Why tariffs aren’t the answer — and is dairy protection actually unfair?
Two questions at the centre of the CUSMA breakdown, answered plainly. Updated for October — including two corrections to the August edition that cut against my own earlier framing.
Gerry · October 1, 2026 · Structure Before Sophistication
What changed since August
I published the first version of this brief on August 23, the day after talks collapsed. Six weeks later, three things have changed enough to warrant a rewrite rather than a patch.
● The shooting started. Canada’s counter-tariffs went live September 8 — $27.6 billion across roughly 900 tariff lines, matched rate-for-rate against the American measures. Dairy is on both lists now.
● The economy did not break. Real GDP expanded at a 3.3 per cent annualized pace in the second quarter, with a notable increase in business investment. Unemployment held at 6.4 per cent in August, near its lowest level in two years. The recession concerns from earlier in the year have largely faded.
● I got the dairy compliance record wrong. The August edition said two dispute panels found Canada non-compliant. That is not what the record shows, and the correction materially strengthens Canada’s position. Details below.
Part one — why tariffs are not the answer
1. The importer pays, not the exporter
The most persistent misunderstanding in the entire debate. A tariff is a tax collected at the border from the domestic company doing the importing. When Washington imposes 50 per cent duties on Canadian plywood, the cheque to U.S. Customs is written by the American buyer. Study after study of the 2018–19 round found nearly the full cost passed through to domestic purchasers and consumers. The foreign exporter absorbs some of it through discounting. The majority lands at home.
This cuts both directions now. Canada’s September 8 counter-tariffs are paid by Canadian importers, and economists estimate they cost families with children roughly $250 a year. Retaliation is a sovereignty instrument. It is not a free one.
2. Every input tariff is a tax on your own manufacturers
Steel and aluminum are not final goods. They are inputs into automobiles, appliances, construction and machinery. Protecting roughly 140,000 American steel jobs raises costs for the several million workers in steel-consuming industries. The 2018 round is estimated to have cost more manufacturing jobs downstream than it preserved upstream.
The Canadian evidence is now in the data. Manufacturing production is running about 3.5 per cent below 2024, with the sharpest declines in steel and wood products. Canadian steel exports are down roughly 25 per cent, aluminum 6 per cent, autos 5 per cent. In an integrated continental supply chain where a component may cross the border up to eight times before final assembly, a tariff is applied repeatedly to the same value.
3. Retaliation is certain and precisely targeted
Partners retaliate, and they aim at politically concentrated constituencies rather than at economic efficiency. Canada’s list was built to be felt in specific congressional districts — dairy, agricultural equipment, appliances, food processing. The predictable result is that both economies shrink while each government tells its public it is winning.
4. Uncertainty does more damage than the duty itself
The tariff is a known cost that can be priced. The possibility of a tariff cannot be. That remains true — but the August edition leaned harder on this than the evidence now supports, and honest updating means saying so.
Canada’s economy proved more resilient than almost anyone forecast. Second-quarter growth came in at 3.3 per cent annualized. Business investment rose. Unemployment sits near a two-year low. Ottawa has deployed more than $30 billion in tariff-related support, and the CUSMA exemption continues to shield roughly 95 per cent of Canadian exports.
What the uncertainty argument still gets right is the distribution. The aggregate held; the incidence did not. Unemployment in manufacturing-heavy London, Ontario is 8.4 per cent while Quebec City sits at 3.8 per cent. Youth unemployment remains above 13 per cent. National statistics are averaging together regions having completely different experiences of the same trade war.
5. They do not fix the underlying complaint
A trade deficit reflects national savings and investment balances, not the fairness of any trading partner. Tariffs redistribute a deficit across countries; they do not eliminate it. Meanwhile the stated grievances — dairy access, auto content, digital rules — are regulatory questions a tariff cannot resolve. You cannot tariff your way to a quota reform.
Six weeks of evidence supports this directly. The tariffs were imposed to force concessions. Canada did not concede. It walked away from the table, retaliated, and legislated further protection for the very sector the tariffs were meant to pry open. Measured against their stated objective, the measures have failed.
The one case where tariffs do work — and why it still fails here
A large economy can improve its terms of trade with a tariff, because foreign exporters cut prices to hold volume. The United States is large enough for this to be real, and intellectual honesty requires conceding it.
But the gain is a transfer, not a creation — global output falls while the American share rises — and it evaporates the moment the partner retaliates credibly. Which is precisely what September 8 did. The one economically valid argument for tariffs is self-cancelling against a partner willing to respond.
Part two — is Canadian dairy protection unfair?
Here the honest answer depends entirely on what you think a trade agreement is for. Both sides have a real argument. Neither is being made in good faith at the negotiating table. But the factual record is clearer than I represented it in August, and it favours Canada more than I allowed.
The correction
The August edition said Canada “administered the quotas in ways two dispute panels found inconsistent with its obligations.” That is wrong. Here is the actual record:
● December 2021 — CUSMA Panel One. The United States won. The panel found Canada’s practice of reserving 85 to 100 per cent of its fourteen dairy quotas exclusively for processors was inconsistent with its obligations.
● November 2023 — CUSMA Panel Two. Canada won, on every claim. After Canada revised its allocation rules, Washington challenged again on four grounds. The panel found for Canada on all four and ruled Canada is not obligated to make further changes.
● September 2023 — CPTPP panel (New Zealand v. Canada). A separate agreement, a split result. New Zealand prevailed on two of six claims. Canada prevailed on the others, including on its discretion to exclude retailers from quota eligibility.
So the accurate summary is: Canada lost once, fixed it, and won the rematch. That is a materially different position from the one I described six weeks ago, and it changes the conclusion I drew about Canada’s negotiating leverage.
Which makes the August 2026 proclamation the real story
Washington’s dairy proclamation this past August asserts that Canada discriminates in administering the cheese quota — specifically, that Canadian retailers cannot hold CUSMA cheese quota but can hold quota for European cheese.
That is a White House determination. It is not a panel ruling. The last panel to examine Canada’s quota administration — including the eligibility question — sided with Canada on every claim.
The United States lost the dispute, and then used an executive proclamation to impose by tariff what it could not obtain by adjudication.
Whatever one thinks of supply management, that sequence should trouble anyone who believes dispute settlement is the point of having a trade agreement. The mechanism worked. It produced an answer. The answer was then overridden by proclamation.
The case that dairy protection is unfair
● Over-quota duties running from roughly 241 per cent on fluid milk to 298 per cent on butter are prohibitive by design. They are not tariffs in any ordinary sense. They are a wall.
● Canadian consumers pay materially more for milk, butter and cheese than Americans or Australians do. The cost is borne by households and it is regressive.
● Canada asks for open access to the American market in autos, energy, lumber and aluminum while closing one of its own. That asymmetry is hard to defend on principle.
● Supply management restricts entry for Canadian farmers too. Quota runs upwards of $30,000 per cow, which functions as a barrier against new domestic entrants, not only foreign ones.
● Canada did lose the 2021 panel, and it did lose two CPTPP claims in 2023. The compliance record is not spotless.
The case that it is not
● Every developed country protects agriculture. The United States spends roughly $20 billion a year on farm support, plus sugar quotas, dairy price supports and export credit programs. The instrument differs. The intervention does not.
● Supply management is funded by consumers rather than taxpayers. The American model shifts the same cost onto the federal budget, where it is simply less visible.
● Canada fixed what the 2021 panel told it to fix, and the 2023 panel confirmed the fix was sufficient. That is compliance, not evasion.
● CUSMA already grants the United States tariff-free access to roughly 3.5 per cent of Canada’s dairy market, phasing in through the late 2030s. The grievance is about administration of quota American exporters have never fully filled.
● Canada’s dairy trade deficit with the United States has grown significantly since CUSMA came into force. On net, American producers are winning this trade — which sits awkwardly beside the claim that they are being shut out.
● Dismantling supply management without a transition framework would transfer roughly $30 billion in quota value — farmers’ primary collateral — to zero, concentrated in rural Quebec and Ontario.
One correction in the other direction
In August I called American dairy exports to Canada “a rounding error.” That was unfair and I want to withdraw it.
American dairy sales to Canada ran about $1.3 billion in 2025 — roughly 14 per cent of total U.S. dairy exports, making Canada the second-largest market after Mexico. For Wisconsin and New York producers that is a serious number. The file is politically outsized, but the economics are not trivial.
Where the two tariff systems actually sit
Press coverage keeps conflating two entirely different measures, so it is worth separating them cleanly.
The old over-quota duties — 241 to 298 per cent — are unchanged and are not being paid by anyone. They apply only above the tariff-free quotas, and their function is to stop trade above those limits rather than to collect revenue.
The 2026 tariffs are new and separate. Since August 19 the United States has charged 50 per cent on Canadian whey, milk proteins, lactose, casein and milk powders. Since September 8 Canada has charged 25 per cent on American cheese and dairy entering inside the quotas — product that had been crossing tariff-free since CUSMA took effect. Butterfat moves in neither direction with a duty, because Canada is short of it.
Canadian dairy exports to the United States have stalled since August. The Dairy Farmers of Canada call the measures “completely unwarranted.” Both statements can be true at once.
The honest verdict
Canadian dairy protection is economically inefficient and costs Canadian consumers real money. It is also not meaningfully more protectionist than what the United States does for its own farmers — it is protectionist in a different currency.
What I got wrong in August was the compliance story. Canada lost a panel, complied, and won the rematch on every claim. The defensible American complaint has therefore narrowed to almost nothing, and what remains is an executive proclamation asserting a conclusion that adjudication rejected.
The indefensible American position is unchanged: treating a marginal export interest as grounds for tariffing $20 billion of unrelated Canadian goods, from hockey sticks to plywood to liquor.
Why this file never resolves
Because neither side actually wants the thing it is asking for. Washington does not need Canadian dairy market access — American exporters cannot fill the quota already granted, while their net dairy surplus with Canada keeps growing. What dairy provides is a permanently available grievance: politically potent in two swing states, modest in economic terms, and impossible for any Canadian government to concede without losing rural Quebec.
Canada has now legislated that impossibility. Bill C-202 formally protects supply management in trade negotiations. The file is not stuck by accident. Both sides have arranged for it to stay stuck, because it is worth more to each of them unsolved.
Bottom line. Tariffs fail because the importing country pays them, they tax domestic manufacturers through their own supply chains, they invite targeted retaliation, and six weeks of evidence shows they did not produce the concession they were imposed to extract. The Canadian economy held up better than the gloomiest forecasts — but the aggregate conceals a brutal regional distribution.
On dairy: supply management is a genuine inefficiency that Canada should reform on its own terms and its own timetable. It is also a settled legal question that the United States lost, reopened by proclamation. Those are different problems, and only one of them is Canada’s to fix.
Structure before sophistication. Fix the thing that is actually broken. Refuse the thing that is designed never to be fixed.
Gerry
Structure Before Sophistication · Briefing Note · Updated October 1, 2026 (first published August 23, 2026)
Corrections in this edition: the CUSMA dairy panel record, and the characterization of U.S. dairy exports to Canada. Both cut against the original framing. A brief that never corrects itself is not a brief — it is a position paper.
** article edited with assistance from Claude by Anthropic