If you are a business or consumer involved in trade between the U.S. and Canada, you need to understand the new rules of the road. Currently, a major new tax—a tariff (or import tax)—has been put in place by the U.S. government on Canadian goods.
This tariff is a big deal because it exists outside of the normal trade agreement between the two countries. It creates a critical split: products that meet the rules of the USMCA trade deal get a free pass, but those that don’t get hit with a hefty tax.
1. The Standard “Emergency” Tax: The IEEPA Tariff
The new tariff is not a standard trade measure. It was imposed using the International Emergency Economic Powers Act (IEEPA), a powerful law that allows the U.S. President to regulate business transactions during a declared national emergency.
- The High Tax Rate: The U.S. now imposes a 35% tariff on the price of most Canadian products.
- Who Pays It? This 35% tax applies only to Canadian goods that do not meet the requirements of the United States–Mexico–Canada Agreement (USMCA). In short, if your product doesn’t qualify for the trade deal, you pay this steep tax.
2. The Golden Ticket: The USMCA Exemption (0% Tax)
The USMCA (United States-Mexico-Canada Agreement) is the free-trade deal between the three countries. It is the key to avoiding the new IEEPA tax entirely.
- The Path to Duty-Free: If a Canadian product successfully qualifies for USMCA—meaning it meets all the strict “rules of origin” and the proper paperwork is completed—it is completely exempt from the IEEPA tariff.
- The Benefit: This means the product can still enter the U.S. duty-free (with a 0% import tax), just as it did before the new IEEPA tariffs were put in place.
- What are “Rules of Origin”? These are clear, detailed rules that determine where a product genuinely comes from. It’s not enough for a product to simply be assembled in Canada; it often requires a minimum amount of its materials, parts, and manufacturing steps to have taken place within North America (the U.S., Mexico, or Canada).
3. Special Exceptions: Lower Tax for Key Sectors
While most non-qualifying goods get the 35% tax, a couple of major sectors important to the economy have been given a lower rate.
- Lower Tax Rate: Imports of energy (like oil and gas) and potash (a key ingredient for fertilizer) from Canada are only subject to a 10% IEEPA tariff if they fail to meet the USMCA standards.
- Why the Difference? This exception shows that policymakers recognize the importance of these specific raw materials to the U.S. economy, even when they don’t fully qualify under the trade deal.
4. The Risk of Cheating: Penalties for Evasion
U.S. customs officials are watching carefully for businesses that try to get around these new duties.
- The Evasion Method (Transshipment): Transshipment is an illegal attempt to hide a product’s true origin by routing it through another country. For example, claiming a product made in a non-North American country was actually made in Canada just to get a lower tariff.
- The Penalty: If customs authorities find a product was illegally transshipped to dodge the 35% tariff, they can hit those goods with an even higher penalty rate of 40%.
Key Takeaway for Businesses
The message is clear: USMCA compliance is more important than ever.
If your product qualifies for USMCA, you pay 0% in IEEPA tariffs. If it doesn’t qualify, you will pay a 35% or 10% tariff, making your product much more expensive for the U.S. market.
