Trump adds pollution cost to Canada's 10% tariff as smoke spreads

Trump escalated trade tensions with Canada on Thursday by vowing to add a "pollution cost" to the 10% levies Ottawa already faces, blaming Canadian forest management for wildfire smoke drifting across the border.

"Canada has refused to engage in basic Forest Management and Debris Removal, knowing that such refusal will lead to exactly this result," Trump said in a statement. "The cost of this pollution must of necessity be added to the TARIFFS Canada is currently paying."

The announcement comes as the administration races to replace expiring tariff authority. The Supreme Court struck down Trump's emergency-powers tariffs in February, forcing a shift to Section 122 of the Trade Act of 1974, which authorized 10% global levies that expire July 24. The U.S. Trade Representative's office is pursuing Section 301 investigations covering 60 countries on forced labor and 16 nations on alleged overproduction, though neither has been finalized. Tariff revenue that peaked at $31.4 billion last October turned negative in June, with the Treasury recording a $25.6 billion loss as refund checks outpaced new collections, according to AP reporting.

The novel pollution-cost mechanism could set a precedent for environmental-tinged trade barriers, adding uncertainty for Canadian exporters of crude oil, lumber, aluminum and agricultural goods. Canada is the largest foreign supplier of crude oil to the U.S., with cross-border energy trade exceeding $100 billion annually.

The last major U.S.-Canada trade dispute — over steel and aluminum tariffs in 2018 — saw Ottawa retaliate with C$16.6 billion in countermeasures targeting American steel, aluminum and consumer goods. That standoff ended after a year when the USMCA agreement was ratified. A similar retaliation this time would hit U.S. exports as the administration manages multiple trade fronts, including active Section 301 investigations and ongoing military strikes against Iran.

A Precedent for Environmental Trade Barriers

Trade attorneys said the pollution-cost linkage is legally untested. "They're going to raise the tariff wall again," said Ryan Majerus, a partner at King & Spalding and a former trade official in the Trump and Biden administrations. The administration has proposed Section 301 tariffs of 10% to 12.5% on countries accused of insufficient forced-labor enforcement, though those remain in the public comment period.

The Canadian dollar weakened against the greenback on the news, while crude oil futures edged higher on supply disruption concerns. The S&P/TSX Composite Index, which has significant exposure to energy and materials sectors, faced selling pressure in afternoon trading.

The July 24 Deadline

The expiration of Section 122 authority creates a hard deadline. If the administration cannot replace those tariffs with Section 301 levies by July 24, Canadian goods would enter the U.S. duty-free for the first time since early 2025 — unless Congress acts to extend them, which is unlikely ahead of the Nov. 3 midterm elections. Trade lawyer Nathaniel Halvorson, a partner at Baker McKenzie, said the U.S. Trade Representative's office is "operating about as fast as legally possible" to close the gap.

Sarah Bianchi, a former U.S. trade official who is now chief strategist at Evercore ISI, said the Section 301 approach has been "pretty legally durable" but noted that using it to impose universal tariffs would face legal challenges. "No one has tried to use it to basically put in place universal tariffs," she said.

This article is for informational purposes only and does not constitute investment advice.