The trade relationship between the United States (“US”) and Canada is facing renewed tensions as President Trump has indicated the US will impose a blanket 25 percent tariff on all Canadian goods on or soon after his inauguration on January 20, 2025.

In response, Canadian government officials have signaled Canada will respond with retaliatory tariffs and other possible countermeasures such as export taxes.  Consequently, it is important to understand how retaliatory import tariffs and export taxes have worked in the past, and how they might work in the future.

Import Tariffs – Echoes from 2018-2019

During the trade dispute of 2018-2019, the Trump Administration targeted Canadian steel and aluminum imports with tariffs through an executive order under the Trade Expansion Act of 1962.

In retaliation, Canada enacted two import surtax orders under section 53 of the Customs Tariff.  A 25 percent surtax was imposed on US steel and aluminum goods, while a 10 percent surtax was levied on a variety of other specifically-targeted goods, such as ketchup and coffee, to cause political fallout for the President in key US districts.

From a practical standpoint, the surtaxes functioned as an additional import tariff.  The party identified as the importer of the goods at the time of import to the Canada Border Services Agency was required to pay the surtax rate in the same manner as “regular” customs duties.  Accordingly, Canadian buyers were generally responsible for paying the surtaxes in cross-border transactions involving US goods.

Export Taxes – An Unlikely Countermeasure

An export tax is an uncommon tax governments levy on goods exported to international markets for sale. Between 1973 to 1985, Canada implemented an export tax on oil exports (and later all petroleum products) under the Oil Export Tax Act and Petroleum Administration Act (the “Acts”).

Under these Acts, a tax was levied on petroleum products exported from Canada on a per-barrel basis, payable by the exporter (seller) under whose license the oil was exported (under the export licensing regime at the time).

Retaliation – Questionable Economic Policy?

Just like the young hockey player learns not to retaliate to the pain they receive in front of the net, a non-retaliatory approach finds some support in the economic theory of “comparative advantage”. Under this theory, it is suggested that proceeding unilaterally with free trade would do Canada better, even in the face of US tariffs, than retaliating with its own tariffs.  Going it alone in free trade would enable competitive Canadian businesses to further develop their manufacturing competences and leverage that to diversify away from US markets.  Indeed, China has used this strategy successfully in the past.

Takeaways

Hopefully the tariffs threatened by President Trump do not come to fruition, and if they are imposed, Canada does not retaliate in kind. Should Canada impose any countermeasures, government officials will likely follow their previous playbook and implement surtaxes and export taxes in a similar format to the past.  However, such a tit for tat approach would be ill-advised.  It may be better for Canada to adopt a position of restraint in response to US tariffs, much like how a pro hockey player never retaliates in the face of a bully to avoid penalization and give their team to the best chance to win.

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