Introduction

Canada has decided to drop retaliatory tariffs and mirror the U.S. exemptions on goods covered under the United States-Mexico-Canada Agreement (USMCA). This represents a success in preserving tariff-free trade for over 85% of Canada-U.S. commerce. But sector-specific tariffs like the 50% duties on steel and aluminium continue to hurt Canadian industries. The development is crucial, given Canada’s heavy reliance on the U.S. market, with more than 75% of its exports heading south.

Significance of the News

1. Tariff Alignment: Canada has chosen to align its tariff exemptions with those of the U.S., signaling a conciliatory move in contrast with earlier retaliatory tariffs.
2. First-time Reset: For the first time since retaliatory duties were announced, Canada is rolling them back to match U.S. exemptions under USMCA, a notable policy reversal.
3. Trade Dependence: With over 75% of Canadian exports going to the U.S., the stakes are extremely high, making tariff negotiations critical for economic stability.
4. Striking Data: 85% of Canada-U.S. trade is still tariff-free, reflecting both success in negotiations and risks if the pact weakens.

What is USMCA?

1. USMCA Pact: Signed in 2020, it replaced NAFTA and provides preferential treatment for Canadian and Mexican goods entering the U.S.
2. Carve-out Mechanism: Goods shielded under the agreement are protected from punitive tariffs, preserving market access.
3. Upcoming Review : The pact is up for review in 2026, adding urgency to Canada’s attempt to preserve smooth trade relations.

How does Canada benefit from this carve-out?

1. Preferential Access: Canadian goods remain shielded from most punitive duties.
2. Export Stability: With 75% of exports going to the U.S., the pact secures critical market access.
3. Low Tariff Burden: U.S. average tariffs on Canadian goods remain among the lowest globally.

What are the challenges despite tariff exemptions?

1. 232 Tariffs: The U.S. has imposed sector-specific duties, including 50% tariffs on steel and aluminium, straining Canadian industries.
2. Renegotiation Risk: U.S. Commerce Secretary Howard Lutnick has hinted at reopening USMCA talks, creating uncertainty.
3. Dependence Dilemma: Canada retains some retaliatory tariffs, but its heavy reliance on U.S. markets weakens bargaining power.

Why is this crucial for North American trade stability

1. Export Dependence: More than 75% of Canada’s exports and 80% of Mexico’s exports head to the U.S., underlining their vulnerability.
2. Regional Integration: The USMCA has reestablished tariff-free trade for the majority of goods, preventing economic disruption in North America.
3. Geopolitical Context: At a time of growing global protectionism, North America’s internal trade pact provides a stabilising force, but also exposes Canada and Mexico to unilateral U.S. decisions.

Conclusion

Canada’s decision to align its tariffs with U.S. exemptions under USMCA reflects both pragmatism and vulnerability. While the pact secures tariff-free trade for the majority of goods, sector-specific tariffs and the looming threat of renegotiation highlight the fragile foundation of North American trade integration. For Canada, the challenge lies in balancing sovereignty with economic dependence, a dilemma increasingly relevant in today’s protectionist world.

PYQ Relevance

[UPSC 2018] How would the recent phenomena of protectionism and currency manipulations in world trade affect macroeconomic stability of India?

Linkage: The USMCA episode shows how U.S. protectionism through sectoral tariffs (like 50% on steel/aluminium) can destabilize even close trade partners like Canada. Such measures reflect the larger global trend of tariff wars and currency leverage, which disrupt supply chains and investment flows. For India, this highlights risks to macroeconomic stability via trade deficits, inflationary pressures, and exchange rate volatility.

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