Fen Osler Hampson

August 6, 2025

In the aftermath of the August 1st decision by the Trump administration to ratchet up tariffs to 35% on all non-CUSMA-compliant Canadian exports, Canada finds itself at a crossroads. Donald Trump’s 50% tariffs on steel, aluminum, and copper already strike at the core of our heavy industries. Automobiles and softwood lumber are also in his crosshairs.

Unless there is a breakthrough in talks soon, or relief through successful court challenges against presidential overreach in Trump’s use of the International Emergency Economic Powers Act (IEEPA) to justify his sweeping tariffs, further trouble on the trade front may arise unless we adjust our strategy. The time has come for Canadian negotiators to consider redirecting talks away from tariffs to tariff rate quota-based (TRQ) trade.

The rationale for such a Canadian bargaining pivot is straightforward. It begins with a simple assessment of why quotas, rather than simply negotiating for tariff reductions or eliminations, should be the centerpiece of our advocacy. By their nature, tariffs are blunt instruments. When the US slaps a 35% or, in the case of steel and aluminum, a 50% duty at the border, Canadian producers do not recoup any benefit; rather, it is the US Treasury that lines its pockets.

Quotas, on the other hand, set a ceiling for managed trade. Within the agreed threshold, trade can flow tariff-free (or nearly so), and our exporters capture the higher prices that accompany restricted, but predictable, access to a foreign market, in this case, the US. For industries operating on razor-thin margins, quotas provide a lifeline that brings stability to trading relationships. Tariffs only kick in if the quota is exceeded.

But this also begs the question of why Trump would be receptive to a discussion about TRQs? Trump is facing growing political pressure from US industries whose operations are being disrupted by steel, aluminum and auto tariffs, raising costs and complicating supply chains. TRQs can address these domestic concerns by protecting US industries without causing the same level of operational disruption or economic fallout as his broad-based tariffs, but they also maintain room for further negotiation if needed. Additionally, TRQs establish predictable limits on imports, offering market stability and clarity while giving the US leverage because tariffs would only apply if those quotas were surpassed. This approach helps Trump appear tough on trade while avoiding immediate Canadian retaliation.

Premier David Eby of British Columbia has called for TRQs instead of tariffs on BC lumber exports to the US. The same principle should be applied to Canadian exports in steel, aluminum, and assembled autos. Quota levels should, at a minimum, preserve the status quo in trade volumes, thus ensuring that existing market share is protected. Tariffs would only take effect when Canadian shipments exceed the agreed-upon limits. Such an arrangement might also have a sunset clause allowing the parties to revisit the terms of the arrangement in several years’ time, when the US under a different administration might be more open to Canada.

There is precedent for this approach, not least in CUSMA’s side letters covering auto quotas and Section 232 tariffs. Similarly, CUSMA (Canada-United States-Mexico Agreement) already uses TRQs in agriculture. The US-U.K. Economic Prosperity Deal, established earlier this summer, also includes a TRQ rate arrangement for automobiles, with reduced tariffs on up to 100,000 vehicles imported annually and preferential rates for parts critical to auto supply chains. These mechanisms work, and they form durable templates for sector-specific relief.  Moreover, TRQs are legal and widely accepted under World Trade Organization rules and have been included under member country tariff schedules. A TRQ permits imports of a product up to a certain quantity at a lower tariff rate, with higher tariffs applied once that quota is exceeded.

In the auto sector, symmetry is also key. Currently, Canada imports roughly 1.7 million vehicles from the US, and ships roughly 1.2 million southwards. New TRQs should be negotiated bi-directionally, i.e., both countries would cap duty-free imports at or near these levels, with any excess incurring tariffs. Importantly, there should be no quotas or punitive duties on auto parts, safeguarding the deeply integrated North American supply chains upon which both economies depend. Furthermore, it would be important for Canada to retain control, as it currently does in poultry and dairy, of how TRQs are allocated in different sectors.

The real lever for Canada may lie in the mounting dissatisfaction among the Big Three automakers. These companies are now publicly criticizing the fact that US tariffs not only target Canadian steel and aluminum, but also extend to vehicles imported from Asia and Europe. While these tariffs are intended to protect the American market, industry leaders argue that, when combined with high duties on steel and aluminum, these policies actually make it more expensive for North American manufacturers to produce vehicles relative to their foreign competitors. As a result, the Big Three face higher input costs, ultimately placing them at a severe competitive disadvantage compared to foreign competitors who may not be subject to the same cost pressures or retaliatory trade barriers.

The sensible path, to which US negotiators have already opened the door in other bilateral deals, is a comprehensive set of sector-specific quotas that guarantee stability for both partners’ industries at current trade volumes.

The louder these complaints echo in phone calls to the White House and members of Congress, the more leverage Ottawa’s negotiators can bring to the table as they press for not just auto sector quotas, but also for reducing the 50% tariffs on Canadian steel and aluminum, which American manufacturers rely on for affordable, high-quality input materials.

TRQs should also be central in talks over copper and softwood lumber. Trump’s recent executive order imposed a 50% penalty on semi-finished copper, while stopping short of targeting refined metal. The signal is clear: one sector after another is vulnerable. Across these industries, tariffed-quota regimes that preserve current flows while allowing for minor, managed increases aligned with demand growth, could both save Canadian jobs and provide a foundation for American industrial stability.

It is equally essential that Canadian negotiators look beyond the technical details and focus on political reality. Treasury Secretary Scott Bessent has acknowledged the concerns raised by US manufacturers and automakers regarding the impact of aluminum tariffs. He has indicated openness to considering targeted tariff relief or adjustments for key trading partners, and noted that negotiated carve-outs or exemptions, such as volume-based arrangements, may be possible if discussions between both sides proceed in good faith. This opening should not be squandered. If the US administration has any appetite for flexibility, now is the moment for Canadian officials to press for sector-specific relief using TRQs as an alternative to tariffs.

To be sure, Canada’s hand has been weakened by recent, arguably ill-timed, moves on the diplomatic front. Prime Minister Mark Carney’s announcement that Canada will recognize a Palestinian state at the upcoming UN General Assembly in September was, in substance, a principled foreign policy decision. But timing is everything in politics. To make such a move while the US president is publicly railing against Canadian “unfairness” at the negotiating table was akin to waving a red flag before a charging bull. By injecting an unrelated irritant into an already fraught bilateral dialogue, Ottawa has risked giving Trump precisely the pretext he may seek to either escalate or attach additional, unrelated conditions to any emerging trade deal. If circumstances require the government to “walk back” or delay this recognition as a concession, it will only undermine its negotiating credibility. In the future, Carney’s staff must better anticipate the downstream, often unintended, effects of high-profile foreign policy announcements during sensitive trade discussions.

There is also an important psychological dimension to be considered. Bullies in negotiations thrive on confrontation, extremes, and shows of force. However, extensive research in negotiation and behavioral economics demonstrates that individuals like Trump are far more moved by the threat of immediate, visible losses than by the promise of future gains.

By framing the conversation around TRQs as a way to prevent catastrophic, short-term loss to the U.S., rather than asking for concessions or touting mutual benefits, Canadian negotiators tap directly into this psychology. Trump’s instinct is to avoid any outcome that could be seen as him “losing ground” or letting others win at his expense. Highlighting that tariffs will cost American jobs, provoke factory shutdowns, and potentially destroy supply chains right now, not years in the future, puts the conversation in terms he cannot ignore. It reframes inaction or sticking with tariffs as a self-inflicted wound, rather than a show of strength.

TRQs allow Trump to protect his “America First” brand and avoid the stigma of immediate defeat: he can claim control, maintain leverage, and ensure future flexibility, all while averting costly blows to his own political constituencies. It channels his keen fear of loss—political and economic—into a pragmatic, face-saving solution.

Looking forward, there is little margin for error. Tariffs at their current levels will destroy investment, hollow out communities from Windsor to Saguenay, and, paradoxically, make the US less competitive by driving up input costs and infuriating domestic producers and consumers alike.

The sensible path, to which US negotiators have already opened the door in other bilateral deals, is a comprehensive set of sector-specific quotas that guarantee stability for both partners’ industries at current trade volumes. Tariffs would only be levied on trade above previously established ceilings as a kind of “insurance policy” that protects domestic producers on both sides.

Fen Osler Hampson, FRSC, is the Chancellor’s Professor and Professor of International Affairs at Carleton University, and President of the World Refugee & Migration Council. He is Co-Chair of the Expert Group on Canada-US Relations.