Trade war: Canada's situation is different from the EU's

When the EU followed Japan and signed up to 15% tariffs, many commentators predicted that Canada would "cave" to Trump too.

But Canada's situation is different to that of the other countries Trump has signed deals with.

The EU was facing across the board tariffs of 30% from August 1st, with 50% on steel and aluminium; the new deal is 15% across the board, with exemptions for the aeronautical industry. The 50% tariff on steel and aluminium remains.

Currently there is a 25% tariff on non-USMCA-compliant goods from Canada and 25% on steel, aluminium and lumber. But USMCA compliant goods are at 0%. That's because the USMCA trade treaty was ratified by Congress. (The EU did not have a similar trade treaty with the US; instead they were trading on WTO terms where either side can change the tariffs on a whim).

To get USMCA certification, the manufacturer has to prove that 60% of the content of their goods were made in either Canada, Mexico and the US.

70% of Canadian manufacturers are USMCA compliant. The rest, who either hadn't bothered with the paperwork because they could previously sell their goods at a negligible 2.5% tariff, or because their goods have high Chinese content, have a path to addressing this. They can shrink their Chinese content, increase their Canadian content, and knuckle down and do the paperwork. Most are scrambling to do just that.

That means Trump's dispute with Canada centres around steel and aluminium, and agriculture, in particular the dairy industry, but also lumber.

Canada exports vast quantities of steel, aluminium and lumber to the USA. Trump has slapped tariffs on these sectors to force Canadians to open up their dairy industry.

Canadians point out that the US is free to export dairy to Canada as long as it complies with Canadian regulations (which are tougher than American regs). They're betting on Americans struggling to replace Canadian steel domestically, and finding the tariffs on steel imports hard to cope with. Remember, Trump has left tariffs on European steel at 50%, and the tariff on Chinese steel is 55%. So if you are an American manufacturer who desperately needs steel, importing from Canada and paying the 25% tariff is the best option.

All of this means that Canada, unlike the EU, has cards to play. Trump has a card to play too; the USMCA treaty is up for renegotiation in 2026, and he's betting the Canadians will fold unless they can find other markets before then.