U.S. President Donald Trump’s sweeping reciprocal tariff plan comes with a “fallback” for free trade partners Canada and Mexico if a national emergency declaration on border controls and fentanyl used in February to justify 25 per cent tariffs on them doesn’t hold up. 

While no new tariffs were imposed on the two countries, the order Trump signed Wednesday contemplated the possibility of the justification being terminated or suspended, which would trigger a new 12 per cent levy.

“This is the fallback” said William Pellerin, a partner in the international trade practice at law firm McMillan LLP and former deputy director at Global Affairs Canada.  “If, for whatever reason, the original 25 per cent tariffs based on fentanyl trade are dropped — including because Canada or other parties successfully challenge those tariffs — then another fight looms to challenge these additional reciprocal tariffs that would take their place.”

According to the executive order, the reduced “ad valorem” rates of duty would not apply to energy, potash or any article eligible for duty-free treatment under the three-way CUSMA trade agreement that is a part or component of any article substantially finished in the United States.

Fen Osler Hampson, co-chair of the expert group of Canada-U.S. relations at Carleton University, said he would not be surprised if the stance on Canada was influenced by growing pushback in the United States, including Virginia Democratic Senator Tim Kaine’s challenge to the imposition of tariffs on Canada, which has even drawn support from Republicans.

“I think they’re obviously worried,” Hampson said. “The fact that there are a number of Republicans who call them on it, I think the message is getting through that we’re not the problem.”

The U.S. administration may also simply opt to reduce tariffs on Canada to the 12 per cent level. All that would need to happen is for officials to decide “that progress has been made on fentanyl/illegal immigration,” economists at Toronto-Dominion Bank said in a note Wednesday.

Hampson said the rhetoric about Canada appeared diminished Thursday, despite Trump’s pointed criticism of the country’s protected dairy industry. Hampson said the U.S. administration appears to be taking note of the interconnectedness of the economies and the potential harm of disrupting that.

“There’s recognition that there’s a lot of hidden wiring in this relationship, that if you take a chainsaw to it, you’re going to get electrocuted,” he said. “And so that that does seem to have gotten through (though) it doesn’t mean that we’re not going to experience some pain.”

The Canada-United States-Mexico Agreement also appears to be offering some protection against the sweeping and punitive shift in U.S. trade policy. Over the past few months, Trump singled Canada out for criticism over its treatment of U.S. imports including lumber and dairy, threatening “retaliatory” tariffs, but he has also backed away from some of this rhetoric as products covered under the three-way North American trade pact adopted in 2020 were exempted.

Clifford Sosnow, a partner in the international trade and investment group at Fasken Martineau DuMoulin LLP, said Trump’s latest order has the effect of “safeguarding” the CUSMA trade agreement “and giving it special treatment in certain circumstances, with the notable exception of steel and aluminum.”

For now, Canada remains subject to the 25 per cent fentanyl/illegal immigration tariff, along with 10 per on energy and potash, with carve outs for CUSMA compliant goods.

TD’s note said around 40 per cent of the dollar value of goods travelling across the border are declared CUSMA compliant, but added that the figure could climb with the incentive of avoiding tariffs.

“It’s estimated that 80 to 90 per cent of the value of exports could become CUSMA compliant,” the analysts wrote.

Hampson agreed.

“As we’ve seen in the past couple of weeks, a lot of companies are filling out that paperwork so because it’s in their interest to do so,” he said.

• Email: bshecter@postmedia.com

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