Canada, US: Canada-US Trade and Security Negotiations: State of Play

As Canada and the US celebrated their respective anniversaries of confederation and declaration of independence last week, we revisit the last few weeks of US-Canada trade-related headlines and breakdown their significance for Canadian and US businesses. While other US trading partners stare down the US administrations’ August 1 “reciprocal” tariff deadline, Canada is focused on inking a new trade and security deal prior to July 21.  

Canadian and US businesses should take note of the following:

• Canada and the US are past the half-way point of the 30-day deadline announced by Canada’s Prime Minister at the mid-June G7 summit to negotiate a new trade and security deal.
• Canada has made a significant concession to the US, terminating the imminent implementation of its Digital Services Tax.
• The US-Canada trade situation remains fluid, with on-and-off-again bilateral discussions, which could result in terminating, or ratcheting up, existing tariffs.
• The trade and security deal is likely to introduce new commitments for both Canada and the US; however, it is unlikely to replace the USMCA.
• Canada may face further pressure to make concessions related to foreign dairy imports and/or softwood lumber exports; however, concessions in either of these sectors remain unlikely.
• Importers and exporters should continue to closely monitor Canada-US trade related developments and can stay up-to-date on developments using Finance Canada’s new releases.
• A tariff-free US-Canada trading relationship going forward is unlikely; however, reductions in current tariff rates and the introduction of other protectionist trade measures (e.g. use of tariff rate quotas by the US to control imports of certain Canadian origin goods) remain possible.

Recap

After months of tit-for-tat tariffs on US and Canadian origin goods, both countries agreed to pursue bilateral discussions towards a new economic and security relationship during the mid-June G7 Leaders’ Summit. Prime Minister Carney promised a deal within 30 days, by July 21, 2025 (Trade Deal).

The bilateral discussions, led by Canada’s Ambassador to the United States, kicked off immediately, but were abruptly terminated on June 27 by the US, citing Canada’s intent to implement a unilateral Digital Services Tax (DST) on June 30. In an about-face, on June 29, Canada announced its intention to rescind the DST, providing a path forward for the bilateral discussions.

Cancelling the DST is Canada’s first major concession in these bilateral discussions. The cancellation follows other strategic announcements by Canada to address concerns voiced by the US administration on defence spending and border security (e.g. increasing Canada’s NATO defence spending to 2% of annual GDP by the end of 2025, and more recently by 5% of annual GDP by 2035, increasing border security spending commitments and the tabling of the Strong Borders Act).   

What is the DST?

The DST is a tax imposed by Canada on companies or consolidated groups, whether based in Canada or abroad, that generate annual revenues of at least €750 million and annual revenues of at least CAD 20 million from Canadian digital services. Canadian digital services revenue refers to revenue earned from specific categories of digital services, including online marketplace services, online advertising services, social media services and the provision of user data that are linked to Canadian users. Please see our blog detailing the recent developments surrounding the DST here.

Why is the DST influencing Canada-US trade negotiations?

The DST is one of several major trade irritants for the US. Canada unilaterally enacted the DST despite OECD members pausing digital taxes while negotiations for a standardized global approach to taxing the digital economy continued. The DST also uniquely applies to specific foreign companies, unlike Canada’s federal GST, which taxes all companies at the point of use.

The US first requested USMCA Dispute Settlement Consultations regarding the DST in August 2024, claiming that the DST discriminates against US companies and is inconsistent with USMCA commitments on cross-border trade in services and investment. On February 21, 2025, the US President declared that American businesses will “no longer prop up failed foreign economies through extortive fines and taxes” and ordered the US Trade Representative to consider whether to investigate the DST.

Will Canada make further concessions during the bilateral discussions?

It remains to be seen what further concessions Canada may be willing to make. Two additional longstanding trade irritants are in the US’ crosshairs: Canada’s dairy supply management regime and Canadian softwood lumber; however, these irritants may be best addressed during the scheduled 2026 USMCA review.

Dairy access was the subject of two (December 2021 and November 2023) USMCA dispute panels under the Biden administration and has also been in the crosshairs of the current US administration. Despite Canada acknowledging earlier this year that it would not make further concessions on supply management, perhaps Canada will indirectly provide further access to US entities by amending its current market access policies administered by Global Affairs Canada (e.g. providing TRQ access to all active applicants, like retailers).

The Canada-US softwood lumber dispute is the longest US-Canada trade dispute, spanning 25+ years. Currently, Canadian softwood lumber remains subject to AD/CVD duties, which is approximately 34.45%. On March 1, the President issued an Executive Order directing the Secretary of Commerce to initiate a section 232 investigation under the Trade Expansion Act focused on the effects on national security of imports of timber, lumber and their derivative products. This investigation is scheduled to conclude in November 2025 and could result in tariffs on Canadian softwood lumber (in addition to the current AD/CVD duties). The Executive Order explicitly cites foreign government support (i.e. subsidies) as a possible root cause of US national security. To address the US’ concerns, Canada would need to examine its current programs benefitting Canadian lumber mills.

Will the Trade Deal replace the USMCA?

It is unlikely that the Trade Deal will replace the USMCA with a bilateral US-Canada trading agreement. Current indications suggest that the USMCA will remain in effect, maintaining preferential tariff treatment for certain qualifying goods, while bilateral discussions may introduce TRQs for Canadian origin steel, aluminum, and automobiles. Additionally, the 2026 USMCA review process could result in changes to existing commitments (such as the section 232 steel and aluminum US-Canada side letter) and create new obligations, including rebuttable presumptions and re-export prohibitions related to forced labour. To support ongoing discussions, Canada may make other concessions regarding USMCA-related trade issues like dairy TRQ administration, which might not be addressed in the Trade Deal documentation.

We expect the Trade Deal will establish mutual commitments by Canada and the US above and beyond their current USMCA obligations and formalize those commitments in an agreement/treaty adopted by the domestic processes of each country. The Trade Deal aiming to also address mutual defence and security may take a similar shape to WWII’s economic defence pact, the Hyde Park Declaration, which the then Prime Minister credited with “laying the enduring foundations of a new world order”. The Trade Deal may make additional commitments in respect of critical minerals, which has been a subject of other US trade and security negotiations, border management, and perhaps, importantly, recognition of Canada’s sovereignty. It remains to be seen whether the US will also seek concessions on Canada’s trading relationship with China. Canada has already responded to US pressure to tariff Chinese origin goods, implementing surtaxes on Chinese origin steel, aluminum and EVs in October 2024.  

While Canada’s stated goal for the Trade Deal was to remove all US tariffs on Canadian-origin goods, this outcome appears unlikely. Canadian exporters should assume that some tariffs will remain in place (at a reduced rate) and that TRQs may be introduced to control the flow of Canadian steel, aluminum and automobiles and parts into the United States.

What happens if the bilateral discussions are unsuccessful?  

Canada has signaled it will adjust its retaliatory tariffs targeting US origin steel and aluminum products on July 21, to levels consistent with progress madeon the Trade Deal. In response Canada may increase or decrease its retaliatory tariffs from their current rates, it may also extend or claw back the US origin goods subject to the retaliatory tariffs.

What US-Canada tariffs are currently in place?

How should Canadian importers continue to arrange their business affairs to mitigate the impact of retaliatory tariffs on US origin goods?

Beyond considering tariff classification, origin, and valuation, several protections and strategic tariff relief policies remains in place for Canadian imports of US origin goods:

• Blanket remission process administered by the Canada Border Services Agency to provide immediate relief from retaliatory tariffs on US origin goods.
• Applicant-specific remission process administered by Finance Canada to provide discretionary relief from retaliatory tariffs on US origin goods.
• Application for duty drawback and other duties relief programs available in the normal course to obtain relief from retaliatory tariffs on US origin goods.
• Reliance on Chapter 99 tariff codes when imports meet certain end-use conditions as set out in the applicable customs notice and HTS (e.g. March 4 tariffs, March 13 tariffs, April 9 tariffs).
• The $10 billion Large Enterprise Tariff Loan facility remains open to applicants.