Trade Negotiations with the United States: Preliminary Considerations

To: The Next Canadian Government
From: Daniel Schwanen
Date: April 17, 2025
Re: Trade Negotiations with the United States: Preliminary Considerations

The “reciprocal” tariffs announced by the White House on April 2 were not tied to any specific barrier maintained by trade partners affected by these new duties. They were meant to punish trade partners for the sum of all unfair policies attributed to them, with the US trade deficit with them used as a measure of the degree of unfairness. They make little sense other than as a pressure tactic and were soon suspended for 90 days to allow for negotiations.

By that “standard,” the United States has determined that the reciprocal tariffs on Canadian products would be 12 percent (zero percent for energy and potash), once the border emergency declared under the International Economic Emergency Powers Act (IEEPA), which triggered a general 25-percent tariff against goods from Canada (10 percent for energy and potash) on March 4, has been lifted. Separate and higher tariffs (25 percent) will continue to apply to imports of autos, steel, aluminium, and any industry the US may target on grounds of supporting domestic industrial capacity for national security reasons, under s. 232 of the Trade Expansion Act of 1962.

Yet the United States has not chosen to withdraw from CUSMA/USMCA, and despite the 25-percent general IEEPA tariff, products certified as being of North American origin under its rules of origin, and which are not affected (or not yet) by s. 232 tariffs, still trade duty-free. Indeed, certification under those rules continues to be granted, although this process raises costs for firms that previously had duty-free access to the US market under most favoured nation zero tariff lines.

That said, the United States has a well-known list of specific grievances against Canada, and it now looks likely that these will be put before Canadian negotiators before too long, as part of an accelerated review of the CUSMA/USMCA (originally scheduled to take place by July 2026).

The April 2 tariff reveal, with its special punishment of countries with which the US runs a trade deficit, and subsequent comments by administration officials, lend weight to earlier pronouncements by Donald Trump that his end game is a reduced US trade deficit. We also know that, more generally, negotiations with partners to remove tariffs will be dependent on trading partners taking “significant steps to remedy non-reciprocal trade arrangements and align sufficiently with the United States on economic and national security matters,” which opens the door very wide as to what the United States may want in exchange.

The Trade Crisis Working Group convened by the C.D. Howe Institute weighed in this week on the implications of this context for forthcoming negotiations between Canada and the United States.

While some members of the group believed that it would be best to keep negotiations with the United States narrow and targeted, many felt that a broader discussion was inevitable. For example, negotiators would need to account for the implications for Canada of new US economic policies, such as those embodied in the recent “Restoring America’s Maritime Dominance” executive order, calling for cabinet secretaries and agency heads to engage “treaty allies, partners and other like-minded countries.” Tactically, there was general agreement that focusing on the most pressing issues and aligning Canada’s negotiating strategy with what matters most to the United States was key.

That said, Canada also needs to set the bar high. It needs to counter the narrative that its trade with the United States detracts from the latter’s industrial strength, when by and large it is doing exactly the opposite.

Canada’s objectives need to include: Securing zero tariffs; ensuring certainty – or at least greater stability – than that provided under CUSMA/USMCA, ideally through an agreement approved by the US Congress; and preserving autonomy in its domestic policies and international relationships, as well as our own defence and security arrangements.

In discussing what could make it attractive to negotiate with Canada on that basis, one proposal is to rely on a “macro” solution that could aim at balanced trade with the United States over time. While balanced trade, key to the administration’s vision, is an impossibility with each country (unless under a Soviet-style countertrade system), it is conceivable between Canada and the United States, and it has happened historically at times when the Canadian economy was relatively strong.

Measures to strengthen the Canadian economy, increase its defence spending – focusing especially on securing both our northern and southern borders – and developing critical minerals and other major projects would be key to the adoption of such a win-win framework for Canada-US negotiations. 

Within this framework, Canada could seek to be treated as being inside the tent with respect to the contribution its materials and auto industries can make to the sought-after strengthening of the US industrial base and its national security.

The general point is that Canada should, in these negotiations, leverage a credible plan to stimulate its own economic growth, since that can be expected to boost Canada’s imports from the United States.

Daniel Schwanen is Senior Vice-President at the C.D. Howe Institute.

To send a comment or leave feedback, email us at blog@cdhowe.org. 

The views expressed here are those of the author. The C.D. Howe Institute does not take corporate positions on policy matters.

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