Canada-US Trade: Ups and Downs Over 160 Years

From before Confederation to the present day, trade between the two nations has seen constant change. The Epoch Times; Getty Images; The Canadian Press; AP

A cornerstone of Sir John A. Macdonald’s vision for the country he played a critical role in creating was a staunchly protectionist trade policy, to allow the growth of the new nation’s fledgling industrial sector against the American giants.

The pro-free trade Liberals of the time opposed the National Policy of Macdonald’s Conservatives, which imposed high tariffs on goods imported into Canada. However, over the century and a half that followed, the perspectives of the two sides changed and eventually merged, with free trade with the United States—or the reduction of trade barriers as much as possible—becoming a given part of life in Canada.

A peak in tensions over the issue came during the 1988 federal election, with Brian Mulroney’s Progressive Conservatives championing a free-trade deal with the United States and John Turner’s Liberals strongly opposing it.

As an “America-first” president takes power in the United States today who is rethinking the status quo of free trade with Canada, here’s a look at the roller-coaster history of trade pacts between Canada and its southern neighbour.

Pre-Confederation

Before Confederation in 1867, the provinces that would later form Canada were for a decade part of a free-trade treaty—called “reciprocity” at the time—with the United States.

In 1854, the United States and British North America signed an agreement called the Reciprocity Treaty, allowing the free trade of natural resources and granting fishermen from both regions access to additional coastal waters.

At the time, British North America, referring to the British colonies and territories in North America after the United States became independent in 1783, consisted of New Brunswick, Nova Scotia, Prince Edward Island, the colony of Newfoundland, and the province of Canada–now Ontario and Quebec.

But the United States abolished the treaty in 1866, partly because the province of Canada imposed the protectionist Cayley-Galt tariffs of 1858–59 on manufactured goods in an attempt to boost domestic manufacturing.

Some Americans felt Canada was the only party benefiting from the reciprocity agreement and, coupled with protectionist sentiments in the United States, the treaty was revoked.

1867: Confederation Is Formed

The need to strengthen the domestic market, along with fears that the larger and more economically powerful United States could dominate or even annex British North America, fuelled the push for Confederation, among a host of other reasons.

On July 1, 1867, four British colonies—Nova Scotia, New Brunswick, Ontario, and Quebec—united to form the Dominion of Canada as a self-governing state within the British Empire. Sir John A. Macdonald served as its founding prime minister from 1867 to 1873.

Sir John A. Macdonald, Canada's first prime minister, in an undated photo. NFB/National Archives of Canada

1879: Macdonald’s National Policy

In his second term in office, from 1878 to 1891, Macdonald’s Conservative Party introduced the National Policy in his first year, a protectionist strategy aimed at building up the national economy for the new country located north of an industrial giant.

The policy imposed heavy tariffs on imported goods to shield Canadian manufacturers from U.S. competition. It also focused on population growth through immigration and the expansion of infrastructure, including construction of a transcontinental railway.

From then until World War II, Canada continued taxing foreign imports to varying degrees.

1896-1911: Wilfrid Laurier’s Free-Trade Ambition

When Wilfrid Laurier brought the Liberal Party to power in 1896, he kept the National Policy in place even though the protectionist strategy was primarily a Conservative measure and the Liberals preferred free trade. The Laurier government then reached a free-trade agreement with the United States, which was approved by the U.S. Congress in 1911. However, despite having a parliamentary majority, Laurier decided to hold an election later that year with free trade as one of the key issues of focus.

Prime Minister Wilfrid Laurier. National Archives of Canada/The Canadian Press

In that election, Laurier was defeated by the Conservatives amid emerging fears that free trade could give America economic control over Canada, weaken the British connection, and potentially lead to annexation. Subsequently, the 1911 free-trade agreement was never implemented.

During the decade after the end of World War I, protectionism was strong in the United States, particularly under Republican leadership. Tariffs on imports remained high, and although there were occasional efforts to lower them to encourage free trade, such as via the Underwood-Simmons Tariff Act of 1913, tariffs were repeatedly increased to shield the economy.

1930: Great Depression Tariffs

During the Great Depression in the 1930s, trade relations between Canada and the United States hit a low point. The United States implemented the Tariff Act of 1930, more commonly known as the Smoot-Hawley Tariff Act, which increased tariffs on more than 20,000 imported goods to protect the economy. U.S. imports and exports declined dramatically, worsening the effects of the Great Depression.

Some scholars argue that the protectionist measures led to a wave of retaliation from trading partners, including Canada, which also raised its tariffs in 1930.

1935-1938: Tariff Reduction

After Canada-U.S. trade declined during the Great Depression, the two countries signed a landmark agreement in 1935 that revitalized cross-border trade for the first time since Confederation.

The Canada-U.S. Reciprocal Trade Agreement, led by Prime Minister William Lyon Mackenzie King and U.S. President Franklin Roosevelt, lowered tariffs and eased long-standing trade barriers, although not to the same extent as the Reciprocity Treaty of 1854.

A second round of tariff reductions followed in a 1938 agreement, expanding on the previous deal. It eased imports into Canada while helping the country export goods such as lumber, cattle, fish, dairy products, potatoes, and machinery.

In the World War II years that followed, and the subsequent years of the Cold War, there was heightened U.S. interest in Canada’s natural resources, to bolster national security.

U.S. President Franklin Roosevelt drives with Canada's Prime Minister W. L. MacKenzie King to the Little White House, his home in Warm Springs, Georgia, on April 23, 1940. George Skadding/AP Photo

1948: GATT Agreement

In 1948, Prime Minister Mackenzie King halted free-trade negotiations with the United States, with some scholars attributing his decision to the long-standing Canadian concern that closer Canada-U.S. economic ties would lead to American annexation.

Instead, Canada joined the General Agreement on Tariffs and Trade (GATT), a pact among 23 nations at the time to reduce trade barriers like tariffs and quotas. Through multiple negotiation rounds, tariff levels were significantly reduced among participating countries, renewing steps toward free trade between Canada and the United States. The GATT was later replaced by the World Trade Organization (WTO) in 1995.

1965: Canada-US Auto Pact

Canada and the United States signed an agreement in 1965 to integrate their auto industries by removing tariffs on vehicles and parts sent across the border. Known as the Canada-U.S. Auto Pact, the deal led to a surge in trade between the two countries.

The pact was terminated in 2001 after the WTO ruled that it violated international trade rules by excluding foreign automakers. But by then, Canada and the United States were already trading under a broader deal.

U.S. President Lyndon B. Johnson and Canadian Prime Minister Lester B. Pearson sign an agreement at the LBJ Ranch in Stonewall, Texas, freeing trade in motor vehicles from custom duties between the two countries, on Feb. 16, 1965. AP Photo

1989: Canada-US Free-Trade Agreement

In the late 1980s, Canada and the United States signed what was at the time the largest-ever trade agreement between the two countries. Known as the Canada-United States Trade Agreement, the deal ultimately eliminated all tariffs between the two countries, cementing their ties as major trading partners.

The agreement was signed by President Ronald Reagan and Prime Minister Brian Mulroney in January 1988 and came into force in 1989.

The debate leading up to the agreement was very contentious in Canada, with the Liberals and the NDP saying it would erode Canada’s sovereignty and effectively make the nation America’s “51st state.” The Progressive Conservative (PC) government’s legislation to implement the agreement was delayed in the Senate, which became part of the reason for Mulroney to call an election in 1988, and for the issue to become the most important topic of the election. Mulroney’s PCs went on to win another majority government in that election.

1994: NAFTA Is Born

The large free-trade zone created by the U.S.-Canada agreement was later expanded to include Mexico. A new deal called the North American Free Trade Agreement (NAFTA) superseded the previous Canada-U.S. agreement, creating a trilateral trading bloc that would become one of the world’s largest free trade areas.

Mexican President Carlos Salinas de Gortari greets Canadian Prime Minister Brian Mulroney and U.S. President George Bush in San Antonio, Texas, on Oct. 7, 1992, as the three leaders negotiate NAFTA. Marcy Nighswander/AP Photo

Signed in 1992 and implemented on Jan. 1, 1994, NAFTA immediately removed tariffs on most goods traded between the three countries. It also set a 15-year timeline for phasing out most of the remaining barriers to cross-border investment and trade flow.

2017-2018: Trump’s Calls for Revision of NAFTA

During his 2016 presidential campaign, Donald Trump pledged to renegotiate NAFTA, referring to it as a “disaster for American workers.” Trump took office in January 2017, and the following year he signed a new trade agreement with Mexico and Canada, known as the United States-Mexico-Canada Agreement (USMCA). To secure the agreement, Canada had to make concessions on its supply management system to give more market access to U.S. dairy producers.

In June 2018, citing trade deficits and weakened domestic production, Trump imposed tariffs of 25 percent on Canadian steel and 10 percent on aluminum, while NAFTA renegotiations were still underway. The president justified the move, saying reliance on foreign products threatened U.S. national security.

Canada retaliated the following month, imposing 25 percent tariffs on U.S. steel imports, 10 percent tariffs on aluminum, and a 10 percent surtax on select items, including food, household goods, and appliances. Both governments lifted their respective tariffs on May 20, 2019.

2020: USMCA Takes Effect

The United States-Mexico-Canada Agreement came into force on July 1, 2020, replacing the 26-year-old NAFTA. The updated agreement included provisions on car manufacturing, labour, corruption, intellectual property, and digital trade. It also included a clause requiring the three countries to review the agreement every six years.

Mexican President Enrique Peña Nieto (L), U.S. President Donald Trump, and Canadian Prime Minister Justin Trudeau sign a new free-trade agreement on the sidelines of the G20 Leaders' Summit in Buenos Aires, Argentina, on Nov. 30, 2018. Saul Loeb/AFP via Getty Images

2025: Trump Threatens Tariffs on All Imports From Canada

During his 2024 election campaign, Trump pledged to invoke the six-year renegotiation provision of the USMCA, which is due for review in July 2026.

Following Trump’s election in November last year, Canada’s premiers called on Ottawa to negotiate a bilateral trade deal with the United States that excludes Mexico. This was in a bid to alleviate America’s concern about China’s abuse of trade pacts, including concerns that Mexico is allegedly being used as a “backdoor” for Chinese imports.

Shortly after being elected, Trump threatened to slap a 25 percent tariff on all goods coming from Canada and Mexico unless the two countries address the flow of illegal migrants and drugs into the United States. In discussing the tariffs, he also indicated that he believes Canada and Mexico are taking advantage of the free-trade deal to the detriment of the United States.

Trump signed an executive order on Feb. 1 to impose the threatened tariffs on Mexico and Canada, as well as a 10 percent tariff on China on top of the existing tariffs on that country. However, on Feb. 3, following a call with Mexican President Claudia Sheinbaum and later with Prime Minister Justin Trudeau, Trump agreed to pause tariffs for 30 days while the two countries implement border security measures.

On his first day in office on Jan. 20, Trump ordered his officials to review existing trade practices with other countries and to make recommendations for changes.

Trump’s nominee for secretary of commerce, Howard Lutnick, has said Trump’s first round of threatened tariffs are focused on ensuring the halt of drugs and illegal migrants, while a second round could be possible depending on the outcome of the officials’ study of trade practices. The study is due in April.