Canada | Free Trade | Trade Disputes | International Taxation | Foreign Exchange Market | Sanctions | National Security | ESG Standards | Environment | Rare Earths | World Trade Organization | Affilia Practical Advice

Affilia thanks André-Philippe Ouellet, Affilia Collaborator, Bernard Colas, and Affilia’s team, for this forecast.

The second half of 2025 will remain marked by unpredictability due to the whirlwind of measures and reversals from the Trump administration in the United States. However, the latter half of the year is expected to see fewer upheavals under the new Carney government. Despite some turbulence, Affilia anticipates the following trends and developments for the second half of 2025.

Commercial Diversification Opportunities

Canada will continue its efforts to diversify trade throughout the year. Canada maintains its goal of finalizing negotiations in 2025 for a trade agreement between Canada and the Association of Southeast Asian Nations (ASEAN) to open new markets for Canadian exporters. Likewise, an agreement is expected to be signed by the end of 2025 between Canada and Ecuador. In addition, Indonesia and Costa Rica are making progress with their applications to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), of which Canada is a member.

Canada—United States Trade Relations: Between Pragmatism and Opportunity

During the second half of 2025, Canada will need to keep being pragmatic in its relations with the United States. As anticipated earlier this year by Affilia, Canada is facing multiple US tariffs. Canadian businesses are navigating a fragmented tariff landscape, but for most of them, it remains manageable.

US “Reciprocity” tariffs have been suspended until August 1st, as the American government aims to finalize agreements with key partners by September. Products with sufficient Canadian content and covered by the CUSMA are therefore exempt from the 25% tariffs (“fentanyl” tariffs), including in the automotive sector. However, tariffs on steel and aluminum have now been raised to 50%. The aerospace and pharmaceutical sectors are currently under US investigations, which could lead to new tariffs.

The first block of Canadian counter-tariffs remains in effect, as Canada has implemented specific counter-tariffs of 25% on steel and aluminum. The introduction of a second block of counter-tariffs is currently on hold and is likely to be implemented if the Trump administration decides to impose a 30% tariff against Canada in August. It is also expected that the first block of counter-tariffs will be applied more strictly, with fewer companies able to benefit from exemptions. Canadian businesses will need to be proactive in asserting their interests. Canada has also announced the introduction of tariff rate quotas of 100% on steel and aluminum from countries with which it does not have a free trade agreement, in order to prevent its market from being flooded due to trade flows now being redirected.

By the end of the year, Canada will be actively seeking a way out. The government is taking a pragmatic approach, even going so far as to forgo imposing taxes on American tech giants (GAFAM) to demonstrate goodwill in ongoing negotiations with the United States. On July 21 or August 1, Canada will need to reassess the appropriateness of applying counter-tariffs, depending on the progress of negotiations with the Trump administration. Although these negotiations are challenging, the United States has reached a trade agreement with the United Kingdom that includes reduced tariffs on cars and a partial exemption from duties on steel and aluminum from the UK, in exchange for concessions—mainly in the agricultural sector. Interestingly, the United States has dropped its traditional demands regarding hormone-treated beef and chlorinated poultry during negotiations with the UK. However, caution is warranted due to the unpredictability of the Trump administration and the nature of these agreements, which are not treaties but rather “Executive Agreements.” These do not require ratification by Congress while their binding force appears questionable.

More generally, the Trump administration delivered its conclusions at the beginning of April regarding tariffs, the reduction of the US trade deficit, and the renegotiation of the CUSMA following a series of investigations and consultations. These reports concluded that it is necessary to implement new tariffs to reduce the US trade deficit. They also noted the intention to increase American access to the Canadian agricultural market, which signals increased pressure on our dairy producers. One of the recommendations is to renegotiate US participation in the WTO Procurement Agreement, or even to withdraw from it. As anticipated by the Affilia team at the beginning of the year, the US International Trade Court has intervened in this matter, but its decision invalidating certain tariffs has been appealed by the executive. Historically, US courts have upheld executive authority in relation to foreign trade, making it unlikely that the tariffs will be overturned by the judicial.

Canada is considering the possibility of implementing a “Buy Canada Act” to prioritize Canadian content in public procurement, while certain provinces, such as Quebec (25% penalty) and Ontario (ban), have imposed restrictions on the participation of American companies in their public procurement. However, the law should allow participation by Canada’s partners considered reliable and who continue to comply with the WTO Procurement Agreement.

Finally, it should be emphasized that the situation is not entirely negative: it is even possible that Canada could benefit from the current circumstances. Indeed, if the United States maintains high tariffs against countries such as China but spares its CUSMA partners, Canada could enjoy a comparative advantage. Canada must ensure it protects its trade relationship with the United States, while our businesses need to remain flexible.

CUSMA Trade Disputes

It will be important to monitor the dispute between the US and Canada regarding the Online News Act, as the United States has so far initiated consultations with Canada without requesting the establishment of a panel.

Separately, it is worth noting that the CUSMA Rapid Response Mechanism, designed to ensure respect of workers’ rights, continues its work, with a second panel of experts having been formed in May.

International Taxation

The G7 capitulated to the United States at the end of June by deciding to exempt American multinationals from the 15% minimum corporate tax intended to be implemented under the OECD, as well as from the profit redistribution mechanism for large digital companies (Pillars I & II), on the grounds that they are already taxed in the United States.

Foreign Exchange Market

In 2025, it will remain essential to closely monitor the Trump administration’s monetary policy, as it is a key consideration in US trade policy. Much like between 1971 and 1974 under the Nixon administration, Trump’s waves of tariffs are notably aimed at pressuring US trade partners to revalue their currencies. It is not out of the question that the United States may attempt to impose on its partners a “Mar-a-Lago” treaty inspired by the Plaza (1985) or the Louvre (1987) Accords.

Economic Sanctions and National Security

This spring, Canada began implementing its sanctions against Russian individuals and entities by seizing an aircraft and taking action against a company that had engaged in illegal trade with Russia. Canada also cracked down on Hikvision by ordering the company to cease its activities in Canada following a national security review under the Investment Canada Act. The Canadian government is expected to become to enforce its sanctions regime more stringently in 2025.

In June 2025, Canada also imposed sanctions for the first time on two senior officials of the Israeli government. These sanctions, coordinated with Australia, Norway, New Zealand, and the United Kingdom, target their roles in facilitating and providing political cover for the expansion of settlements and acts of violence committed by settlers in the West Bank.

It will also be important to monitor the possible implementation by the United States of secondary sanctions targeting countries that continue to do business with Russia, particularly in relation to gas and oil, which could destabilize the energy and foreign exchange markets.

ESG Regulatory Developments and Carbon Pricing

As anticipated by Affilia at the beginning of the year, the European Commission has proposed an omnibus law that would reduce the scope and content of environmental, social, and governance (ESG) disclosure obligations, as well as the EU’s Carbon Border Adjustment Mechanism (CBAM). This proposal has been submitted to the European Parliament and could be finalized by the end of autumn 2025.

It is proposed to reduce the administrative burden by at least 25% under the recent CS3D (Corporate Sustainability Due Diligence Directive) and to exempt 80% of companies initially targeted under the CSRD (Corporate Sustainability Reporting Directive). These Directives impose strict due diligence and reporting obligations on companies regarding the environmental and social impacts linked to their supply chains. Furthermore, the scope of the EU’s Carbon Border Adjustment Mechanism will be narrowed. If this new version is adopted by the European Parliament, 90% of importing SMEs in Europe would be exempted, while formalities would be streamlined for covered businesses.

This proposal has been criticized and is seen by some as a step backward, but it is expected to be adopted. The EU is taking a more pragmatic approach due to the discontent these directives have caused, now proposing to apply them only to large companies.

Finally, it should be noted that the United Kingdom’s carbon border adjustment mechanism is expected to come into force in 2027. The movement toward strengthening reporting and environmental obligations does not appear to be weakening as other states are expected to implement carbon adjustment mechanisms.

Environment

As anticipated by Affilia, the member states of the International Maritime Organization (IMO) reached an agreement in April 2025 on implementing a carbon tax for maritime freight emissions. The measure is expected to be formally adopted in October and will apply from 2027 to ships over 5,000 tonnes. The carbon tax will range from 100 to 380 US dollars per tonne of CO₂. Companies should therefore prepare for increased maritime transport costs.

For now, the European regulation aimed at combating deforestation has produced minimal results. Only countries considered hostile, such as Russia or North Korea, have been classified as at risk of deforestation. Canada, like all Western states, has been classified as low risk for deforestation.

By the end of September 2025, Canadian companies with reporting obligations related to the federal plastics registry must submit reports for the year 2024. Companies producing, importing, or marketing more than 1,000 kg of plastic per year have reporting obligations starting this year. These obligations will increase in 2026 and 2027.

Finally, the Competition Bureau has recently published guidelines to help businesses comply with their new obligations regarding the prohibition of greenwashing and misleading environmental claims related to the products and services they offer.

Challenge of Rare Earths and Supply Chains

Companies using rare earths as inputs or goods containing them should keep an eye on the export restrictions put in place by China, a country with a virtual rare earths monopoly. Since April, importers have had to obtain authorization from the regime in order to import seven different types of rare earths, and restrictions are set to multiply by the end of 2025, both in China and elsewhere. However, the United States has just signed an agreement with China to secure its supplies of rare earths in exchange for tariff de-escalation.

World Trade Organization (WTO)

The year 2025 was supposed to be rather uneventful at the WTO. Although reform projects are at a standstill, joint initiatives continue their work, and the dispute settlement system is once again active due to the trade war launched by the Trump administration.

First, Canada has initiated three rounds of consultations with the United States regarding tariffs on steel and aluminum, the initial 25% tariff applicable to all goods, as well as automotive tariffs. Canada has requested the establishment of a panel against China concerning restrictive measures imposed on Canadian agricultural products (canola, pork, etc.). China, for its part, has challenged Canadian tarifs on Chinese electric vehicles and other products. Canada is likely to prevail in its disputes against the United States and China. However, it is probable that Canada will lose the dispute initiated by China regarding electric vehicles. A new dispute could also arise due to safeguard measures being considered by China in connection with beef, which could affect Canadian exporters.

Since the beginning of the year, China has also requested the establishment of a panel against the EU and Turkey regarding their restrictions on the importation of electric vehicles. The EU, however, is likely to prevail as its measures are targeted and fall under countervailing duties rather than a single tariff like the one imposed by Canada. China has also challenged US measures at the WTO.

Interestingly, Russia has initiated consultations with the EU regarding the legality of its carbon adjustment mechanism, which Russia alleges violates the most-favored-nation principle, among others. The EU has refused to participate in the consultations due to the war in Ukraine, but this will not prevent the case from moving forward. A ruling declaring the EU’s measures contrary to WTO law would likely push the EU to adjust its mechanism’s parameters.

It is important to understand that, due to the possibility of appealing a report into a legal void, thereby depriving it of any binding force, reports in cases involving the United States and Russia will not acquire binding force. Disputes involving Canada, China, and the EU, however, will have tangible legal consequences since these countries participate in the MPIA. With the recent addition of the United Kingdom, the MPIA now has 57 participants (out of 166 WTO members).

Paradoxically, the WTO could regain some of its prominence and become a dynamic negotiating forum again due to the tariff war and the so-called American “reciprocity” tariffs. As the United States demands tariff concessions from all states, this movement could lead to increased liberalization if these concessions are based on the most-favored-nation (MFN) clause, as provided for in WTO agreements. Some blocs of states, including the EU, have already announced that the granting of new concessions should comply with the MFN clause. It will be interesting to monitor the approach adopted by Canada, which enjoys a significant advantage in being able to offer concessions only to its CUSMA partners. Other states may be tempted to negotiate free trade agreements with the United States to avoid extending their concessions on an MFN basis.

The agreement on subsidies for overfishing and illegal fishing is expected to enter into force by the end of 2025, as 102 members have already ratified it out of the 111 required. The agreement on government procurement should also have two new members by year-end: Albania and Costa Rica.

Finally, negotiations for the accession of Uzbekistan and Ethiopia to the WTO should be completed by the end of the year, while Somalia has just begun its accession process.

Affilia’s Practical Advice

Given these anticipated developments for the second half of 2025, Canadian companies would be well advised to:

• Use financial programs established by the federal government and the provinces to mitigate the impact of US tariffs or Canadian counter-tariffs;

• Develop new business partnerships to diversify their exports, including in the states and groups of states with which Canada is currently negotiating free trade agreements (Indonesia, ASEAN, and Ecuador);

• Maintain moderate optimism regarding the international trading system and the WTO, considering the continued increase in the number of WTO member countries and countries joining the MPIA appeal mechanism and the WTO Government Procurement Agreement, as well as the numerous complaints submitted to the dispute settlement mechanism;

• Prepare for the growing implementation of carbon border adjustment mechanisms by the EU and the UK and anticipate the increase in maritime transport costs related to the upcoming introduction of a carbon tax on maritime freight;

• Comply with their reporting obligations, particularly regarding the plastics registry by September 2025 and the new requirements related to the ban on greenwashing;

• Continue to exercise diligence in their business relationships to avoid falling under Canadian, US, or European sanctions.

For more information on these developments and on the potential impact these trade regulations, economic sanctions, and ESG standards may have on your activities, please do not hesitate to contact the Affilia team.