Canada and Mexico Outsmart Trump Tariffs Amid Raucous Trade Talks

USMCA Safeguards Trade in Canada and Mexico Against Trump’s Tariffs

Background

From the very first day of President Trump’s administration, Canada and Mexico have been central to discussions about US import duties.

Key Protection Offered by USMCA

• Automotive Components: Most parts traded within this 3‑country group fall under the same tariff
• Labour‑Intensive Goods: Fluctuations in duty rates are largely mitigated for items produced under the new labour‑policy chapter
• Agricultural Products: Many staples continue to avoid additional tariffs thanks to the provisions set before the trade war

Implications for U.S. Companies

Despite aggressive tariff announcements, the USMCA agreement keeps the bulk of cross‑border exchanges duty‑free, reducing the operational risk for American businesses that rely on Canadian and Mexican suppliers.

US President Trump Implements Tariff Adjustments on Canada and Mexico

Key Exemption Ensures Most Trade Remains Duty‑Free

Last week, President Donald Trump increased tariffs on Canadian goods to 35%. However, a pivotal exemption tied to the United States‑Mexico‑Canada Agreement (USMCA) protects the bulk of traded products from these higher duties.

Understanding the USMCA

• Signed in 2020, the USMCA succeeds NAFTA as the primary trade agreement for North America.
• It establishes comprehensive rules governing the movement of goods and services.
• The agreement strengthens labor and environmental standards.
• It bolsters intellectual property and digital commerce protections.
• Dispute‑resolution mechanisms are embedded to manage disagreements among the three nations.

How the Exemption Operates

The executive orders that introduced the new tariffs explicitly recognize the USMCA’s provisions. Under these rules, goods that originate entirely in Canada or Mexico—excluding items imported from third countries and resold—fulfill the “rules of origin” requirement. Alternatively, products whose main components are produced in one of the two countries also qualify for exemption.

Consequently, the vast majority of items flowing between the United States, Canada, and Mexico avoid tariff charges, provided they meet these origin criteria.

Most Canadian exports reach the US duty-free

Canada’s Trade Landscape Under the USMCA

Export Compliance
The Bank of Canada reports that 100 % of energy exports and 95 % of all other exports meet the USMCA’s key pact criteria. In April, the Royal Bank estimated that almost 90 % of Canadian goods reached the United States without incurring duties.

US Tariff Status and Market Access

Prime Minister Mark Carney emphasized that the United States’ steadfast commitment to the core provisions of the USMCA keeps the average tariff on Canadian products among the lowest in the region. He added that over 85 % of bilateral trade remains free of tariffs.

Industry Leaders’ Perspectives

• Flavio Volpe, president of the Automotive Parts Manufacturers’ Association, noted that Canada’s relative advantage comes from the U.S. default reliance on the USMCA, which provides a “tough tariff headline” while granting access to indispensable components.
• John Manley, former Canadian minister of industry, finance, foreign affairs and deputy prime minister, remarked that the headline 35 % tariff on U.S. imports targets only specific sectors, leaving most trade lines unaffected.

Implications for Canadian and Mexican Firms

Companies in Canada and Mexico can secure preferential treatment provided their products are manufactured in the respective country. Only selected industries feel the 35 % tariff impact; the broader trade framework remains largely liberal.

Economic Resilience Amid Uncertainty

Despite global fluctuations, Canada’s economy continues to perform robustly, surpassing many expectations. The absence of duties on energy exports further reinforces the nation’s favorable position in the USMCA arena.

25% tariffs on Mexican goods target a small slice of trade

Trump Announces 90‑Day Negotiations with Mexico

President Trump revealed last week that he will initiate a 90‑day negotiation period with Mexico, one of the United States’ most significant trade partners. The current 25% tariff—reduced from the earlier 30% threat—remains in place, but it applies solely to the portion of Mexican trade that falls outside the USMCA framework.

México’s Position in the New Commercial Order

• Following a brief discussion with Trump on Thursday, Mexican President Claudia Sheinbaum stated that, under the new commercial landscape, Mexico remains the best‑positioned nation thanks to the existing free‑trade agreement.
• Sheinbaum clarified: “Within the USMCA there are no tariffs, except for the known categories—automobiles, steel, and aluminium. For products outside the treaty, a 25% tariff applies.”
• Economy Secretary Marcelo Ebrard added that the USMCA eliminates tariffs on more than 84% of Mexico’s trade with the United States.

Impact on Canada and Mexico

• Although the USMCA still protects most imports from Canada and Mexico, the agreement is slated for review next year.
• US Commerce Secretary Howard Lutnick noted last month that he believes “the president will absolutely renegotiate the USMCA.”
• Maintaining this free‑trade pact is crucial for Canada and Mexico, as a loss could trigger drastic tariff increases, ranging from 20% to 30%, which could disrupt the markets beyond rebound capacity.
• More than 75% of Canada’s exports and over 80% of Mexico’s exports go to the United States.

Risk Assessment

Given the possible escalation of the trade conflict, “the risk to the USMCA is very high,” said Manley. “Uncertainty in business is the enemy of decision‑making.”

Charging for access

US Trade Actions Raise Concerns for Canadian Industries

Canada’s Investment Appeal

Canada remains an attractive destination for foreign investors thanks to its

• Abundant natural resources
• Highly skilled labor force
• Open immigration policies
• Unrestricted access to the US market, the world’s largest economy

When the relationship with the United States weakens, new strategies must be devised to maintain investment momentum. The investment thesis can still stand strong by emphasizing these core strengths.

U.S. Tariff Landscape

Trump’s administration has implemented sector‑specific tariffs (232 tariffs) that are reshaping trade dynamics:

• 50% tariff on steel and aluminium imports
• 25% tariff on automotive imports
• Special carve‑out for Canadian and Mexican manufactured vehicles

Affected Canadian Sectors

Despite Canada’s many advantages, critical industries are experiencing heightened pressure from U.S. trade measures:

• Automotive
• Steel
• Aluminium
• Copper
• Pharmaceuticals
• Semiconductors
• Softwood lumber

In response, authorities announced an aid package targeting the lumber sector, a key component of Canada’s trade portfolio.

Conclusion

It is evident that the traditional trading partnership with the United States can no longer be taken for granted as a cornerstone of Canadian prosperity. Adaptation and diversification will be essential to safeguard growth.