Customs duties, once the chief source of revenue, have declined in importance as a revenue source as Canada's economy has grown and developed. The tariff, however, still is an important instrument of economic policy. There is a wide range of duties, progressing from free rates on raw materials to higher duties as goods become more highly processed. Producer goods, including machinery of a kind not made in Canada, are subject to lower rates or are admitted free. Imports from the United Kingdom, most Commonwealth countries, and some crown colonies receive a tariff preference on a basis of reciprocity. Imports from nonmembers of the World Trade Organization (WTO) that have not negotiated a trade agreement with Canada are subject to the general or highest duty category. A federal goods and services tax, excise tax, and provincial retail sales tax add to the cost of importation.
In October 1987, Canada and the United States reached agreement to establish a free trade area between the two countries, which came into force in 1989 with all tariffs being eliminated within 10 years. Today, there are essentially no tariffs on US goods, although there remain a few non-tariff barriers to trade. Canadian commercial policy is generally opposed to the use of quantitative restrictions except as permitted by the WTO, or for sanitary reasons, in emergencies, to allocate scarce supplies, or to meet balance-of-payments problems. Canada does not adhere to a general system of import licensing but does require permits for a limited number of products, such as electric power, petroleum, and natural gas and by-products. There are no free ports, but bonded facilities are operated at many ports. Except in grain, for which storage facilities are extremely large, customs warehousing is not extensive.
The United States, Canada, and Mexico signed the North American Free Trade Agreement (NAFTA) in December 1992. Approved by the legislatures of all three countries in 1993, NAFTA replaced the existing free trade agreement between Canada and the United States in 1994 but retained many of its major provisions and obligations. Canada and Chile signed a free trade agreement in 1997. NAFTA members are working towards a Free Trade Area of the Americas to incorporate Central and South America.