Canada must not rush into new trade deal with US

TORONTO (ICIS)–As US President Donald Trump keeps pursuing his erratic on-off tariff policies, Canada and other countries are coming under pressure to conclude bilateral deals with the US.

However, in a webinar hosted by Canadian law firm Torys, Canada’s former chief trade negotiator, Steve Verheul, advised countries not to rush into deals.

• What price will the US extract for a deal?
• Will the US honor the deal?
• What will happen to multilateral trade?

CANADA NEEDS US MARKET
Canada is “kind of stuck by the key facts” that about two thirds of its GDP relies on trade, and 75% of its exports go to the US, Verheul said.

While Canada can work to diversify its export markets and remove barriers to its inter-provincial trade to help offset some of the negative impacts from US tariffs, this will go only so far, he said.

“At the end of the day we are not going to be able to get away from some kind of a relationship with the US”, he said.

It was therefore in Canada’s interest to get started on negotiating a new deal with the US, Verheul said.

However, Canada needed to be cautious as the US administration currently sees itself in a strong position and would therefore make “extreme” demands, he said.

Verheul suggested that Canada and others wait until there is more “push-back” from stock market turmoil and economic indicators that could bring the US demands down to more reasonable levels.

He noted signs of push-back from US corporate leaders, as well as some Republican lawmakers.

Within the US administration, however, there did not seem much dissent to Trump’s hardline trade policies, he said.

Another challenge for Canada was that any new trade deal with the US will also include security-related issues, which will make the negotiations broader and more complicated, Verheul said.

Canada, of course, would aim to restore the free trade it enjoyed under the US-Mexico-Canada (USMCA) agreement, before Trump began imposing tariffs after starting his second term on 20 January, Verheul said, adding, “Anything less than that is going to be difficult to accept.”

Importantly, going forward Canada needed to try to cooperate with Mexico, as well, he said.

After Trump made his initial tariff threats, some prominent Canadian politicians criticized Mexico and called for its exclusion from USMCA.

Verheul added that Canada could take some comfort from Trump’s tariff exemptions for USMCA compliant goods and products.

That was an “important signal” and “gives us something to build on” as it was an acknowledgement that Trump sees North America of particular importance and that most of the region’s trade would continue to be duty-free – with the exception of the specific sectors the president views of strategic importance, Verheul said.

These sectors include auto; steel and aluminium, lumber, pharmaceuticals and semiconductors.

USMCA was concluded during Trump’s first term. At the time Trump, lauded it as, “a tremendous victory for American workers, farmers, manufacturers and businesses alike”. Verheul led the USMCA negotiations for Canada.

WHAT PRICE?
Verheul said that for Canada or others seeking a bilateral deal with the US, a key question was, “What price will the US extract for a deal?”

This was difficult to determine at this time as “things are changing day to day” at the White House and, “a lot of the policy thinking in this Trump administration is not backed up by a lot of careful analysis”, Verheul said.

In its tariff policy, the US was not just looking at a country’s tariffs, and how to counter those, he said.

Instead, the Trump administration was seeking to use tariffs to target other countries’ value added taxes (VAT) and alleged currency manipulations, as well.

Furthermore, Trump wants to raise revenue through tariffs, and at the same time he wants to use tariffs to incentivize the re-shoring of manufacturing capacities to the US, Verheul said.

Given these US ambitions, Verheul advised countries not to move too quickly on concluding deals.

“The countries that are most eager to conclude something with the US right now are going to face the most extreme US demands,” he said.

WILL US HONOR NEW DEALS?
The other question is whether the US will honor new bilateral deals, Verheul said.

He noted that the US has broken its obligations under most of its trade agreements and added that “the US is currently breaching the core fundamentals” of USMCA.

Despite the lack of assurances that the US will honor its end of new trade deals, Canada and other countries would still seek to obtain the “sense of added security” they may get from concluding these deals, he said.

“Better to have some kind of agreement than to have no agreement, even if you don’t have a lot of confidence in your trading partner living up to the agreement at the end of the day,” he said.

Verheul added that countries were also hoping that things may improve under a future US president.

“So, there is a certain element of ‘let’s do what we can during this administration’ and see if we can get back on track with the next administration, whatever that might look like”, he said.

FUTURE OF GLOBAL TRADE
Another key issue in rushing into bilateral deals with the US now is what this could mean for the future of multilateral trade, which is based on the World Trade Organization (WTO) and the most favored nation (MFN) rule.

A specific country may negotiate and reach a deal with the US, Verheul said.

However, is that country then going to provide the concessions it made to the US to all other trading partners, he asked.

If countries do not abide by the MFN rule, then the international trade system may unravel, with the US emerging as the hub and all other countries being the spokes, leaving the US in control of trade relations with all of those countries, he said.

As it stands, countries needed to ask themselves whether the current trade tensions were specific to Trump and would just last through the next US midterm elections or the end of his term in four years, Verheul said.

“Does everybody want to make a radical change to the entire world economy if it might turn around again, in two or four years?” he said.

CURRENT STATUS OF US-CANADA TARIFF CONFLICT
Canada’s finance ministry provided the following overview of the current status:

• On 4 March, US tariffs of 25% on Canadian goods and 10% on energy and potash exports from Canada to the US came into effect. The US subsequently limited these tariffs to non-USMCA compliant goods.
• On 12 March, the US imposed tariffs of 25% on Canadian steel and aluminium products.
• On 3 April, US tariffs of 25% on Canadian automobiles came into effect.
• Canada responded by imposing 25% tariffs on nearly C$60 billion (US$43 billion) of goods imported from the US, and on 9 April it imposed a 25% retaliatory tariff on US-made vehicles. Vehicle imports from the US were C$35.6 billion in 2024.

The retaliatory tariffs on US vehicles are the first implemented by the government of Mark Carney. Carney, who took over as prime minister from Justin Trudeau on 14 March, has called an election for 28 April.

Meanwhile, Trump on 9 April announced that his so-called reciprocal tariffs would be lowered to a universal 10% for most countries, for 90 days.

This 10% tariff will not apply to imports from Canada, Canadian government officials confirmed.

However, the earlier US tariffs on Canadian steel, aluminium and auto remain in place.

In chemicals and plastics, US-Canada trade comes to about C$ 115 billion/year, according to the Chemistry Industry Association of Canada (CIAC).

(US$1 = C$1.41)

Please also visit US tariffs, policy – impact on chemicals and energy

Thumbnail Photo: Steve Verheul (Source: Torys)

Focus article by Stefan Baumgarten