President Trump issued a memorandum on January 20th, directing the US government to review trade policies and evaluate trade relations with China, Canada and Mexico. The executive memo instructs federal agencies to examine two key issues: the trade deficits the US has with several countries, including Canada, Mexico, and China, and the currency policies of other countries.
President Trump has a very strong belief that trade imbalances function as subsidies. The threat of tariffs is intended to bring the other countries to the negotiating table, with the possibility of imposing them if agreements on outstanding issues cannot be reached.
This announcement should not be viewed as a reprieve but as the opening of negotiations. This study and the threat of tariffs are likely being used as a bargaining tool to influence the renegotiation of the United States-Mexico-Canada Agreement (USMCA), scheduled for 2026, and to address other outstanding issues, such as border security and defence spending. Considering the list of outstanding trade irritants identified by the US, we should expect the following issues to be raised.
Digital Service Tax Act. In June 2024, the Canadian government enacted a 3 per cent digital services tax (DST) on certain revenues of large digital services providers, including those from online marketplaces, online advertising, social media platforms, and the sale or licensing of user data. The DST applies retroactive to January 1, 2022. In August 2024, the United States requested USMCA dispute settlement consultations with Canada regarding its DST.
Online News Act. Effective December 2023, the Online News Act enables Canadian news outlets to collectively negotiate payments with digital platforms (e.g., Google, Meta) for the use of their news content.
Online Streaming Act. The Canadian Radio-Television and Telecommunications Commission (CRTC) requires television and radio companies operating in Canada to fund and broadcast a specified percentage of Canadian content. Enacted in April 2023, the Online Streaming Act extends CRTC’s regulatory authority to include entities that broadcast through social media platforms (e.g., Facebook) and online streaming services (e.g., Netflix, YouTube). The CRTC plans to implement a new regulatory framework for Canadian content requirements in late 2025.
Automotive. USMCA has tightened content requirements for duty-free automotive trade in North America. These “rules of origin” stipulate that a certain percentage of a vehicle’s parts must come from within North America for it to be eligible for tariff-free trade between the three countries under the agreement. Mexico and Canada have interpreted these rules more flexibly than the US. A USMCA panel ruled in favour of Mexico and Canada, but did not determine how the issue should be resolved.
Critical Minerals. The US has initiated the Minerals Security Partnership with Canada and other countries to facilitate coordination between the public and private sectors on critical minerals investments. Canada is a leading provider of key critical mineral inputs for EV batteries to the US. Canadian firms are considered domestic sources under Title III of the Defense Production Act and have received US federal funding for critical minerals projects in Canada. While the focus of EV battery production in the US has been on countering China, the debate over content rules could shift toward a discussion on the location of battery plants.
Dairy and Supply Management. Canada supports its dairy, poultry, and egg sectors by limiting production, setting prices, and restricting imports. Under USMCA, Canada agreed to provide greater access for US dairy exports through 14 US-specific tariff-rate quotas, which allow specified quantities to be imported into Canada at preferential duty rates. This is likely to be a flash point in future trade discussions, particularly as New Zealand, Australia and US companies have recently accused Canada of dumping low-priced milk products on the world market.
Softwood Lumber. The United States and Canada have had a decades-long dispute over trade in softwood lumber, which is primarily used in residential construction, remodeling, and repair. The last agreement governing US-Canada softwood lumber trade expired in October 2015, and since then, the United States has imposed antidumping and countervailing duties on imports of Canadian softwood lumber. Given the need to rebuild in California and the risks of other potential natural disasters across the US, the added burden on building costs—especially during a time when Americans are concerned about rising house prices— may influence the decision to impose any additional duties.
Border Security. In December, Ottawa announced a $1.3 billion allocation to strengthen border security and disrupt the flow of fentanyl. The provinces have also taken steps to strengthen border security. Hopefully, these measures will be sufficient to address concerns surrounding this issue.
Defence Spending. Canada has committed to reaching its NATO target of spending 2 per cent of GDP on defence. To reach this target by 2032, Canada will need to double its defence spending. Achieving both fiscal targets and this spending goal will require a significant rebalancing of fiscal priorities.
Historically, similar tariff threats have often been used as negotiating tactics rather than being fully implemented. For example, during the 1971 “Nixon Shocks,” the US imposed a temporary import surcharge, which caused significant economic strain but was ultimately lifted after renegotiations with trading partners. Similarly, the Smoot-Hawley Tariff Act of 1930, initially intended to protect American agriculture, was scaled back over time due to international retaliation and the economic fallout it triggered.
These instances demonstrate how sweeping initial threats often give way to more targeted and limited measures once the political and economic consequences become clear. This pattern suggests the proposed tariff may be used as leverage to secure specific political or economic concessions, rather than being fully implemented in its broadest form.
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