Tax Insights: US imposes reciprocal tariffs on its trading partners ─ How will it affect Canadian businesses?

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Issue 2025-18

In brief

What happened?

On April 2, 2025, US President Donald Trump signed an executive order¹ that imposes:

• a baseline reciprocal tariff at a rate of 10%, starting April 5, 2025 (12:01 am ET) on most imports into the United States from all trading partners
• a higher reciprocal tariff of up to 50% for certain trading partners (identified in Annex I of the order), effective April 9, 2025 (12:01 am ET)

This executive order is issued under the US International Emergency Economic Powers Act (IEEPA), citing that the US needs “to address the national emergency posed by the large and persistent trade deficit that is driven by the absence of reciprocity” in their trade relationships.

However, on April 9, 2025, President Trump amended the above executive order by:

• for China, applying a 125%² reciprocal tariff rate, effective April 10, 2025 (12:01 am ET) because China had retaliated against the US for imposing reciprocal tariffs
• for other trading partners (identified in Annex I of the order), suspending the higher reciprocal tariff rates for 90 days, from April 10, 2025 (12:01 am ET) to July 9, 2025 (12:01 am ET), to allow negotiations with the US to address perceived unfair trade practices; the baseline 10% reciprocal tariff rate remains in effect for those trading partners

For Canada and Mexico, the reciprocal tariff will not come into effect as long as the executive orders under the IEEPA relating to border security concerns³ remain in effect. Under those executive orders, goods that qualify as originating goods under the Canada‑United States‑Mexico Agreement (CUSMA) are not subject to the IEEPA tariffs, while non‑CUSMA compliant goods are subject to a 25% tariff (10% for potash and Canadian energy products).

Canada and Mexico also continue to be subject to other recently imposed US tariffs⁴ (under the US Trade Expansion Act of 1962) on imports of: (i) steel and aluminum products, and (ii) automobiles and automobile parts.

Why is it relevant?

The US administration’s objective for implementing reciprocal tariffs on its trading partners is to rebalance international trade on what it perceives to be unfair trade relations. However, these reciprocal tariffs and potential retaliatory tariffs imposed by affected trading partners, as well as tariff policy changes that may result from negotiations between the US and their trading partners, are expected to fundamentally change the international trading system. This will affect how Canadian businesses engage in cross-border trade and operate in the global economy, and is expected to increase costs for Canadian businesses, disrupt supply chains and reduce profit margins.

Actions to consider

This new wave of global tariffs creates a dramatically more complex business environment. Businesses must continue to develop multiple planning models that reflect constantly changing tariff policies and prepare flexible strategies and contingency plans so that they can respond quickly to changes in the business environment. They should continue to review their goods to ensure that all goods that qualify for preferential treatment under the CUSMA are identified and gather proper documentation to support this treatment.

In detail

Background

The April 2, 2025 executive order is a result of the America First Trade Policy announced by President Trump on his inauguration day. On that day, President Trump directed the relevant US government agencies to undertake reviews and propose recommendations on a broad range of trade issues (e.g. tariffs, trade deficits, economic security), and to deliver a report of their findings by April 1, 2025. On February 13, 2025, he ordered the development of a comprehensive plan for reciprocal tariffs to restore fairness in US trade relationships and counter non‑reciprocal trading arrangements. All non‑reciprocal trade relationships and perceived unfair trade practices with its trading partners, including Canada, were examined (see “Report on foreign trade barriers” below).

For more information, see our Tax Insights, “US to impose reciprocal tariffs: How will it affect Canadian businesses?Opens in a new window.”

US reciprocal tariffs

Key provisions in the April 2, 2025 executive order on reciprocal tariffs that are relevant to Canada include:

• Canada will not be subject to a reciprocal tariff, provided that it is subject to the executive order under the IEEPA related to border security concerns; if that executive order is terminated or suspended, the reciprocal tariff executive order will apply to Canada, as follows:
  • goods that qualify as originating goods under CUSMA will continue to receive preferential treatment
  • non-CUSMA compliant goods will be subject to a 12% reciprocal tariff (except for energy or energy resources and potash)
• certain goods will not be subject to the reciprocal tariffs (listed in Annex II of the order), including:
  • all articles subject to 50 USC 1702(b) (e.g. books and other informational materials)
  • articles already subject to tariffs under section 232 of the Trade Expansion Act of 1962 (i.e. steel and aluminum, automobiles and automotive parts)
  • copper, pharmaceuticals, semiconductors, lumber articles, certain critical minerals, and energy and energy products
  • all articles from a trade partner subject to rates set forth in column 2 of the Harmonized Tariff Schedule of the United States
  • all articles that may become subject to future section 232 tariffs of the Trade Expansion Act of 1962

While the above noted goods are currently exempt from the reciprocal tariffs, they could be subject to future sector specific tariffs (e.g. pharmaceuticals, copper, lumber).

• the reciprocal tariff will apply only to the non‑US content of an imported good, provided at least 20% of the value of the imported good originated in the United States; US Customs and Border Protection (CBP) can request that the importer provides documentation that verifies the value of the US content of the imported good, and whether it was substantially finished in the United States
• the reciprocal tariff rate for certain trading partners could increase if they retaliate, or the rate could decrease if the trading partner takes significant steps to fix the perceived unfair trade practices and align more closely with the US on economic and national security issues

A CBP notice released on April 4, 2025 provides additional guidance on how the executive order will be implemented and states that drawback is available with respect to these tariffs.

Report on foreign trade barriers

On March 31, 2025, the Office of the United States Trade Representative (USTR) submitted the 2025 National Trade Estimate (NTE)⁵ to President Trump and Congress. The NTE is an annual report detailing foreign trade barriers faced by US exporters and USTR’s efforts to reduce those barriers. Highlights from the NTE report as it relates to foreign trade barriers with Canada follow:

• Canada's supply management system – Canada regulates its dairy and poultry through a supply management system involving production quotas, producer-marketing boards and tariff‑rate quotas (TRQs) for imports. This system severely limits US producers' ability to increase exports above TRQ levels and imposes high tariffs on imports beyond quota levels.
• Customs and trade facilitation issues – The implementation of the Canada Border Services Agency Assessment and Revenue Management (CARM)⁶ system and its mandatory participation has created access issues for US importers, which has affected the release of goods at customs. Importers have reported difficulty accessing the CARM Client Portal, and the transition period for “release prior to payment” is affecting the movement of goods.
• Restrictions on fresh produce imports – Canada prohibits bulk imports of fresh fruits and vegetables in packages exceeding certain sizes unless a ministerial exemption is granted; this complicates US access to the Canadian market.
• Digital services tax (DST) – Canada enacted a DST⁷ that may disproportionately affect US companies, raising concerns about its compliance with international tax agreements.
• Technical barriers to trade – Canada's zero plastic waste agenda aims to reduce plastic pollution, but raises concerns for US industry regarding food safety and trade impacts. In addition, Quebec’s Bill 96 is intended to strengthen French language use in the province, but US businesses are concerned about the requirement to translate a “generic term” or “product description” of its federally registered trademark into French.
• Market and services barriers – Canadian provincial liquor control boards create market access barriers for US wine, beer and spirits, and the Online Streaming Act imposes conditions on online streaming platforms to support Canadian programming.
• Mandatory bargaining code – The Online News Act requires platform services companies to negotiate with Canadian news providers to pay for content accessed via their digital platforms.

The takeaway

These reciprocal tariffs and any tariff policy changes that result from future negotiations between the US and its trading partners will have significant implications on businesses. The cost of doing business in Canada and globally will increase as these tariffs take hold. Many companies import goods globally, which often end up in the United States, making those goods subject to US tariffs.

Multinational organizations should evaluate their operations to determine if changes can be made. For example, instead of routing goods through the United States for distribution to Canada, Mexico, South America and Europe, a Canadian business could route those goods through Canada for distribution. This approach could avoid US tariffs on all goods that do not enter the United States and could potentially benefit from duty‑free entry into Canada. Canada has 15 trade agreements covering 51 countries, which can offer diverse opportunities for more efficient and cost‑effective distribution channels.

In addition, companies operating in this evolving international trade environment should:

• stay informed of ongoing developments, including government support programs, and engage with industry associations and government stakeholders
• continue scenario analysis and develop flexible strategies to adapt quickly
• rethink supply chain arrangements and take advantage of Canada’s trade agreements with non‑US countries
• ensure that their goods meet the specific criteria under the CUSMA and that the required documentation to prove CUSMA‑compliance is available (using tools, such as PwC’s Origin Compliance)

PwC can help your business navigate this current tariff situation. See our:

• Tariffs and Trade Policy Resource CentreOpens in a new window for extensive information to help your business assess and manage these tariffs
• Tariff relief: Unlocking government supportOpens in a new window for Canadian federal and provincial/territorial tariff-related support programs

^{1. Executive order “Regulating Imports with a Reciprocal Tariff to Rectify Trade Practices that Contribute to Large and Persistent Annual United States Goods Trade DeficitsOpens in a new window” (April 2, 2025).}

^{2. On April 8, 2025, President Trump had already amended his April 2, 2025 executive order, by increasing the reciprocal tariff rate for China from 34% to 84%, effective April 9, 2025 (12:01 am ET), because China had implemented retaliatory tariffs on imports from the United States.}

^{3. For more information, see our Tax Insights “US tariffs and Canadian countermeasures: How will it affect Canadian businesses?Opens in a new window” (March 7, 2025 update).}

^{4. For more information, see our Tax Insights:
 - “US imposes tariffs on steel and aluminum imports from CanadaOpens in a new window” (March 14, 2025 update)
 - “US imposes tariffs on automobiles and automobile parts from CanadaOpens in a new window”}

^{5. Office of the USTR report “2025 National Trade Estimate Report on Foreign Trade Barriers of the President of the United States on the Trade Agreements Program (PDF)Opens in a new window” (March 31, 2025).}

^{6. For more information, see our Tax Insights, “Businesses importing goods into Canada must register for CARM: Action required! (October 2024 update)Opens in a new window.”}

^{7. For more information, see our Tax Insights, “Canada's Digital Services Tax Act is now law: What is next and how can you prepare?Opens in a new window” (July 5, 2024 update).}