Trade agreements come with rules: Here’s what Canada can and cannot do

Lawrence Herman, senior fellow and international trade lawyer at C. D. Howe Institute, Herman & Associates, Cassidy Levy Kent LLP, joins BNN Bloomberg to discuss Canada's situation on global trade.

When Prime Minister Mark Carney travelled to China two weeks ago, he reached a deal to lower tariffs on Canadian canola and allow some electric vehicles into the country.

U.S. President Donald Trump appeared to not like that.

He threatened a 100 per cent tariff on Canadian goods, said “China will eat Canada alive,” and his administration suggested Canada may have violated the Canada–U.S.–Mexico Agreement (CUSMA).

Canada didn’t break any trade agreements, but the U.S. did, said Carlo Dade, a public policy expert and director of International Policy at the School of Public Policy at the University of Calgary.

The Americans wanted Canadians to “freak out” and believe they broke a trade agreement so Canada could be punished ahead of the CUSMA renegotiation, he explained.

“None of that is true, yet the perception is out there,” said Dade.

“Canada got played and the Americans played Canada perfectly.”

What Canada actually did

Canada did not enter into a comprehensive free trade agreement with China.

Instead, it reached limited tariff adjustments in specific sectors, including canola and electric vehicles.

Under international trade law, those types of arrangements do not constitute a free trade agreement, explains Dade.

“Those are working arrangements to recalibrate tariffs,” he said.

The trade rules, simplified

Before Trump, the way trade rules worked was straightforward, Lawrence Herman, an international trade lawyer, told BNN Bloomberg.

Over 100 countries, who are part of the World Trade Organization, set tariff rates and agreed to bind them, ensuring members were treated equally.

There are also exceptions where countries are permitted to enter preferential trade arrangements among themselves.

“That’s why we have the CUSMA, which provides for free trade among Canada, the U.S. and Mexico, but doesn’t give the rest of the world the same preference, and that’s allowed under the WTO agreement,” said Herman.

Under WTO and CUSMA rules, Canada cannot:

• Favour domestic companies simply because they are Canadian
• Tax imports more heavily than domestic goods
• Give one foreign country better treatment than another outside a trade agreement
• Exclude foreign firms from covered government procurement
• Ship goods tariff-free under CUSMA without meeting North American content rules

Where the system broke

The U.S. began to raise tariffs against countries citing a narrow national security exception under the WTO, called the International Emergency Economic Powers Act, said Herman.

“What Donald Trump has done is say, ‘I’m going to use that exception and declare that there is a national security emergency against countries of the world because we have a deficit in trade with those countries,” said Herman.

It even went further to favour domestic producers through Trump’s One Big Beautiful Bill, despite agreeing not to under the WTO.

“If the leader, and the most important economy in the world, is no longer respecting the rules, then other countries feel that they don’t have to respect the rules either,” said Herman.

“We’re in a new world. Those rules, which require good faith and respect, are no longer respected in good faith by the U.S. So the rules based trading order has been shattered.”

Canada stayed inside the rules

Canada is still following the rules, said Herman, clarifying that its tariffs against the U.S. and China were retaliatory and fall within permitted responses under trade law.

Canada is also fully entitled under international trade law to diversify its trade, he said.

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“We are allowed to enter into trade negotiations with whoever we want, provided that the agreement covers all or most of the trade between us,” said Herman.

Why the U.S. reacted anyway

Trump’s response is about leverage, not legality, said Herman.

“He wants to maintain his aggressive dominance over Canada...and he doesn’t want Canada to have diversified arrangements with rest of the world,” he said.

Dade said Trump also took personal offence to Carney’s comments at the World Economic Forum in Davos, Switzerland, where he said the global order is broken.

“This is unique with Trump. We don’t usually have leaders that make policy by how upset they are personally,” said Dade.

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Why CUSMA still matters

Despite the breakdown in enforcement, CUSMA continues to benefit all three countries, explains Herman.

Even though Trump has raised tariffs on certain imports into the U.S, a large amount of trade among Canada, the U.S. and Mexico remains duty-free, he said.

If CUSMA is discontinued, trade won’t stop between the countries, but preferential access will, explains Dade.

“You don’t necessarily incur a higher cost. You just incur the cost of not having the benefit cost,” he said.

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