, these include Austria, Croatia, Czechia, Denmark, Estonia, Finland, Germany, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Romania, Slovakia, Spain, and Sweden. The 10 member states that have not ratified CETA include Belgium, Bulgaria, Cyprus, France, Greece, Hungary, Ireland, Italy, Poland, and Slovenia. On a customs basis, Canada’s exports to the EU totalled $34.3 billion in 2024, with imports from the region more than double at $84.6 billion, resulting in a $50.3 billion trade deficit (Chart 2). Among the member states, Canada exports the most to the Netherlands, Germany, and France (Table 1). It imports the most from Germany, Italy, and France, which is also the ranking of the largest trade deficits. The largest surplus is with the Netherlands. And there are trade surpluses with only two other member states, Malta and Latvia. |
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There is a break in the trade data after December 2020. The U.K.’s exit from the EU occurred on January 31, 2020, and during the transition period that ran until the end of the year, U.K. figures continued to be included in EU aggregates. Note that when it was an EU member, the U.K. had ratified CETA. After Brexit, Canada and the U.K. agreed to continue abiding by most of CETA’s rules, with the Canada-United Kingdom Trade Continuity Agreement (Canada-U.K. TCA) coming into force on April 1, 2021. In 2024, Canada exported $28.3 billion to the U.K. and imported $9.5 billion from it for a trade surplus of $18.8 billion, on a customs basis (Chart 3). |
Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)In March 2018, the CPTPP was signed by Canada and the other 10 original members. It came in force for Canada after it and at least five other countries ratified the deal. This occurred on December 30, 2018, with the other first approvers being Australia, Japan, Mexico, New Zealand, and Singapore. The other five original members approved the trade deal as follows: Vietnam (January 2019), Peru (September 2021), Malaysia (November 2022), Chile (February 2023), and Brunei (July 2023). Canada already had a free trade agreement with Mexico, along with Chile and Peru. In December 2024, the U.K. officially joined the CPTPP, but Canada has yet to ratify this. Of course, Canada already has a separate free trade agreement with the U.K. Canada’s exports to CPTPP members, but not including the U.K., totalled $34 billion in 2024 (Table 2). Imports from the group hit the $100 billion mark, resulting in a $66 billion trade deficit. Among the members, Canada exports the most to Japan, Mexico, and Australia. It imports the most from Mexico, Vietnam, and Japan, which is also the ranking of the largest trade deficits. Canada sports a relatively small trade surplus with Singapore, Australia, and Brunei. |
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Short run pain, long term gainGoods exports to the European and Asia-Pacific regions under the auspices of CETA, the Canada-U.K. TCA, and CPTTP totalled almost $100 billion in 2024. But this still pales in comparison to the $591 billion worth of goods exports to the U.S. last year. On top of the relative magnitude, the hit to U.S.-bound exports from tariffs would be almost immediate, while it would take time to accelerate the growth in non-U.S.-bound exports. Meanwhile, the dismantling of interprovincial trade barriers has already begun in earnest, but it’s unclear how quickly the sizeable benefits can accrue. On balance, given Canada’s enormous exposure to U.S. trade, pursuing alternatives is unlikely to supply much meaningful short-run relief for the negative economic consequences of U.S. tariffs. But, invoking the adage about not letting a crisis, or trade war, go to waste, the longer-term goals of greater international trade diversification and internal economic efficiency are sufficiently compelling to begin and keep acting now. |