OTTAWA — Canada is granting the United States a major carve-out from its retaliatory tariffs, which Prime Minister Mark Carney says will help maintain the advantage President Donald Trump has given his northern neighbour through the North American trade pact.

What’s changing?

Beginning Sept. 1, the federal government will not apply its 25 per cent counter-tariffs to any U.S. goods that enter through the United States-Mexico-Canada Agreement (USMCA) that Trump negotiated during his first term to replace the North American Free Trade Agreement.

Canada launched its initial wave of retaliatory tariffs in early March on a wide range of U.S. products worth $30 billion, from orange juice to motorcycles, in response to Trump’s 25 per cent universal tariffs on Canadian goods. Days later, Trump granted a carve-out for anything that moved through USMCA. Canada did not reciprocate at the time with a corresponding exemption.

How does it work?

The USMCA, which in Canada is also known as CUSMA, gives preferential tariff treatment to goods that meet certain rules regarding the country of origin. The shipper needs to complete paperwork to prove a product is eligible. That can be onerous. RBC Economics estimated that just 38 per cent of Canadian exports to the U.S. moved through USMCA last year, but when there is a will there is a way. In June, RBC reported, 92 per cent of Canadian goods moved duty-free. The new carve-out from Canada means businesses shipping U.S. goods into Canada will need to take those steps, too.

Why is it changing?

After Trump announced his tariffs on the auto sector this spring, Carney declared the old Canada-U.S. relationship “over” and vowed to negotiate a new one. The carve-out for USMCA-compliant goods was already in place at the time. Much has happened since, including Trump’s decision to hike the fentanyl-linked tariffs on non-USMCA goods to 35 per cent on Aug. 1.

Carney highlighted Trump’s decision that day to preserve Canada’s carve-out for USMCA-compliant goods. That has kept Canada’s effective U.S. tariff rate low—at 5.6 per cent, Carney said Friday, compared to a global average of 16 per cent.

“Canada currently has the best trade deal with the United States. While it’s different from what we had before, it is still better than that of any other country,” the prime minister said in Ottawa. Yet Carney also noted that Trump has made clear he is serious about overhauling U.S. trade policy in a way that means there is scant hope of escaping tariffs entirely. “As we work to address outstanding trade issues with the United States, it’s important—it’s vital—we do everything we can to preserve this unique advantage for Canadian workers and Canadian businesses.”

What’s next?

Carney said Trump agreed Thursday in a phone call to “intensify” Canada-U.S. trade talks as a result of the move. He said the federal government will also launch new consultations for the review of the USCMA, which is due by July 2026, and a new industrial strategy that will help shore up parts of the economy hit by Trump’s sector-specific tariffs, such as steel and autos.

Which retaliatory tariffs are staying?

The federal government is keeping its 25 per cent counter-tariffs on $12.6 billion worth of steel and $3 billion of aluminum products from the U.S. Canada also has 25 per cent retaliatory tariffs on vehicles made in the U.S., but there are USMCA-related exemptions for those, too. A six-month reprieve from tariffs on goods used in Canadian manufacturing or processing, packaging food or beverages, as well as for health care, public health, public safety and national security began in April.

What about the money?

The Liberal election platform booked $20 billion worth of revenue from retaliatory tariffs in the current fiscal year. It is difficult to say how much has flowed in to date, but the Fiscal Monitor showed that customs import duties contributed $3.4 billion to federal coffers from March to May this year—a 168 per cent increase over that period in 2024.

What’s the reaction?

Conservative Leader Pierre Poilievre accused Carney of breaking his election promises to strike back at American tariffs and secure a new trade and security deal with Trump. “His elbows have mysteriously gone missing,” he told reporters Friday on Parliament Hill.

Goldy Hyder, president and CEO of the Business Council of Canada, called the decision “a necessary step to preserve and strengthen our preferential trade relationship with our most important trading partner.” 

Catherine Fortin LeFaivre, senior vice-president of international policy and global partnerships at the Canadian Chamber of Commerce, said businesses hit by sector-specific tariffs have “borne the brunt” of the trade war, without any USMCA exemption. “Canada must work closely with these businesses to calibrate our response while pressing for a lasting resolution with the U.S. and other trade partners,” she wrote in a statement.