(Photo by Pixabay)
News Analysis
Prime Minister Mark Carney’s decision last week to drop some of Ottawa’s counter-tariffs against the United States to re-start stalled trade talks could significantly impact grocery prices for Canadians.
Prices for a variety of goods are expected to drop as of next month when the reciprocal tariffs will officially be removed by the Canadian government.
Ottawa slapped a surtax on $30 billion worth of U.S. goods in March in response to the 25 percent tariffs the White House imposed on Canada due to concerns about border security and drug trafficking. The March 3 order imposed a 25 percent tariff on 1,256 different types of goods of a wide variety, from food stuffs to firearms.
A total of 366 different food items are covered by the tariffs, which will be removed on Sept. 1, Carney announced on Aug. 22, a day after speaking with U.S. President Donald Trump.
Some of the U.S. products being tariffed since March include meat, milk, yogurt, and cheese. A wide variety of fruits and vegetables are targeted, such as tomatoes, citrus fruit, melons, and peppers. Cereals including wheat, rye, barley, and rice are also impacted.
Food inflation had risen in past months as the overall Consumer Price Index tracked lower. Food inflation rose to 3.8 percent in April, the highest level since December 2023, while general inflation was at 1.7 percent.
Statistics Canada said the largest contributors to food inflation were the rise in the prices of fresh vegetables, fresh or frozen beef, coffee and tea, sugar and confectionary, and other food preparations. All of these items, if imported from the United States, were subjected to a 25 percent surtax.
Prices for these products are expected to come down after Sept. 1. A wide range of personal and household items will also no longer be tariffed, such as beauty products, toilet paper, soap, and kitchenware. Other necessities such as tires, for anything from automobiles to aircraft and bicycles, will also no longer be tariffed.
Amid a housing shortage and a pledge by Ottawa to speed up the construction of new homes, prices for construction materials could also come down after Sept. 1. A number of building products coming from the United States are the subject of a surtax, such as different types of wood, particle boards, fibreboards, plywood, windows, doors, shingles, and flooring panels.
The Sept. 1 removal of the counter-tariffs will arrive too late for the parents of school-age children who need to refresh their wardrobes. Ottawa imposed tariffs on various categories of children’s clothing, including jackets, dresses, skirts, and pants.
Tariff Strategy
Canada was the only country, apart from China, to retaliate against the tariffs imposed by the Trump administration. The response was swift in early March, in the last days of Justin Trudeau’s tenure as prime minister.
The idea was to put pressure on certain sectors of the U.S. economy while trying to mitigate the impacts on Canada. This strategy remained in place under Carney and he defended it earlier this month.
“We have always said that we will apply tariffs where they have the maximum impact in the United States and a minimum impact in Canada,” Carney said on Aug. 5. The prime minister was responding to a reporter’s question about why Canada had not retaliated after Trump increased the tariff rate on Canada to 35 percent on Aug. 1.
A key distinction to make in the trade conflict between Canada and the United States is that the general 35 percent U.S. tariff, imposed in March at the initial rate of 25 percent, does not apply to goods covered by the United States-Mexico-Canada (USMCA) free trade agreement. Steel, aluminum, copper, and autos, however, come under separate sectoral tariffs.
This means that even though Canada is facing novel U.S. trade policy and tariffs under the new administration, it still faces an advantageous situation compared to other countries. According to the Fitch ratings agency, the United States has an average effective tariff rate of 17 percent, while Canada has an average rate of 10 percent.
Canada had not included USMCA exemptions in its retaliatory measures, and it became an irritant in the trade talks between Ottawa and Washington.
“I think some of the retaliatory tariffs to the U.S. are a huge irritant,” U.S. Ambassador Pete Hoekstra told podcaster Jasmin Laine earlier this month.
“Our negotiators have said ‘we are not going to implement tariffs on any products that are covered under [USMCA].’ Canadians have said those guardrails are off,” Hoekstra said, as trade talks were stalled.
Canada became an outlier with other major U.S. trading partners like the European Union, Japan, and South Korea reaching trade deals to receive lower tariff rates.
Mexico, which falls under the same tariff regime as Canada, also remains without a deal, but was granted a three-months pause instead of a tariff increase like Canada saw. Mexico, unlike Canada, had not retaliated to Trump’s tariffs.
Carney made the move last week to remove the irritant mentioned by Hoekstra, saying that Canada already has the “best trade deal” with the United States. “The actual U.S. average tariff rate on Canadian goods is 5.6% and remains the lowest among all its trading partners, and more than 85% of Canada-U.S. trade is now tariff-free,” Carney said in a statement.
He said that in this context, his government would match the Trump administration and remove tariffs on U.S. goods compliant with the USMCA.
The sectoral tariffs on metals and automobiles, which remain in place, have been causing the most damage to the Canadian economy. Ottawa has imposed retaliatory measures for these tariffs and Carney said those would not be removed. Some of these are not in effect, however, due to a remission order to help public and private sectors of the economy.
Carney said his government’s focus going forward will be “squarely” on bringing down Trump’s tariffs on sectors he deems strategic.
The U.S. sectoral tariffs, imposed under a national security rationale, have remained in place even for countries that reached recent trade deals. Some, however, obtained a discount. This includes the United Kingdom, which had the tariff on its steel and aluminum exports to the United States maintained at 25 percent, while other countries face a 50 percent rate.
In this context, it seems unlikely Canada will be able to do away with all the U.S. tariffs, which are imposed in part to rebuild the U.S. manufacturing sector.
“Canada and Mexico have taken a lot of our business over the years,” Trump said on Aug. 22. “They took a lot of our business, and it’s basically all coming back into the United States now. We’re hot as a pistol, and it’s coming back in because of tariffs and the incentives we give.”