Not all goods can easily become USMCA-compliant, leaving some businesses vulnerable

Trucks make their way to the Ambassador Bridge to cross into the U.S. at Detroit on April 1.

Bill Pugliano/Getty Images Canadian businesses now face a significant incentive to ensure that their goods are compliant with North America’s free-trade agreement to avoid U.S. tariffs, but some will face a greater challenge in achieving that compliance.



Canada and Mexico were both left out of U.S. President Donald Trump’s sweeping global tariffs on Wednesday but continue to face some sectoral levies, as well as across-the-board 25-per-cent tariffs on goods that are not compliant with the United States-Mexico-Canada Agreement.

Non-compliant energy products face a lower 10-per-cent tariff rate. While about 40 per cent of goods that enter the United States are typically USMCA-compliant, trade experts believe that the majority of Canadian exports to the U.S.

could become compliant with the completion of the necessary paperwork. Many businesses haven’t bothered with that because their products faced little or no tariffs under the most-favoured-nation tariff rate. Still, economists say that anywhere from 10 per cent to 20 per cent of U.

S.-bound shipments can’t feasibly be made compliant, in what they caution is a rough estimate. Some businesses will have more difficulty meeting the USMCA’s product-specific rules of origin, which have minimum requirements for the use of North American inputs and manufacturing, leaving them exposed to hefty tariffs if they can’t retool their supply chains and manufacturing processes.

Jesse Goldman, a partner at Osler, Hoskin & Harcourt LLP who specializes in trade law, said businesses in aerospace, telecommunications and medical equipment could be vulnerable. “Canadian manufacturers that rely on a lot of inputs from Europe and from Asia, and can’t switch and change up their supply chain very quickly, are going to be facing the 25-per-cent tariff until such time as they can either make their goods USMCA-compliant or figure out a different way to manufacture them in Canada,” Mr. Goldman told The Globe and Mail.

Why the White House’s math on country tariffs doesn’t add up The agricultural and resource sectors will largely be unaffected by the tariffs, which the U.S. has tied to border-related complaints with Canada and Mexico.

“If your product is entirely sourced and made in Canada ...

if it is coming from the ground, if you’re growing it, you’re mining it, you’re cutting it, that seems to be all safe,” said Steve Bozicevic, chief executive officer of A&A Customs Brokers. As for companies more likely to struggle with compliance, examples given by trade experts include exporters of toys and electronic equipment, or businesses dealing with rope and rubber products. If imported materials, such as rubber from China, make up a significant portion of the product’s value or if the product underwent a substantial transformation outside the continent, companies have to get creative, Mr.

Bozicevic said. They can lower supplier costs, find local sources, blend imported and local materials, or even increase production costs in Canada by raising wages or production complexity. “You say, ‘My manufacturing costs increased by 20 per cent,’ ” he said.

“You gave your Canadian employees raises.” Martha Harrison, a trade lawyer at McCarthy Tétrault LLP, said her firm is also fielding calls from food producers. Food products crossing the border must sometimes undergo sufficient transformation in Canada to be sold tariff-free.

For example, if fruit from Panama is imported into Canada, is glazed and then sold in the U.S., that finished product wouldn’t likely qualify for duty-free treatment because of insufficient transformation, she said.

But turning that fruit into jam through substantial processing could qualify, as the final product would be classified differently than the original fruit. For businesses that cannot make their products USMCA-compliant, it’s unclear how long they will continue to face tariffs. The White House executive order issued on Wednesday with regard to reciprocal tariffs noted that if those levies are lifted, a 12-per-cent tariff would apply to goods that are not compliant with the USMCA.

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