Why Canada Didn’t Secure a Trade Deal With Trump by Aug. 1

News Analysis

Canada has become a holdout among major U.S. allies in not having a recent trade deal, but there are several potential factors explaining the state of affairs.

Those could include hard-to-solve trade irritants, bold foreign policy moves, and the larger continental framework for a potential deal.

In his latest move, U.S. President Donald Trump raised the baseline tariff rate on Canada from 25 percent to 35 percent on July 31, noting how Canada had imposed counter-measures on the United States and is allegedly not doing enough to counter the flow of fentanyl, a powerful synthetic opioid causing deaths on both sides of the border.

The hike came after Trump secured a series of trade deals with close allies such as the European Union, the United Kingdom, Japan, and South Korea. Trump has kept a general tariff rate between 10 and 15 percent for these countries and the EU, which have in turn in most cases pledged to make hundreds of billions in investments in the United States while also opening their markets.

What most of these different deals haven’t done is remove the hefty 50 percent sectoral tariffs on steel and aluminum. The United Kingdom, however, managed to obtain a 25 percent rate on these metals in its deal, which is much lower but still substantial.

Trump showing limited flexibility on steel and aluminum is potentially one of the reasons Canada hasn’t been able to secure a deal so far. The industry is highly integrated across the border and the impacts of U.S. tariffs have particularly roiled the Canadian sector, while leading to increased prices south of the border.

This integration is likely a card Ottawa can play to set it apart from other trade partners as it negotiates with Washington. But with Trump’s stated goal of bringing back manufacturing to the United States, as a matter of national security, Canada might have to make concessions in other areas to protect its steel and aluminum sectors.

It’s a general observation that Carney made last week when discussing the state of trade negotiations. He noted that the U.S. approach is to have tariffs in sectors deemed to be strategic, such as metals, automobiles, pharmaceuticals, semiconductors, and lumber.

“Obviously, in any broader deal, there are gives and takes, and there’s various factors,” he said on July 30. “But I think we have to recognize that, in the strategic sectors—again, as defined by the United States, what’s strategic to them—that they have tariffs.”

It will be interesting to see whether concessions could be made in relation to supply management, the system of quotas controlling the production and price of dairy, eggs, and poultry. The Liberal government has pledged to protect the system, and Parliament recently passed a law to shield aspects of it in relation to international trade.

It is one aspect the Trump administration has consistently complained about in recent months.

“They have been charging very, very high tariffs to our farmers, some over 200 percent, and they’ve been treating our farmers very badly,” Trump told reporters on July 31 when asked what’s the holdup in trade negotiations with Canada.

The Canadian side is also likely trying to push for more concessions to protect its auto sector. It has been hit with the 25 percent universal tariff, although some items are covered by exemptions under the United State-Mexico-Canada Agreement (USMCA). Specifically, for CUSMA-compliant vehicles, the 25 percent U.S. tariff applies only on those vehicles’ non-U.S. content., not on their full value.

The other deals, with the UK, the EU, Japan, and South Korea, home to major car manufacturers, were all accompanied by lower tariff rates on autos and parts. The UK is charged a 10 percent rate whereas the others are charged 15 percent.

‘Lowest’ Rate

Another reason that could explain why Canada is late securing a deal is that its current situation is better than most, which doesn’t compel it into quickly accepting unfavourable conditions.

Canada already has a free-trade deal with the United States that is functioning, with the baseline U.S. tariff of 35 percent not applying on goods covered by the USMCA.

Nearly 80 percent of Canadian goods imported to the United States in 2024 were duty-free, according to Fitch Ratings agency. A spring analysis by RBC suggested 86 percent of Canadian goods can cross into the United States without tariff.

In a statement on Aug. 1, Carney said the U.S. commitment to the USMCA, reaffirmed when it raised tariffs last week, means that the U.S. tariff rate on Canadian goods “remains one of its lowest for all of its trading partners.”

“Over 85 percent of Canada-U.S. trade continues to be tariff-free in both directions,” Carney said on Aug. 5.

What this means effectively is that Canada, even when counting the other sectoral tariffs imposed by Trump, is in an enviable position compared to other countries, or even the “best” position, according to Carney.

Fitch Ratings says the effective tariff rate (ETR) the United States applies on average for all countries is currently at 17 percent, while the ETR placed on Canada is at 10 percent and the rate placed on the EU is 15 percent. Fitch describes the ETR as the “total duties as a percentage of total imports and changes with shifts in import share by country of origin and product mix.”

Other analyses point to a different ETR for Canada, with the Budget Lab at Yale University saying it’s 13.1 percent. At any rate, this is below what other U.S. trading partners are facing.

Holdout

It now happens that outside the European Union, which is a large bloc representing 27 countries, the Americans’ three largest trading partners have not struck recent deals.

Mexico is the United States’ number one commercial partner in total trade, and it has mostly fallen under the same tariff regime as Canada, which is the United States’ number two partner in total trade.

The two U.S. neighbours were hit early by Trump’s tariffs related to his concerns about drug trafficking—as was China, the third-largest trading partner of the United States.

Trump had threatened both Canada and Mexico that he would raise their tariff rates to 35 percent and 30 percent respectively on Aug. 1, but he only followed through for Canada. The president instead afforded Mexico a 90-day pause for negotiations. While Mexico has been a much larger source of drugs and illegal immigrants, it has not retaliated against Trump’s tariffs, contrary to Canada.

It is perhaps not a coincidence that the two top U.S. trading partners have yet to strike deals, according to David Leis, president of the Frontier Centre for Public Policy. Part of the reason is to allow time for the United States to assess whether there are effective efforts to address security concerns related to money laundering, drug trafficking, and other border issues, Leis told The Epoch Times in an interview.

Another factor is the continental dimension, which increases the strategic importance of Canada and Mexico. “If you look at any of the current administration’s directions and frameworks for strategy, they emphasize continental security,” said Leis.

“It’s like Monroe Doctrine number 2.0, and therefore it would, in my opinion, be logical to hold those agreements and finalize them only when other priority agreements have been finalized, whether it’s the EU, Japan and, of course, China itself,” said Leis. The Monroe Doctrine refers to a U.S. policy articulated by U.S. President James Monroe in 1823 stating that European encroachment in the Western Hemisphere would be viewed as a hostile act against the United States.

Leis said this represents a “great opportunity” for Canada if it can craft a deal around economic and continental security.

Carney has been casting negotiations in this light, saying he wants to reach a new security and economic partnership with the United States.

Trump has also alluded to the security dimension when voicing his displeasure with low levels of defence spending by Canada. He raised the issue during his most recent comments on trade negotiation holdups.

“They want to be under the, as we call it, the Golden Dome,” Trump said. “And I said, ‘Well, you know, you’re gonna have to pay for that.’ They want it. They want a lot of things from our country. And for years, we did it. We basically protect them with our military. They spend very little money on their military, as you know, not an acceptable amount of money.”

Trump had put the price tag at US$71 billion in June for Canada to join the “Golden Dome“ project—his plan to build a new U.S. air defence system to protect against a variety of threats—making the project continental. Meanwhile, also in June, Carney pledged to reach the former NATO defence spending target of 2 percent of GDP by the end of this fiscal year, while also backing NATO’s plan to raise the bar to 5 percent by 2035.

Foreign Policy

Other factors that could play against Canada in reaching a trade deal with the United States are some of its recent foreign policy moves.

Ottawa has grown increasingly further away from Washington in the past two years on the Israel-Hamas conflict. A major break was announced last week, when Carney said on July 30 that Canada will recognize Palestinian statehood at the General Assembly of the United Nations this September, something the United States and Israel say rewards Hamas for conducting its October 2023 terrorist attacks.

Trump initially reacted to Carney’s move by saying on July 31 that Ottawa recognizing Palestine would make it “very hard” to reach a Canada-U.S. trade deal. Later that day, he told reporters he didn’t like what Carney said but that it would not be a “deal breaker.”

In other diplomatic moves that may not sit well with Trump, Canada sent two of its top ministers to Mexico this week to meet with Mexican President Claudia Sheinbaum in a bid to strengthen ties. Global Affairs Canada announced on Aug. 4 that Finance Minister François-Philippe Champagne and Foreign Affairs Minister Anita Anand will travel to Mexico City from Aug. 5 to Aug. 6 for the bilateral visit.