On July 10, 2025, President Donald Trump issued an open letter proposing a 35% tariff on Canadian goods unless a revised trade agreement is finalized by August 1, 2025. The proposed tariffs would function as a base rate in addition to any existing sectoral tariffs, and Canadian companies relocating production to the US would be exempt and fast-tracked for regulatory approvals.

It remains unclear whether the proposed 35% tariff would apply universally to all Canadian imports or only to the limited set of goods currently subject to US tariffs. Based on current landscape and informal guidance, the expectation is that existing 25% tariffs on select Canadian products would rise to 35%, while goods exempt under the United States-Mexico-Canada Agreement (CUSMA) would remain unaffected. No formal policy document has been released, and the trade environment is subject to change.

Canada’s dairy sector in the crossfire

While the announcement broadly targets Canadian imports, the letter places particular emphasis on Canada’s dairy sector. President Trump claims that Canada’s dairy sector distorts market competition and drives up tariffs on American exports. Specifically, the letter alleges that Canadian tariffs result in charges of up to 400% for American dairy farmers, contributing to a trade imbalance that affects US economic and national security interests.

Although dairy represents a fraction of US and Canada trade, it has become a focal point in the current US administration’s trade negotiation strategy. Currently, Canada maintains tariffs on certain dairy products (some reaching up to 285%). These tariffs apply only to imports that exceed Canada’s tariff rate quotas. In practice, US dairy exports to Canada have consistently stayed under those quotas, meaning the high tariffs are rarely triggered and almost never enforced.

Pros and cons of supply management

The Government of Canada and proponents of supply management maintain that the system stabilizes prices based on production costs, ensures food security and preserves the long-term viability of domestic agriculture. In the dairy sector, by example, supply management system enforces quality standards such as banning the use of artificial growth hormones in milk production, standards that are not consistently applied in other countries. The system also guarantees predictable returns for producers, supporting small and medium-sized family farms and maintaining the diversity of Canada’s agricultural landscape.  

On the other hand, critics of supply management argue that the system no longer aligns with current market realities in the agricultural sector. Supply management limits market access, discourages investment and innovation, supports inefficiencies and results in higher prices and fewer choices for consumers. Supply management has also been criticized for limiting Canada’s negotiating flexibility in free trade agreements, with foreign counterparts often requiring concessions in other sectors in exchange for preserving Canada’s domestic protections.

US pressure on agricultural markets around the globe

The US approach to Canada’s dairy sector reflects its broader stance in trade negotiations worldwide. For example, in talks with India, the US has similarly pushed for greater access to agricultural markets, including dairy. Due to India’s deep reliance on the agriculture industry, it has traditionally excluded agriculture from trade agreements. Nonetheless, the US has recently sought greater access to Indian markets for other agricultural products, including dairy, illustrating its strategy of pressuring trading partners to open protected agricultural industries.

India has expressed some willingness to open its market to US dry fruits and apples, but remains cautious about broader concessions on poultry, corn, soybeans and dairy products. Granting market access to the US could compel India to extend similar concessions to other trading partners, raising domestic political and economic concerns.

In both India and Canada, dairy is not just an economic matter but a politically charged issue that highlights the broader struggle between domestic agricultural protection and international trade goals.

Further complications from Bill C-202

Adding to the complexity of US-Canada trade talks is Bill C-202, which received Royal Assent on June 26, 2025. The legislation amends the Department of Foreign Affairs, Trade and Development Act to prohibit the Minister of Foreign Affairs from making any commitment in a trade agreement that would increase Canada’s tariff rate quotas or reduce tariffs on dairy, poultry or eggs. In effect, the bill bars the federal government from making any commitment by international trade treaty or agreement that would have the effect of watering down supply management. This legislative constraint significantly narrows the Canadian government’s flexibility and will likely complicate any future deal with the US that seeks to extract concessions in these sectors.

Next steps and risk management

The dairy industry is poised to remain central in US and Canada’s trade discussions. Stakeholders across the supply chain, including producers and processors, should proactively assess how potential tariff changes and policy shifts may affect their operations. With the trade landscape evolving rapidly, early engagement and strategic planning will be essential.

Our integrated team of legal and public policy professionals across Canada and the US is actively tracking developments and are available to support your organization in navigating these changes. For guidance on how these tariffs may affect your business, please contact the authors, Morgan Camley, KC, Paul Lalonde, Mélanie Power and Ivy Yang. Thank you to articling student Mariam Zaidi for her contribution to this insight.

Visit our Navigating today’s shifting tariff and trade environment hub for additional resources.