The Trump administration has vowed to impose new 50% tariffs on some Canadian goods, citing unfair treatment of US alcohol, cars and dairy products, further exacerbating trade tensions between the two neighbors.
Goods Affected & Exemptions
Goods subject to the new tariffs include milk, hockey equipment, beer and plywood, but do not include imports of key resources such as energy, potash and critical minerals. Goods that are already subject to separate duties such as the automotive and steel sectors are also exempt.
Most notably, for the goods on the new tariff list, no exemptions will be granted to exporters shipping goods under the rules of the existing North American Free Trade Agreement between the United States, Canada and Mexico. The Canadian dollar fell on the news, before recovering to around C$1.407 per US dollar.
Most Drastic Action in a Long Time
If Trump goes ahead with the tariffs, which are scheduled to take effect in 30 days, they would be among the most drastic trade measures he has ever taken against the United States' second-largest trading partner. Trump signed a proclamation ordering the tariffs early Monday.
This is a major escalation, and the situation is likely to get worse before it subsides, according to William Pellerin, an international trade lawyer at McMillan LLP. The tariffs are imposed under Section 338 of the Tariff Act of 1930, a provision that authorizes the president to impose duties of up to 50 percent on countries deemed to be discriminating against U.S. trade, and has never been used before.
Trump-Carney Ties Soar
Monday's action has the potential to further strain relations with Canadian Prime Minister Mark Carney, who watched the World Cup final with Trump in New Jersey on Sunday. Last week, Trump also threatened higher tariffs to punish Canada for the haze of wildfire smoke that has blanketed U.S. cities.
Carney described the new tariffs in a statement as a continuation of a series of unilateral US trade actions that began with tariffs that directly violate the USMCA agreement, including tariffs on Canada's auto sector. He stressed that Canada was merely matching the measures, as it was its right.
The Real Cause of the Tariff Action
The US action on Monday stemmed in part from the decision of several Canadian provinces to pull US alcohol products from store shelves, in response to tariffs imposed by Trump last year.
Trade Representative Jamieson Greer said Canada had pulled US alcohol products, given better market access to European Union dairy products, and restricted US vehicle exports to Canada. According to Tyler Meredith, a former policy advisor to Justin Trudeau, this was a pressure tactic aimed at extracting more concessions from Canada.
The Impact on the Market
The two countries traded goods and services worth almost $900 billion last year, although most of the goods affected by the new tariffs represent only a small fraction of that total.
Such an escalation of the trade war between the world's two largest economies usually triggers a broader risk-off sentiment in global financial markets, with investors seeking safe havens over regional currencies, including the Ringgit. The ongoing uncertainty over US trade policy is also an additional risk factor that global investors need to monitor in assessing the overall direction of international trade.
Key Takeaways
The United States has announced a new 50 percent tariff on Canadian goods such as milk, beer and plywood, without any exemptions from the USMCA.
The move uses Section 338 of the Tariff Act of 1930, a provision that has never been used before by any president.
The Canadian dollar briefly fell before recovering to around C$1.407 per US dollar following the announcement.
Canadian Prime Minister Mark Carney described the move as an extension of unilateral trade actions that violate the terms of the USMCA.
The escalation of the trade war has the potential to trigger a risk-off sentiment in global markets, with spillover effects on regional currencies, including the Ringgit.
As long as negotiations between the two countries have not reached a resolution, the market is expected to continue to monitor the development of these trade tensions, given their potentially far-reaching impact on overall global trade dynamics.
