Trump Announces Plans for Reciprocal Tariffs on Canadian Lumber, Dairy

On March 7, President Trump announced plans for "reciprocal" tariffs on Canadian lumber and dairy imports, which could be implemented as soon as early next week. This follows his March 1 executive order directing the Commerce Department to investigate whether foreign government subsidies for lumber and derivative products threaten U.S. national security.

Forecast

• U.S.-Canada trade relations will remain turbulent until USMCA joint review negotiations conclude, with tariffs and threats of tariffs used as leverage to extract concessions from Ottawa and counter alleged discriminatory practices.
• Should the Section 232 national security investigation on lumber and derivative products proceed without a settlement, resulting duties may persist for years, similar to those imposed on steel and aluminum.
• Canada will likely expand its retaliatory measures proportionate to U.S. actions.

Recommendation

U.S. importers of Canadian dairy and lumber products should expect continuing long-term volatility and seek alternative sources. These sectors represent entrenched structural differences between the U.S. and Canada that have persisted for decades and were not able to be adequately addressed by the USMCA.

U.S. companies importing other products also should diversify their supply chains but maintain relationships with Canadian suppliers. The overall bilateral relationship will ultimately stabilize around a new equilibrium after the USMCA renegotiation concludes, although tensions related to specific products may continue if Canada remains unwilling to make significant changes in response to U.S. and international concerns.

The report from the Section 232 lumber investigation is due by November 26, 2025, at which time additional duties may be imposed. These tariffs may result in higher market prices for both domestic and imported lumber. Companies in lumber-dependent industries such as construction should monitor the investigation and factor potential cost increases into their long-term planning. Impacted U.S. lumber consumers should consider submitting comments at appropriate times in the proceeding.

Background

President Trump's targeting of Canadian lumber and dairy imports signals the administration's willingness to disrupt relationships with close allies to address longstanding trade irritants and secure more favorable terms. These sectors represent decades-old disputes that previous trade agreements, including USMCA, failed to fully resolve.

The softwood lumber dispute dates to 1982, when U.S. producers first alleged in a petition filed with the Department of Commerce that Canada's provincial governments unfairly subsidize their timber industry.

The dispute centers on Canada's system of administratively set stumpage fees, which differs from the U.S. approach of market-determined timber prices. U.S. producers claim Canadian provincial stumpage fees are significantly below market prices, amounting to an unfair subsidy for Canadian producers. Despite negotiated settlements in 1996 and 2006 and numerous challenges through NAFTA, WTO and now USMCA mechanisms, the dispute remains unresolved. The U.S. insists Canada adopt market-based pricing, while Canada maintains its sovereign right to manage public resources and support an important domestic industry.

Similarly, Canada's dairy sector operates under a supply management system that establishes production quotas, pricing controls, and strict import limitations. This system uses tariff rate quotas (TRQs) that permit limited imports at low duties but impose prohibitive tariffs of 150-300% on imports exceeding these quotas.

Although USMCA increased U.S. dairy access to Canadian markets, the allocation remains minimal at just 3.5% of Canadian consumption. A recent WTO panel found Canada had violated USMCA commitments by directing the vast majority of quota allocations to Canadian processors, effectively limiting foreign competition.

The EU and New Zealand have joined the U.S. in criticizing Canada's dairy management system. However, both the dairy and lumber industries receive significant political protection in Canada, making substantial policy changes unlikely without considerable external pressure.