Maintaining CUSMA in its current form and reaffirming its commitments would strengthen Canada's position as a competitive trading partner with the United States.
Tasneem Azim-Khan Vice President and Chief Investment Strategist
In mid-September, the U.S. formally began discussions regarding the future of the Canada-U.S.-Mexico Agreement (CUSMA) in anticipation of the formal review date on July 1, 2026. The intense negotiations involving its renewal or replacement are expected to transpire over the course of several months.
While the agreement does not automatically expire until 2036, the ramifications of this review seem far more fraught in light of the Trump administration’s exacting tariff agenda. More concerning is that any of the three countries that are parties to the agreement could choose to withdraw from it by providing six months’ notice. The other two options on the table are the extension of the agreement for another 16 years or the triggering of annual reviews up until the agreement’s expiry in 2036.
That the preservation of CUSMA is a critical underpinning of the economic narrative for Canada in the years to come is hardly debatable. When the U.S. slapped a blanket 25 percent tariff on Canadian and Mexican goods earlier this year—which was later increased to 35 percent for Canada in August—CUSMA served as a crucial shield for the country’s exporters. According to RBC Economics, approximately 90 percent of U.S. imports from Canada in Q2 of this year were free of tariffs as a result of the exemptions covered under CUSMA.
Furthermore, this agreement has resulted in the average effective tariff rate for Canada coming in around the low-to-mid-single-digit range—well below the average U.S. tariff rate on all imports in June. A reconfirmation and continuation of CUSMA in its current form would enhance Canada’s competitive position as a trading partner with the U.S., relative to other countries.
In a nod toward trade reconciliation, and to lay the groundwork for smoother negotiations on CUSMA, Canada has already stepped up its military and border security spending in recent months. Perceived under-funding in these two areas was a key point of contention for the Trump administration. In addition, Canada has scrapped the Digital Services Tax (DST) on major U.S. internet-based companies operating in the country. More recently, Prime Minister Mark Carney eliminated retaliatory tariffs on U.S. goods that are in compliance with CUSMA.
As discussions unfold, we suspect other points of contention that the Trump administration may raise with Canada include the country’s supply-management system for dairy, eggs and poultry, for which tariffs on U.S. imports are high. Higher North American content in automobiles (currently at 75 percent), alongside demands that a specific portion of each vehicle be made of U.S. auto parts, may also be raised. The perceived “insular” nature of Canada’s banking and financial industry may also be brought into question.
We expect the negotiations, ostensibly on trade, to intersect meaningfully with geopolitics and the Trump administration’s desire to secure greater alignment with its allies around its national security priorities. In this regard, China remains in the crosshairs of the U.S., as the latter seeks to isolate the former technologically, and build a stronger domestic manufacturing footprint.
Consider that CUSMA contains a clause that forbids its signatories from trade negotiations with a “non-market economy” (read: China) in the absence of informing the other parties. The U.S. may seek to further curtail Chinese foreign direct investment in North America.
While Canada has already proffered some alignment with the U.S. with respect to its stance on China, a more stringent approach to the world’s second-largest economy could come at an economic and political cost to Ottawa. Not least because the Liberal government campaigned on a transformational economic agenda for Canada, of which the diversification of trade and global economic partnerships was no small part. An insistence from Washington that North America must operate as a supposed “bloc” under some new version of CUSMA to fend off the competitive threat China is perceived to pose may in fact further entrench Canada’s reliance on the U.S. as a trading partner.
All told, we believe the forging of CUSMA 2.0 will require some concessions from Canada and Mexico for the broader, more meaningful contours of the framework to remain intact.
While a great deal of energy and ink are justifiably expended on the critical nature of the agreement to Canada’s economic outlook, it is important to note that the fate of CUSMA also has the potential to be significantly consequential for several trade-sensitive sectors in the U.S.
RBC Economics estimates that the average effective U.S. tariff rate faced by U.S. importers currently sits close to 15 percent—a sizeable jump from under three percent last year—and the highest rate since the 1930s (although this is largely a result of duties on imports from regions other than Canada).
In Trump’s new global trade “playbook,” the existence of CUSMA stands out as a safeguard that affords all parties involved—including the U.S.—a relatively lower tariff bill. By RBC Economics’ assessment, at least 95 percent of U.S. goods exported to Canada in 2024 had zero tariffs thanks to the agreement. Notably, Canada was the top export market for 32 U.S. states last year. To the extent that CUSMA exemptions are ultimately eliminated, the average effective U.S. tariff rate faced by U.S. importers could move as high as 20 percent, according to RBC Economics’ estimates.
Even though we’ve been here before, this time feels different. The stakes for Canada feel particularly high in light of persistently soft economic data, high unemployment and anemic GDP growth. History offers an ambiguous barometer of what may come to pass. On the one hand, if the Trump administration’s approach thus far to tariff negotiations is anything to go by, one would be right to expect a series of tense and potentially volatile months ahead in parallel with heightened economic uncertainty for Canadians. The Trump administration may very well leverage Canada’s reliance on U.S. trade in its favour (as it has done in the past).
And yet, the successful renegotiation of NAFTA (CUSMA’s predecessor) during Trump’s first term provides some grounds for optimism. Similarly, the president’s decision to allow tariff exemptions for those goods that are CUSMA-compliant is also a positive sign in our view. Lastly, given the trade and economic benefits conferred by CUSMA on the U.S. itself, we suspect Trump will be politically motivated to show his voter base that a successful agreement has been secured in time for the midterm U.S. elections coming in the fall of 2026.
Importantly, the U.S. Supreme Court has announced it will hear oral arguments on Nov. 5 on the legality of Trump’s sweeping global tariffs, with a ruling expected by the end of this year or early next. This announcement follows a ruling by a federal appeals court earlier this year that President Trump overstepped his authority by invoking the International Emergency Economic Powers Act (IEEPA) to impose sweeping global tariffs, including on China, Canada and Mexico this past spring.
The Federal Circuit majority noted that the U.S. Constitution bestows the power to establish tariffs on Congress, not the president. Indeed, in other instances, the Supreme Court has required Congress to be explicit when yielding its authority over a substantive economic or political issue.
Proponents of Trump’s tariff agenda have argued that this policy is authorized under the IEEPA—a law that gives the president a potent myriad of measures to address national security, foreign policy and economic emergencies. Importantly, however, the IEEPA does not explicitly mention tariffs as one of those measures, although a key provision says the president can “regulate” the “importation” of property to address an emergency.
On the opposing side, the court will likely hear arguments that the U.S. trade deficit—cited by Trump as justification for his policy—does not constitute an “unusual and extraordinary threat” required under the law for the president’s emergency powers to be triggered under the act.
The eventual ruling—in either direction—carries import (pun intended). Should the court rule against the tariffs, this would cut the current average effective tariff rate, currently in the mid-to-high-teens, by at least half according to Bloomberg Economics . Subsequently, the U.S. government would be directed to refund tens of billions of dollars collected under these tariffs. In addition, the validity of any preliminary trade deal that Trump has already struck with some nations may be brought into question.
And yet, administration officials have suggested that the impact of such litigation may well be overstated, and that most of the tariffs can be imposed via alternative legal avenues. For example, Trump’s tariffs on steel, aluminum and automobile imports were imposed under a different law—Section 232—and as such are not directly impacted by the appeal. In fact, the Department of Commerce, which oversees this type of tariff, seeks to expand the scope of tariffs under this law to potentially include other goods such as timber, critical minerals, aircraft and wind turbines, and that could ultimately result in a further escalation in the levy rate.
Legal experts in the U.S. have opined that Section 232 is relatively secure from legal challenges. By the same token, arguments in favour of tariffs on items such kitchen cabinets and upholstered furniture, predicated on the basis of national security, may well require justification by the Trump administration.
Ultimately, we believe it is reasonable for investors to anticipate some market volatility in the lead-up to and throughout the CUSMA negotiations. However, as we mentioned, over the medium to long term, the impacts on markets are likely to matter far less than the outlook for corporate earnings and GDP growth, and over the shorter term, we learn toward a positive outcome that will ultimately benefit all three countries. Your Investment Counsellor has the experience and perspective to look beyond the noise and to remain focused on managing your well-constructed, well-diversified portfolios built on a robust investment framework and geared to achieving your goals. Against this backdrop, it is our view that staying the course is the best “trade” you can make through the coming months of negotiations and beyond.
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