A 30-Day Reprieve in the US-Canada Trade War: What Companies Should be Considering Now

On Monday, February 3, 2025, just before market close, U.S. President Donald Trump and Canadian Prime Minister Justin Trudeau announced they had reached an agreement to postpone the application of tariffs on goods originating from Canada and the U.S., respectively, for 30 days. The temporary delay creates an opportunity for businesses to review their internal measures and implement key changes and/or policies that will place them on more solid footing in the event tariffs come in force, and which they may have been unable to implement during the rapid-fire announcements of the past few days.

Background

On February 1, 2025, President Trump signed an executive order (the “Executive Order”) applying a 25% tariff to all goods originating in Canada and imported into the U.S. (other than “energy and energy resources”, which would instead be subject to a 10% tariff), beginning on February 4, 2025. President Trump’s cited justification for the Executive Order was to prevent “illegal migration” and the flow of illicit substances, namely fentanyl, from Canada to the U.S.

Prime Minister Trudeau responded with a two-step retaliatory plan, which would first impose a 25% tariff on approximately $30 billion worth of U.S. imports starting on February 4 (“Phase 1”), followed by additional tariffs to a further approximately $125 billion in annual volume of imports from the U.S. (“Phase 2”, and together with Phase 1, the “Retaliatory Measures”).

 Our detailed assessment of the Executive Order and Retaliatory Measures is set out in our February 3 client alert

Following Prime Minister Trudeau’s announcement of the Retaliatory Measures, the full list of Phase 1 goods was released. The list is extensive and includes, among other things, food products, beauty and hygiene products, apparel, manufacturing and home goods. A full list of goods subject to Phase 1 of the Retaliatory Measures, along with their Harmonized System codes, can be found on Canada’s Department of Finance website here.

The goods encapsulated by Phase 2 (described in more detail below) are expected to include items such as passenger vehicles, steel and aluminum products and certain fruits and vegetables.

Alongside Canada’s Retaliatory Measures, a number of Canadian provinces announced additional measures against U.S. products such as removing U.S. alcohol from liquor distribution entities. A full list of provincial measures announced as of February 3, 2025 is in our client alert here.

The Canadian government has announced that there will be a remission process to consider requests for relief from the Retaliatory Measures. As described in more detail below, the government will consider requests for remission where 1) goods used as inputs cannot be sourced domestically and 2) there are exceptional circumstances where there is a risk of an adverse impact on the Canadian economy.

30-day reprieve following Trudeau-Trump call

Late afternoon on Monday, February 3, 2025, following a call with Prime Minister Trudeau, President Trump agreed to postpone the imposition of the tariffs set out in the Executive Order by 30 days in exchange for a series of commitments from Canada related to border control and the flow of fentanyl. In particular, Prime Minister Trudeau committed to appointing a “fentanyl czar” to coordinate with the U.S. on combatting drug trafficking and further agreed to list Mexican cartels as terrorists under Canadian law.

Prime Minister Trudeau also reiterated Canada’s plans to forge ahead with a $1.3 billion border security plan announced in December 2024 (as addressed in our client alert “ 2024 Fall Economic Statement signals significant changes ahead for economic sanctions, modern slavery, and AML measures”) that would include increased co-ordination with U.S. officials to crack down on drugs and migration.

What Does the Delay Mean for Businesses?

The 30-day reprieve gives businesses a much-needed opportunity to assess their supply chain and consider their response to the incoming tariffs. Information published to date has helpfully clarified (although much remains unclear) the scope of the tariffs and the goods that are expected to be targeted by both side’s measures. At this time, businesses should consider the following:

1. Conduct a supply chain review to determine extent of cross-border trade.

President Trump’s Executive Order is broad in scope and will apply a 25% tariff to all goods originating in Canada other than “energy and “energy resources” (which will be subject to a 10% tariff, as noted below).

Businesses should conduct a review of the scope of their exposure to cross-border trade for all non-energy-related goods. This will include an assessment of the number of direct exports of goods to the United States and direct imports of goods to Canada, and vice versa.

Although the measures announced to date focus on tariffs or surtaxes on imports into each of the United States and Canada, the supply chain review should also consider the possibility of other measures, including the imposition of export taxes, quotas or prohibitions on critical products as well as discriminatory measures in government procurement at both the federal and provincial or state levels.  

2. Identify goods that are subject to the U.S.’s “energy and energy resources” exception.

The Executive Order defines “energy and energy resources” as including crude oil, natural gas, lease condensates, natural gas liquids, refined petroleum products, uranium, coal, biofuels, geothermal heat, hydropower and critical minerals. Businesses, particularly in the energy sector, should consider whether goods in their supply chain fall within this exception, meaning that they would be subject to a significantly lower tariff rate.

3. Identify goods subject to Phase 1 of Canada’s Retaliatory Measures.

As noted above, Canada’s list of goods subject to Phase 1 of the Retaliatory Measures is lengthy and includes a wide range of food, beauty, home and other consumer goods. Businesses should review the full list of goods subject to Phase 1 (viewable on Canada’s Department of Finance website here) and consider whether goods in their supply chain are captured.

The assessment of whether a particular good falls within the scope of Phase 1 will require a careful assessment of the product’s tariff classification. Businesses should develop and/or review their internal policies for tariff classification to ensure a clear delineation of which goods fall within the scope of Phase 1. In cases where they are unsure, businesses should consult with their customs counsel and advisors.

4. Identify goods likely to be subject to Phase 2 of Canada’s Retaliatory Measures.

Although a full list of items subject to Phase 2 has not been published, the Press Release announcing the Retaliatory Measures noted that Phase 2 is likely to include “passenger vehicles and trucks, including electric vehicles, steel and aluminum products, certain fruits and vegetables, aerospace products, beef, pork, dairy, trucks and buses, recreational vehicles, and recreational boats.” Businesses should seek to identify whether any of the goods in their supply chain are likely to fall within these categories.

5. Review your customs declarations and key drivers of tariff liability.

If you are an importer, carefully review the key elements that drive the assessment of tariffs on your products, including tariff classification (which could be a factor in determining whether your product is within scope of any U.S. tariff or retaliatory measure) as well as the value for duty and origin of the goods being imported. A close review of and legally permissible adjustments to these elements of your customs declarations could further mitigate exposure to tariff liability.

6. Consider whether tariff relief may be available to your business.

As noted above, and as described in more detail in our February 3 client alert “Canada Responds to U.S. Tariffs – What Businesses Need to Know”, the Canadian government will consider requests for tariff relief in “exceptional and compelling circumstances that, from a public policy perspective, are found to outweigh the primary rationale behind the application of the tariff.” This may include instances where goods used as inputs cannot be sourced domestically, either on a national or regional basis, or reasonably from non-U.S. sources, or where there are exceptional circumstances that could cause a severe adverse impact to the Canadian economy.

In order to apply for such relief, businesses will need to fill out a template with specific and detailed questions about the company, the relevant goods that are subject to surtaxes, whether there are Canadian alternatives to sourcing the goods and how those goods are used by the requesting company.

Although we expect these remissions to be available only in the most exceptional of circumstances, businesses who provide essential goods should consider whether they may wish to seek a remission.

7. Consider options for assembly facilities abroad.

Businesses whose goods are assembled in a jurisdiction that is not their target market may wish to consider building assembly facilities in their target market, particularly if the goods at issue are high value. Assembling goods in the target market based on components built elsewhere, rather than shipping finished products into the target market after assembling them elsewhere, may minimize the customs value of goods that are subject to duties.

8. Review contractual arrangements and seek proactive negotiation with trading partners.

Businesses should review their contractual agreements with cross-border trading partners to determine which contracting party will be responsible for additional costs caused by the tariffs. This will become an increasingly important element of cross-border partnership due diligence and should be taken into account when negotiating new contracts or updating prior contracts with cross-border trading partners. In particular, businesses should ensure that their incoterms are not accruing tariff liability inadvertently.

There may be opportunities in the coming weeks to proactively negotiate terms with trading partners to ensure that, when the time comes, there is clarity and mutual agreement between the parties as to how the tariffs will be addressed.

9. Work with tax and trade advisors.

Although the announcements of the past few days have provided some clarity, this remains a complex set of issues. Be sure to consult with your trade and tax advisors about risk, as well as how to best structure your supply chain to minimize the impact of tariffs and retaliatory measures.

10. Diversify your trading base.

Over the longer term, consider how to diversify your trading base to include trading partners in countries other than the United States. This should include an examination of how your business can leverage Canada’s trade and investment agreements with other countries, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) or the Canada-European Union Comprehensive Economic and Trade Agreement (CETA).

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This situation is extremely fluid, and we expect new information on tariffs and countermeasures to come out of both Canada and the U.S. on a daily basis. As discussed in our recent client alerts, there are actions that Canadian businesses can take to mitigate the damage caused by these tariffs and any retaliatory measures. McCarthy Tétrault’s International Trade and Investment Law Group has advised, and continues to advise, a large number of clients in a variety of industries on how to navigate the uncertainty caused by the U.S. tariffs and the Canadian countermeasures. We will continue to monitor and report on any further developments in this space and expect the next client alert will provide more details on how these measures can impact supply chains and what strategies could be used to address these impacts.