The $20 billion trade off: How Trump is using Section 338 to force concessions from Canada

The US and Canada have long discussed issues such as Canadian softwood lumber exports and Canada’s protected dairy market. Yet the two countries have also remained close allies and trading partners.

The 5,525-mile US-Canada border remains undefended. About 330,000 people and $2 billion worth of goods cross the border each day, reported AP. Around 800,000 Canadians also live in the United States.

Trump has repeatedly pushed tariffs on Canadian goods and has also joked about making Canada the 51st US state. 

Tension between the two neighbours have reached to such an extent that a petition seeking the removal of US Ambassador Pete Hoekstra has collected nearly 218,000 signatures since July 21, reported AP. The petition accuses Hoekstra, a Trump ally, of having “normalized” Trump’s comments about annexing Canada.

The latest tariff threat has raised the stakes further. Canada depends heavily on the US market. Nearly 72% of Canadian goods exports went to the United States last year, according to AP report.

Canadian Prime Minister Mark Carney said the two sides were still negotiating on Monday. “The negotiations are very intense and delicate. This is not the time to talk about negotiations in public,” Carney said in French.

What does US want from Canada?

The US is seeking several concessions from Canada as part of the effort to resolve the dispute, according to AP report.

One major US demand involves defence purchases. Washington wants Ottawa to buy more US military equipment, including F-35 fighter jets, according to Ryan Majerus, a partner at law firm King & Spalding and a former US trade official, as reported by AP.

The US also wants Canada to participate in President Trump’s “Golden Dome” missile defence programme.

Another key issue is access to critical minerals. Washington wants greater access to Canadian supplies as it tries to reduce US dependence on China for strategically important minerals. Canada has large natural-resource reserves, making its supplies important for US industries and national security, reported AP.

The negotiations therefore go beyond the immediate question of tariffs on consumer and industrial products. The Trump administration also wants Canada to make changes that could strengthen US defence capabilities and supply chains.

Canada, meanwhile, wants relief from several US trade measures. Ottawa wants the United States to reduce or remove tariffs on steel and aluminium, reported AP. Canada also wants relief from US tariffs on softwood lumber, a longstanding source of disagreement between the two countries.

The US has accused Canada of unfairly subsidising its softwood lumber industry. The negotiations have therefore created a trade-off. Washington wants more access to Canadian markets, minerals and defence cooperation. Ottawa wants the US to ease tariffs that have already affected Canadian exporters.

Majerus said both sides have an incentive to reach an agreement. “I don’t think either side really wants these tariffs to come into effect,” he said, as reported by AP. “There’s a pretty strong push on both sides to find an off ramp here,” he added. 

That “off ramp” could involve a deal before the 50% tariffs take effect, reported AP. The new duties would come ahead of the November US mid-term elections, while American voters already face concerns over the high cost of living.

A fresh round of tariffs could raise costs for US importers and consumers. US importers would initially pay the tariffs, although businesses can pass some or all of those costs to consumers through higher prices.

That creates a political risk for the Trump administration if the dispute pushes prices higher before voters head to the polls. Canada also faces major pressure because of its dependence on the US market. 

A tariff on Canadian products can make those goods more expensive in the United States and reduce their competitiveness, reported AP. Canadian exporters could then face weaker demand in their largest foreign market.

Ottawa therefore has strong reasons to reach a deal. But political pressure inside Canada makes major concessions difficult.

Canadian government cannot simply accept US demands without showing that it has secured something in return, according to Daniel Beland, a political science professor at McGill University in Montreal.

“Making further concessions without getting something meaningful in exchange would probably lead to a strong backlash,” Beland said, as reported by AP. 

He also warned that Canada could appear weak if it gives in to US pressure without a significant return. “The risk is for the Carney government to make Canada look weak and, therefore, even more vulnerable to future trade and geopolitical bullying on the part of the Trump administration,” he said, as reported by AP.

Why is Trump using a new tariff law?

Trump has made tariffs a central part of his second-term economic policy. He previously imposed broad import taxes on goods from countries around the world. The administration justified those measures in part by citing the long-running US trade deficit.

The US Supreme Court ruled in February that Trump had exceeded his authority with those tariffs. That decision also created the possibility of refunds for importers that had paid the duties.

Trump then sought other legal tools to impose tariffs. In July, his administration imposed tariffs of 10% to 12.5% on 59 countries and the European Union, according to AP report. Together, those countries account for about 99% of US imports. The administration linked those tariffs to alleged failures to restrict imports made with forced labour.

For Canada, Trump has turned to a provision that dates back almost a century. The president invoked Section 338 of the Tariff Act of 1930 to impose tariffs of up to 50% on products that account for about 5% of Canadian exports to the United States, reported AP.

The law dates back to the period of the Great Depression. Congress passed the 1930 tariff law as the US economy and global economy faced severe pressure.

The legislation became known as the Smoot-Hawley Tariff Act, named after its congressional sponsors. Economists and historians have long criticised the tariffs for restricting international trade and worsening the Great Depression.

Section 338 allows the president to impose tariffs of up to 50% on imports from countries that discriminate against US businesses, reported AP. The provision differs from Section 301 of the Trade Act of 1974, which US trade officials have traditionally used for certain trade sanctions.

Section 301 requires an investigation. Section 338 does not require such an investigation, according to AP. There is also no fixed limit on how long tariffs imposed under Section 338 can remain in place.

Trump has accused Canada of discriminating against US exports of automobiles, alcohol and cheese, reported AP.

Canada and China were the only countries that responded with retaliatory tariffs of their own when Trump imposed duties on their products last year, reported AP.

US Trade Representative Jamieson Greer said Washington would respond if Canada retaliated again. “If a country retaliates against us, we’re obviously not going to tolerate that,” Greer said at the Iowa State Fair on Friday, as reported by AP.”We’ll take action,” he said.

Greer also said he believed Canada wanted a more conciliatory approach, but added that the outcome would depend on the negotiations.

The new tariff threat gives Washington additional leverage at a critical time because the US and Canada are also renegotiating their broader North American trade agreement.

The US-Mexico-Canada Agreement, or USMCA, governs a large part of trade between the three countries. Trump pushed Canada and Mexico to accept the agreement during his first term. The United States now wants to re-negotiate the agreement again.

Christopher Gundermann, a fellow in the economics programme at the Center for Strategic and International Studies, said the tariff dispute and the USMCA negotiations are closely connected. “From Carney’s perspective, you need (USMCA) to be renegotiated,” Gundermann said, as reported by AP. “You can’t renegotiate it with a massive trade war going on,” he said.