Overview
On February 1, 2025, the White House announced a sweeping tariff of 25% against most Canadian imports into the United States and a 10% tariff against Canadian energy. Canada promptly announced retaliatory measures. The U.S.-initiated trade war is likely to be extremely disruptive to businesses on both sides of the border, including many of Fillmore Riley’s clients. We have prepared this tariff primer to explain what the tariffs are and how the U.S. and Canadian measures operate.
What are Tariffs?
Tariffs are a type of import tax, similar to a customs duty. They are paid by companies importing a product into the country and remitted to the government that imposed the tariff. Economically, they are intended to foster autarky, meaning economic self-sufficiency. Their dual purpose is to (1) force companies to produce goods domestically rather than import them, and (2) make domestic goods appear cheaper in comparison to imports by making the imports more expensive.
For domestic industry, tariffs can be beneficial because they reduce foreign competition, but only if those companies do not need to rely on international supply chains. Politicians who defend tariffs argue that tariffs create domestic jobs by encouraging goods to be produced domestically. For consumers, on the other hand, tariffs tend to lead to higher prices across the board.
In Canada, tariffs are imposed under federal legislation called the Customs Tariff. In the United States, tariffs are imposed under the Harmonized Tariff Schedule.
The February 2025 tariffs on both sides of the border are established under separate emergency powers, as explained below.
30 Years of Low or No Tariffs — NAFTA and CUSMA
Protectionist trade policies underpinned by tariffs were common until the 1970s, giving rise to the term “branch plant economy” — the phenomenon of foreign companies opening domestic branch plants to be able to circumvent tariffs.
Beginning in the 1970s, western economies reduced tariffs and began to focus on so-called “free trade”. This led to the North American Free Trade Agreement, better known as NAFTA, being signed in 1992 and coming into effect in 1994. NAFTA was a three-party agreement entered into by Canada, the United States and Mexico. Since 1994, the agreement has been re-negotiated several times. The three countries are currently signatories to the Canada-United States-Mexico Agreement, known as CUSMA. CUSMA is the most recent iteration of NAFTA.
Under CUSMA, most goods originating in North America, except for certain agricultural products, are exempt from tariffs. To make the products eligible for the tariff exemption, vendors supply a so-called NAFTA Certificate of Origin to prove the goods originated in a member country. The original 1992 NAFTA and its successor agreements have led to the North American economy becoming integrated in a number of industries, with domestic supply chains having been replaced with international supply chains.
The New U.S. Tariffs
The U.S. tariffs imposed on February 1 do not form part of the U.S. Harmonized Tariff Schedule but instead were imposed by President Trump under an Executive Order ostensibly authorized under two statutes called the National Emergencies Act and the International Emergency Economic Powers Act.
The National Emergencies Act is a statute that enables the President of the United States to declare a national emergency. The International Emergency Economic Powers Act is a statute that allows the President to take extraordinary economic measures in response to a declared national emergency. Historically, the statute was used primarily to deal with terrorism and acts of war, such as measures taken against Iran after the 1979 hostage crisis, targeted measures taken against al-Qaeda members after the September 11 attacks, and measures taken against Russia after the invasion of Ukraine.
The Executive Order declares a national emergency as a result of “sustained influx of illicit opioids and other drugs” into the United States and, among other things, accuses Mexican drug cartels of synthesizing fentanyl in Canada. We would caution clients not to give credence to this argument, as U.S. drug seizures at the Canadian border are less than 1% of seizures at the Mexican border. In our assessment, the argument was made in order to be able to meet the legal test required under the two statutes and be able to impose tariffs without requiring congressional approval or renegotiating CUSMA.
The Executive Order imposes a 25% tariff on all items except “energy resources” effective at midnight on February 4, 2025. The tariff applies to goods entering the United States at a border crossing after that time as well as goods currently located in a customs warehouse within the United States that are withdrawn from the warehouse on or after February 4. The only exception is goods loaded onto a vessel and in transit to the United States before February 1, 2025. To avail themselves of this exception, importers must file a certificate with U.S. Customs and Border Protection.
A 10% energy rate applies to “energy resources” as defined in an earlier Executive Order signed on January 20, 2025:
(a) The Term "energy" or "energy resources" means crude oil, natural gas, lease condensates, natural gas liquids, refined petroleum products, uranium, coal, biofuels, geothermal heat, the kinetic movement of flowing water, and critical minerals, as defined by 30 U.S.C. 1606 (a) (3).
Conspicuously absent from the definition of “energy resources” is electricity. Taken at face value, this means that the February 1, 2025 executive order applies the 25% tariff to electricity, since there is no separate exemption. In 2023, the United States imported approximately 33 Terawatt-hours of electricity from Canada, mostly to the Northeastern states, which means a 25% tariff applied to electricity would severely affect the U.S. economy.
The Executive Order also overrides a long-standing de minimis rule under which low-value importations, such as an item sent by mail, are exempt from a customs tariff. This means that American tourists returning to the United States may have to pay the 25% tariff on all accompanying items, and that parcels sent from Canada to the United States may be delayed pending more aggressive customs inspections. Humanitarian aid and information such as news media will continue to remain exempt from customs tariffs under article 50 U.S.C. 1702(b).
Canadian Retaliatory Tariffs
Canada announced retaliatory tariffs on $155 billion worth of goods in the evening of February 1, 2025. Tariffs on $30 billion worth of goods are to take effect on February 4, 2025 (the day the U.S. tariffs come into effect), while tariffs on the remaining $125 billion worth of goods are to come into effect after a 21-day consultation.
On February 2, 2025, the federal government released the complete list of items subject to the initial tariffs. The list is focused on includes meat and dairy products, food products, personal care items, clothing, tools, tires, appliances, furniture, motorcycles, and vehicle parts.
According to the government’s news release, the second round of tariffs will include passenger vehicles and trucks, including electric vehicles, steel and aluminum products, certain fruits and vegetables, aerospace products, beef, pork, dairy, trucks and buses, recreational vehicles, and recreational boats.
Canada’s Customs Tariff operates by establishing a default 35% tariff on all goods entering the country and then creating country-specific exemptions based on trade agreements or policy measures, a concept known as Most-Favoured-Nation status. Retaliatory tariffs can be imposed in one of two ways — withdrawal of Most-Favoured-Nation status or a surtax. At this time, the mechanics of how the retaliatory tariffs are to be implemented remains unclear.
Withdrawal of Most-Favoured-Nation status can be accomplished by Cabinet order for a period of up to 180 days, following which the order has to be ratified by Parliament. Considering the prorogation of the Canadian Parliament in December 2024, maintaining such tariffs for more than six months may present a logistical challenge that will require support from opposition parties.
Surtaxes can be imposed retroactively and do not require Parliamentary approval. Subsection 53(2) of the Customs Tariff authorizes surtaxes “for the purpose of enforcing Canada’s rights under a trade agreement in relation to a country or of responding to acts, policies or practices of the government of a country that adversely affect, or leads directly or indirectly to adverse effects on, trade in goods or services of Canada”. Considering that Canada is a signatory to CUSMA, we have no doubt that sufficient authority exists for Canada to trigger subsection 53(2).
What Happens to Goods Shipped Through Canada or the United States?
Customs tariffs are generally applied based on country of origin. However, in international supply chains, goods are often shipped through an intermediate country, a process known as “transshipment”. Under Canada’s Customs Tariff, transshipment is ignored for customs purposes if there is a Canadian consignee on the bill of lading and the goods do not leave customs control in the intermediate country. At this time, we expect those rules to continue to apply to non-U.S. goods transshipped to Canada through the United States.
U.S. Customs and Border Protection applies similar transshipment rules as Canada. However, the February 1, 2025 Executive Order is silent on transshipment issues. We expect this issue to be clarified in the near future, once the consequences of the order become clear.
Are Services Affected?
Professional services are currently not subject to either U.S. or Canadian tariffs. However, professional service providers can be affected by the trade war in other ways. The Province of British Columbia recently announced a buy-Canadian directive to its government departments and Crown corporations that applies to professional services, and we cannot rule out that other provinces will follow suit. This may lead to similar directives being issued in the United States, which means that both U.S. and Canadian consulting firms may have contracts at risk even without tariffs on consulting fees.
Conclusion
The recent Executive Order signed by President Trump is without precedent in Canada/U.S. trade relations and is missing significant details. This means that it will likely be supplemented by additional Executive Orders to clarify or amend policy in the original order, with the Canadian government having to amend its retaliatory measures accordingly.
Fillmore Riley is committed to guiding our clients through this period of trade uncertainty and our lawyers are available to provide advice on your specific business needs.