OTTAWA — The majority of Canadian goods exported to the United States fall outside the North American free trade pact—a figure that until now represented little more than a desire for businesses to avoid extra paperwork.

Earlier this month, U.S. President Donald Trump announced he would grant a temporary carve-out from his steep universal tariffs for any goods deemed compliant with the United States-Mexico-Canada Agreement (USMCA) reached during his previous administration. He said the reprieve would end April 2, when he has threatened to impose wide-ranging reciprocal tariffs.

A White House official said at the time that about 62 per cent of imports from Canada are not considered USMCA-compliant and so would still face tariffs of 25 per cent, or 10 per cent for energy products and potash.

While Canada does not dispute this figure, it does not tell the whole story.

The numbers

U.S. trade data shows about 38 per cent of total Canadian exports to the U.S. went through USMCA last year, which is the flipside of the figure cited by the White House. That means nearly US$157 billion worth of goods went through USMCA, while another US$255 billion worth went across the border with no preferential tariff treatment claimed.

A note from RBC Economics estimated about 57 per cent of exports to the U.S. were traded outside USMCA, but were eligible under the agreement. Proving eligibility requires paperwork many smaller businesses considered onerous, though, and many Canadian exports required little to no duties anyway. As a result, not every product eligible for USMCA status is shipped that way. If it were, only six per cent of goods would be non-compliant, including a large portion of those from the aerospace sector.

Rules of origin

The continental free trade deal gives preferential tariff treatment to goods that meet certain rules regarding the country of origin.

The details of those rules can vary. If the product literally comes from the ground—from the potatoes grown on Prince Edward Island to the potash mined in the Prairies—then it is eligible. It can get complicated for manufactured goods, where there can be a threshold for the amount of content originating from either the U.S., Canada or Mexico. 

The paperwork

Actually getting preferential tariff treatment under USMCA requires paperwork to prove a product is eligible. There is no standard form for this “certification of origin,” but the shipper must provide a document listing information about the exporter, the producer, the importer, the tariff classification code, how it meets rules-of-origin criteria and other administrative details.

In sectors where Canada-U.S. trade happens at a high volume, such as autos, there are complicated formulas for determining originating status. In those industries, the time and expense of USMCA paperwork is just part of doing business. 

Other businesses, especially small ones, have not always considered it worthwhile. That is because, until now, most goods crossing the Canada-U.S. border would already qualify for low tariffs rates, or even duty-free treatment, under the “most favoured nation” principle at the World Trade Organization. Although WTO countries are supposed to treat all their trading partners equally, the rule lets them negotiate preferential tariff treatment through separate trade agreements. Since the duty outside USMCA, if it even applied, could be as low as two per cent, many smaller businesses—Canadian exporters and American importers—simply eat that cost.

“We just trade. We trade freely, openly, and have been doing so for a very long time,” Liberal MP Mary Ng said earlier this month in her previous role as international trade minister.

Changing math

David Coulson, the chief operating officer of BorderBuddy, a Canada-U.S. customs brokerage, said many businesses are now scrambling to complete those forms. Some got a rude awakening once the universal tariffs came into effect March 4—and now see the benefit of proving they are USMCA-compliant, at least as long as the carve-out lasts.

“We’ve gotten a couple shippers within the last week that suddenly got a $40,000 duty bill [when] they had zero last week,” Coulson said. “And these were items that were eligible for USMCA and they hadn’t done their homework in order to produce that certificate.”

John Babcock, a spokesperson for Global Affairs Canada, wrote in an emailed statement last week that the “actual scope of U.S. imports from Canada that can qualify for preferential treatment under [USMCA] is unclear.” In other words, it is hard to say how many are in that position, given the impossibility of tracking something when exporters and importers deliberately steered around the tracking process.