Listening to most of the media and s prime minister, youd think the U.S. and its northern neighbor were in a full-blown trade war after new tariffs were announced days ago. Au contraire: Anyone who checks the numbers can see this is merely a skirmish.
On Aug. 22, the administration’s Section 338 tariffs took effect, at 50% on roughly $20 billion of Canadian goods, or about 5% of what Canada sells the U.S. Ottawa’s answer, effective Sept. 8, will be varying tariffs on roughly $20 billion of American exports to Canada, about 6% of what Canada buys from the U.S.
While tariffs on $40 billion arent chump change, theyre a small portion of the roughly $900 billion in products and services that are exchanged across the U.S.-Canadian border annually. Roughly 95% of transactions are proceeding exactly as they did in July.
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People should be much more focused on January, because thats when 50% tariffs hit many more Canadian exports, including cars, trucks and auto parts. Throw in potential Canadian retaliation, and were looking at higher tariffs on well over $100 billion of trade between the two countries.
When the artillery joins in like that, we go from a skirmish to a war. However, that doesnt mean we can brush off these recent developments as insignificant. The current skirmish feels eerily similar to Union and Confederate reconnaissance units encountering each other outside Gettysburg.
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What makes this time different is the United States-Mexico-Canada Agreement (USMCA). Other tariffs had carveouts for USMCA-compliant products. This was extremely important because businesses invested billions of dollars over several years to create supply chains in North America, and they shouldnt be punished for playing by the rules.
That principle was violated, though not for the first time, with the recent implementation of these Section 338 tariffs, which apply regardless of USMCA qualification and which stack on top of the ordinary rate. Companies that played by the rules are now being punished for complying with a trade agreement that was heralded as “the new gold standard.”
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This is pulling the rug out from under firms that acted in good faith, and on a large scale. The share of imports from Canada and Mexico claiming USMCA preference climbed from roughly 45% in late 2024 to 86% by February. Federal Reserve economists priced this regulatory compliance at $39 billion to $71 billion per year in manufacturing.
Ironically, some firms that spent years moving some of their production and assembly plants to Ontario now face higher effective tariff rates than some firms that stayed in Shenzhen, China. Certain tariffs that are supposed to serve as leverage for benefiting American production are instead hamstringing it.
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