By Prof. David Collins
The recent announcement of sweeping tariffs by US President Donald Trump on imports from Canada, Mexico, and China has ignited a global trade conflict with far-reaching implications. President Trump’s decision to impose a 25% tariff on most Canadian and Mexican goods, with a 10% tariff on Canadian energy resources, and an additional 10% on Chinese imports, marks a significant departure from the longstanding free trade relationship between the two nations. In response to the US tariff threat, Canada announced retaliatory measures, planning to impose 25% targeted tariffs on $155 billion worth of US imports.
While a temporary reprieve has been granted for both Canada and Mexico, it is not clear that the tariffs will not eventually be imposed, as they have been on China, potentially violating the US’s commitments under international treaties. All four countries, as WTO members, are bound not to raise tariffs beyond their committed levels under Article II of the General Agreement on Tariffs and Trade (GATT). Article I of GATT further requires countries not to treat imports from different WTO members differently with respect to tariffs. Article 2.4 of the United States-Mexico-Canada Agreement (USMCA), which replaced the North American Free Trade Agreement (NAFTA) prevents those three parties from increasing tariffs.
The USMCA was negotiated by President Trump – indeed it was one of his signature achievements in international economic policy during his first term. Ongoing US grievances against Canada under the USMCA are legitimate – Canada retains a highly protectionist dairy sector and is closed to foreign investment in telecommunications, aviation and banking. Still, it is unclear why Trump did not wait until the USMCA is renegotiated next year, or else insist that the renegotiation be brought forward. His impatience may have something to do with the fact that Canada’s parliament is currently prorogued pending the Prime Minister’s resignation. A Canadian federal election and a new Prime Minister are likely before the summer.
In the event that US tariffs are ultimately applied next month, should Canada or Mexico challenge Trump’s tariffs either under the USMCA or the WTO, the US may argue that its actions are justified under the national security exceptions of Article 32.2 of the USMCA or Article XXI of GATT. President Trump claimed authority to impose the tariff, which would normally require congressional approval, under the US International Emergency Economic Powers Act on the basis that Canada and Mexico’s failure to close their borders to drug smuggling and illegal migrants amounts to a national security risk. It is unclear whether a USMCA or GATT panel would be willing to investigate a claim were the national security defence asserted, as these provisions are framed in “self-judging” language which would seem to preclude an objective assessment of their legitimacy. If a panel were to hear such an argument, the broad application of tariffs to all imports, rather than targeted measures, may be seen as disproportionate to the stated security threat.
It is unlikely that President Trump’s real reason for the tariffs was the smuggling of fentanyl across the US’s northern frontier. Canada accounted for less than 1% of the fentanyl entering the US, although there are valid concerns that Canada has not properly attended to drug cartels emerging within its territory. It is more likely that Trump sought to use tariffs to raise revenue as part of his efforts to cut income taxes. He has counted on Americans believing that tariffs are paid by the exporter (Canadians, Mexicans and Chinese) rather than the importer (Americans) – which of course is untrue. It is quite likely that domestic pressure from both Democrats and Republicans, fearing more inflation, led to Trump’s offering of a month-long reprieve to Canada (and Mexico). Most of the additional border measures offered by Canada had already been arranged back in December. It is not clear what the appointment of a “fentanyl czar” by the Canadian government will achieve in reality, although tighter border security should be welcomed by both countries. Far from securing a victory over his neighbours, Trump’s relenting on the tariffs is closer to an embarrassing capitulation.
Canada’s planned retaliatory measures, while potentially justifiable as a response to the US action, must also comply with WTO and USMCA rules. The principle of proportionality in international trade law suggests that any countermeasures should be commensurate with the harm caused by the initial action. Were the disputes ever to be adjudicated by an international trade tribunal under the USMCA or GATT, it may be necessary to assess whether Canada’s expected response meets this criterion.
The implications of this trade war extend beyond North America, potentially affecting the United Kingdom’s trade relations with the US, as well as Canada and Mexico. As the UK navigates its post-Brexit trade strategy, it finds itself in a precarious position between its traditional allies. The UK’s ability to negotiate favourable trade terms with both the US and Canada (as well as Mexico and China) may be compromised by the ongoing dispute. If the UK aligns too closely with either side, it risks damaging relations with the other. A Canada-UK free trade agreement is still under negotiation and a re-set of relations with China also appears to be in contemplation by the current UK government.
The North American trade war also raises questions about the future of regional and multilateral trade agreements. The US has demonstrated itself to be an unreliable trade partner, potentially undermining USMCA renegotiations. If major economies like the US and Canada can unilaterally impose tariffs despite existing agreements, it may undermine confidence in the international trade system. This could have significant implications for the UK as it seeks to establish new trade relationships globally.
The dispute furthermore highlights the potential need for reform in international trade law. The current system may be ill-equipped to handle rapidly evolving economic relationships and national security concerns, particularly in an era of heightened nationalism and economic interventionism. The fact that the WTO dispute settlement system lacks a functional Appellate Body (due to the US’s ongoing blockage of appointment of new members) has only exacerbated these issues. The UK, as a significant player in international trade, may need to consider its role in shaping future trade regulations that can better address these challenges. It must also keep in mind that it may end up being the next target of US tariffs.
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