Key Takeaways
- The U.S. tariff campaign has had a significant impact on Canada’s economy, but a key exemption under the Canada-U.S.-Mexico agreement (CUSMA) has allowed the majority of Canadian goods to cross the southern border duty-free.
- This exemption is at risk in 2026 as North American trade officials prepare for a review of CUSMA, which could result in the full weight of current tariffs being imposed on the economy.
- Experts warn that the loss of the CUSMA exemption could lead to "longer-term scarring" for Canada’s economy, with the size of the economy potentially being lower for several years, possibly permanently.
- The upcoming review of CUSMA is an ongoing uncertainty, and the Trump administration has signalled a willingness to walk away from the agreement if certain concessions are not secured from Canada and Mexico.
Introduction to the Tariff Campaign
The U.S. tariff campaign, led by President Donald Trump, has moved at a breakneck pace towards Canada’s economy in 2025. The threats of double-digit tariff rates and sharp pain in manufacturing-heavy industries have been a significant concern for Canadian businesses. However, a key exemption under the Canada-U.S.-Mexico agreement (CUSMA) has allowed the majority of Canadian goods to continue to cross the southern border duty-free. This exemption has been a saving grace for the economy, but experts warn that it is at risk in 2026 as North American trade officials prepare for a review of CUSMA.
The CUSMA Exemption
The CUSMA exemption has been a crucial factor in mitigating the impact of the U.S. tariff campaign on Canada’s economy. Data from the U.S. Census Bureau showed that 90% of Canadian goods entered the States tariff-free as of July. This is because goods that are compliant with CUSMA are exempt from the blanket tariffs imposed by the United States. According to William Pellerin, an international trade lawyer at McMillian LLP, CUSMA compliance can be a straightforward or a "very, very complicated process." Businesses can demonstrate their compliance with the trade pact by proving that their product was substantially made in Canada. Pellerin noted that the idea of tariffs between North American trading partners runs counter to the agreement itself, but allowing for the CUSMA exemption is a workaround of sorts for the Trump administration.
The Risk of Losing the CUSMA Exemption
The upcoming review of CUSMA in 2026 poses a significant risk to the Canadian economy. If the CUSMA exemption were to end, Canada’s economy would face "longer-term scarring," according to Tony Stillo, director of Canada economics at Oxford Economics. The size of the economy would be lower for several years, possibly permanently. Pellerin said that the 2026 CUSMA review is meant to be a review, not a renegotiation, but the Trump administration has signalled a willingness to walk away from the agreement if certain concessions are not secured from Canada and Mexico. Pellerin warned that the CUSMA exemption itself "absolutely could be at risk" in talks next year, which he views as a "nuclear option."
The Impact of Tariffs on the Economy
The tariffs imposed by the United States have already had a significant impact on Canada’s economy. The Bank of Canada said in its updated October forecasts that it pegs the effective or average U.S. tariff rate on Canada at 5.9%, up from near-zero at the start of the year. Oxford Economics pegs the average tariff rate a little higher at 6.3%. Earlier in 2025, the firm was forecasting a sharp recession would hit Canada in the wake of tariff disruption. However, the CUSMA exemption and Ottawa ending the bulk of its counter-tariffs in September pulled the economy out of quicksand. Stillo said that if the CUSMA exemption were to end, Canada’s economy would face a significant decline.
The Future of Tariffs and Trade
The future of tariffs and trade between Canada and the United States is uncertain. The Trump administration has signalled a willingness to walk away from the CUSMA agreement if certain concessions are not secured from Canada and Mexico. Pellerin said that he expects some form of permanent tariffs are "possible if not likely" at the end of the 2026 review, possibly in the form of side letters between Canada and the U.S. Stillo said that Oxford Economics’ baseline forecast for 2026 calls for a renegotiation that leaves lower but ongoing U.S. tariffs on steel, aluminum, and agricultural industries in Canada. Both Stillo and Pellerin said that the Trump administration appears to be wising up to the pain tariffs are inflicting on U.S. industry and consumers, and may be starting to soften their view on tariffs as a blunt instrument for their industrial strategy.