Context: The recent U.S.–Canada trade dispute highlights the risks of excessive economic dependence and uncertainty surrounding trade agreements, offering important lessons for India’s trade negotiations with the United States.
U.S.–Canada Economic Integration
- Deep integration: U.S.–Canada economic integration began with free trade in automobiles and parts in 1965, expanded through a 1989 Free Trade Agreement, and subsequently into the North American Free Trade Agreement (NAFTA) in 1994.
- Complementary trade: Canada, as a smaller economy, pursued economies of scale by specialising in a few products for the large U.S. market.
- Strategic supplies: Canada accounts for about 70% of oil refined in the U.S. Midwest, 60% of U.S. aluminium supply, and nearly all lumber varieties used in U.S. residential construction.
Recent Trade Dispute
- Despite decades of successful economic integration, the relationship has deteriorated, with Canada withdrawing from negotiations for a new tariff agreement, citing last-minute U.S. demands; the U.S. has made similar allegations against Canada.
- Canada imposed reciprocal tariffs of up to 50% on U.S. imports in response to equivalent U.S. tariffs on Canadian goods.
- From September 29, the U.S. is set to ban imports of certain Canadian alcoholic spirits, dairy products and motorcycles, further escalating tensions.
- U.S. President Donald Trump’s statements have added to uncertainty rather than signalling reconciliation.
Lessons for India
1. Do Not Assume Preferential U.S. Treatment
- If the U.S. imposes aggressive trade measures even against a neighbour, alliance partner and long-standing trade partner, India should not assume that favourable treatment will necessarily continue.
- India must therefore preserve policy flexibility and diversified export markets rather than becoming excessively dependent on the U.S. market.
2. Evaluate Trade Deals Beyond Tariff Benefits
- Rushing into trade agreements may be counterproductive if the long-term costs of market opening outweigh expected tariff or market-access benefits.
- Malaysia withdrew from a U.S. trade deal after arguing that the expected benefits had diminished once the U.S. reciprocal tariff system was considered illegal.
- India should similarly assess tariff concessions, domestic industry exposure, non-tariff barriers and future policy risks before concluding a U.S. trade agreement.
3. A Trade Deal May Not End Tariff Pressure
- India’s experience shows that tariff concessions may not eliminate subsequent trade restrictions based on other grounds.
- Despite the February 2026 agreement limiting tariffs on Indian imports to 18%, the U.S. continued investigations into forced labour and excess capacity, which could potentially result in tariffs exceeding the agreed level.
- Hence, India should evaluate not merely the headline tariff but also trade-remedy investigations and regulatory measures that could subsequently restrict market access.
4. Competitiveness Advantage Can Change
- The advantage secured through a trade agreement is not necessarily permanent, as changes in U.S. policy, tariffs or treatment of competing countries can alter India's relative competitiveness.
- India has therefore been justified in insisting that any agreement should provide a clear and durable advantage over competing exporters.
