How Canadian businesses can prepare for tit-for-tat tariffs in 2025

This is not Canada’s first rodeo with an America-first, U.S. presidential administration. The President-elect’s recent announcement of 25% tariffs on “all” Canadian (and Mexican) imports echoes of 2018, where in his first term, President Trump applied 25% tariffs on Canadian-origin steel and aluminum products (2018 Tariffs). In response, Canada applied countermeasures targeting U.S. origin steel and aluminum and a range of  U.S. origin goods. 

In this article we examine lessons from the tit-for-tat tariffs applied by Canada and the U.S. during 2018/2019 and outline strategies for businesses with North American supply chains to navigate potential uncertainty in the first quarter of 2025. 

What can recent history teach us?

Below we have provided a timeline of the reciprocal tariffs implemented by the U.S. and Canada in 2018-2019, and we have provided some high-level take-aways on how we expect the Government of Canada to react in 2025.

• March 8, 2018: U.S. announces 25% tariffs on steel imports into the U.S., with exemptions for Canada and Mexico under the authority of section 232 of the Trade Expansion Act, effective March 23, 2018.
• May 31, 2018: U.S. announces tariffs on certain steel & aluminum products exported from Canada at rates of 25% and 10% under the authority of section 232 of the Trade Expansion Act.
• May 31, 2018: Canada (Department of Finance) initiates a 2-week consultation period on proposed countermeasures.
• June 28, 2018: Canada registers the United States Surtax Order (Other Goods) and the United States Surtax Order (Steel and Aluminum).
• July 1, 2018: Canada implements the Orders, which impose tariffs ranging from 10% to 25% against U.S. origin goods, including steel and aluminum and consumer products. The countermeasures target up to CAD 16.6 billion in imports, which represented the value of 2017 Canadian steel and aluminum exports affected by the U.S. measures.
  • The Order re: Other Goods is largely based on goods originating from strategic political districts in the U.S. At that time, the U.S. was approaching midterm elections in November 2018 and Canada intended to target certain Republican members of congress.
    • E.g. Whiskey, which includes bourbon from Kentucky. At the time, this was the home state of Republican Senate Majority Leader, Mitch McConnell.
    • E.g. Cucumbers, Soy Sauce, Carbonated Water, and Soy Sauce. Wisconsin is a major producer of all of these products. At the time, Wisconsin was the home state for the Republication House Speaker, Paul Ryan.  
• October 11, 2018: Canada (Department of Finance) initiates a remission process, allowing Canadian imports relief on a discretionary basis.
• October 25, 2018: Canada implements a 25% provisional safeguard surtax against seven steel products being imported into Canada from all countries, subject to limited exceptions.  Canada instructs the Canadian International Trade Tribunal (CITT) to conduct an inquiry into whether a final safeguard is warranted based on the risk of diversion of steel products based on the U.S. tariffs.
• April 3, 2019: The CITT issues finding in safeguard inquiry. Safeguards warranted against only 2 of 7 steel goods (heavy plate and stainless steel wire). Safeguards in the form of TRQs are implemented as of May 13, 2019 and remain in place until October 2021.
• May 17, 2019: The U.S. and Canada agree to lift U.S. section 232 tariffs on Canadian steel and aluminum as well as Canada’s retaliatory countermeasures.

Given Canada’s previous actions in response to the 2018 Tariffs, businesses may be able to expect the following if the U.S. enacts tariffs against Canadian imports:

1. Canada will likely implement countermeasures, in the form of tariffs on specified U.S.-origin goods.
2. The countermeasures will likely be proportionate to the value of the trade impacted by the U.S. tariffs between the U.S. and Canada.
3. Canada will likely consult with the Canadian public prior to implementing countermeasures. This presents an opportunity for impacted businesses to speak with the Department of Finance ( keeping in mind Canada’s lobbying requirements) about which goods are essential to their supply chain and the economic hardships they might face if countermeasures are implemented. 
4. Canada will likely implement a remission process; however, it may not immediately be available. A remission process was implemented most recently in Canada’s initiation of tariffs against Chinese origin EVs, and steel, aluminum. See the requirements here. We expect any future remission process to follow this template; however, we do not expect the process to include the same stringent requirement that a requester must show that inputs and substitutes cannot be sourced domestically or reasonably from non-Chinese sources, or in the case of future US retaliatory tariffs, from non-US sources.
5. U.S. tariffs will likely have knock-on effects that indirectly impact other sectors of the Canadian economy. The 2018/2019 safeguards inquiry illustrates such indirect impact. Depending on the tariffs imposed by the U.S., there might be a risk that goods will be diverted from the U.S. market to Canada, causing the Government of Canada to take action to protect domestic industries.   

How might the tariffs imposed in 2025 be different from the 2018 Tariffs?

Importantly, there is a range of possibilities flowing from the President-elect’s announcement. The significant difference is that the proposed tariffs appear to be less surgical than those implemented in 2018 as tariffs are proposed across all goods imported from Canada. However, the scope of these tariffs is likely subject to change prior to inauguration day. For example, the promised tariffs could:

• Come into effect as announced, such that all goods exported from Canada, regardless of origin, face 25% tariffs upon import to the United States;
• Only Canadian-origin goods exported from Canada or elsewhere face 25% tariffs;
• The tariffs are limited to specific goods, instead of “all” goods; 
• The amount of the tariff is decreased (or increased); or
• No tariffs come into effect.

What’s happening behind the scenes?

Despite all of this uncertainty, what remains clear is that the President Elect will use the expected economic fallout on Canadian and Mexican businesses to extract promises from Canada and Mexico on immigration, border enforcement, and Chinese-origin goods.

Canada may be able to lessen the effect of the proposed tariffs by making commitments in respect of the President-elect’s concerns regarding border security as it relates to immigration and the proliferation of drugs.  Since the November 25 announcement, the Government of Canada has met with the Premiers of all provinces, and visited the President-elect (the first G7 leader to do so). Canada has promised the U.S. enhanced resources at the border (e.g. helicopters) and the Royal Canadian Mounted Police may deploy more of its workforce to the border. 

The Government of Canada has also been reported to be considering U.S. origin goods that may become subject to retaliatory tariffs. It is apparent that the proposed U.S. tariffs remain subject to negotiation over the next 6 weeks until inauguration day.  

How can North American businesses prepare for uncertainty in Q1 2025?

1. Know your supply chain. Determine if your business is relying on Canadian, Mexican or U.S. inputs in order to manufacture goods or whether unique manufacturing steps occur across different jurisdictions requiring the import and export of goods to create a final product.  
2. Be confident in the tariff classification, origin and valuation of y inputs/products. This will allow a business to quickly determine whether goods are subject to tariffs (assuming they are based on tariff items or origin) and will allow a business to minimize duty impact, where possible.
3. Increase inventory and secure warehousing space, as appropriate.
4. Prepare financially. If a supply chain is at risk for tariffs, consider setting aside funds to pay increased duties and taxes (taxes are calculated on the duty-paid value of the goods when imported into Canada). Take the time to determine how tariffs may impact financial outcomes.
5. Prepare government relations teams to meet with key public officials, or consider engaging in conversations with key public officials (subject to applicable lobbying laws) regarding U.SA. origin goods that may be targeted by retaliatory tariffs.
6. Consider the economic arguments to put forward if a business needs to seek a future remission order.
7. Where possible, diversify suppliers (by jurisdiction) for key inputs. Redundancy, allowing for supply chain flexibility can be crucial.
8. Consider the beneficial impact of FTAs or other mechanisms, such as duty drawback/deferral programs, that may be applicable and consider how to restructure, or tariff-proof, your supply chain.