Canada rethinks its trade future

As we cross the halfway mark of 2025 – the year of tariffs – the landscape continues to shift atop what little certainty the supply chain has managed to maintain.

In early July, U.S. President Donald Trump formalized a sweeping plan to escalate tariffs on key trading partners, which once again includes Canada. Set to take effect Aug. 1, Canada is facing an increase from 25 per cent to 35 per cent on non-Canada-U.S.-Mexico Agreement (CUSMA) goods, along with sector-specific duties, including 50 per cent on steel and aluminum and 25 per cent on non-CUSMA autos and parts.

This could, however, be delayed due to the ongoing injunction heard May 28 in the U.S. Court of International Trade, where the “Liberation Day” tariffs were ruled unlawful under the International Emergency Economic Powers Act. The Federal Court of Appeals is set to review the case July 31, leaving the August tariffs and trade talks in legal limbo.

Canada continues to respond to the tariffs with domestic diversification strategies. In late July, the government imposed a 25 per cent tariff on steel imported from other countries containing Chinese-melted and integrated steel. This preventative measure aims to stop diversion through Canada following the U.S. steel escalation. Also enacted in July, the Supply Management Law – Bill C-202 – came into effect, restricting foreign dairy and poultry deals but retaining provincial flexibility for internal reforms.

The effects of these tariffs on the Canadian supply chain and industry are already being felt amid the uncertainty and potential delays, with Canada’s auto industry taking one of the biggest hits. GM reported a US$1.1-billion Q2 earnings hit due to tariffs on Canadian imports, with profits dropping 35 per cent and a projected tariff-related loss of US$5 billion in 2025 alone.

Canada is currently looking to other countries for potential free trade deals with Mercosur – a South American trade bloc and customs union established in 1991 that includes Brazil, Argentina, Uruguay and Paraguay – while also exploring trade with China, India, Ecuador, the United Arab Emirates and Indonesia in an effort to reduce reliance on U.S. trade.

On July 21, a delegation of Republican and Democratic U.S. senators visited Ottawa in an attempt to salvage a Canada-U.S. deal before the looming Aug. 1 deadline. Among the topics discussed were softwood lumber quotas – which have recently come under scrutiny – as well as digital services taxes, which triggered the latest tariff push from Trump. These taxes have since been scrapped by Prime Minister Mark Carney in an attempt to ease tensions with the U.S. president. The Canada Revenue Agency has already begun refunding fees collected under the tax, which was implemented before Carney’s time in office.

As the August tariff talks continue to unfold, there is potential for more delays, with the Court of International Trade possibly postponing enforcement as it prepares for the appeals hearing set for July 31. While U.S. Commerce Secretary Howard Lutnick has insisted the Aug. 1 deadline will stand regardless of the court ruling, he did acknowledge negotiations may continue even as the new tariffs take effect.

Earlier this week, Ontario Premier Doug Ford hosted Canada’s 13 premiers in Huntsville for a three-day summit focused on tariffs and trade disruptions. Carney was also in attendance, announcing his plans to participate shortly after Trump threatened the new round of 35 per cent tariffs on non-CUSMA goods. Carney offered a stark outlook, stating that a tariff-free trade deal with the U.S. is highly unlikely and should be viewed as the new reality. Quebec Premier François Legault said that while the trade talks are still developing, there must be some assurance that whatever deal is reached will endure.

Canadian leaders are taking a new approach to the tariff pushback as the country’s limited leverage becomes increasingly clear. Following the leadership meeting, officials downplayed the likelihood of meeting the August deadline, emphasizing that a good deal is more important than a fast one. A team of Canadian negotiators is set to head to Washington prior to Aug. 1 in a final attempt to secure an agreement in Canada’s best interest for future trade relations with the U.S.

There has been a clear narrative shift from the premiers and Carney, who campaigned on his economic record and claimed he was best positioned to negotiate with the U.S. president on looming trade issues. As the possibility of reaching a tariff-free agreement grows dimmer by the day, expectations are being recalibrated accordingly.