Key Takeaways:
- The Canada-U.S.-Mexico agreement (CUSMA) exemption has allowed the majority of Canadian goods to cross the southern border duty-free, despite the U.S. imposing tariffs on various goods.
- The CUSMA exemption is at risk in 2026 as North American trade officials prepare for a review of the agreement.
- Experts warn that if the CUSMA exemption were to end, Canada’s economy would face "longer-term scarring" and the size of the economy would be lower for several years, possibly permanently.
- The Trump administration has signalled a willingness to walk away from the CUSMA agreement if the U.S. doesn’t secure certain concessions from Canada and Mexico.
- Ongoing tariffs are already running against the spirit of the CUSMA agreement, and some form of permanent tariffs are possible if not likely at the end of the 2026 review.
Introduction to the CUSMA Exemption
The U.S. tariff campaign, led by President Donald Trump, has had a significant impact on Canada’s economy. However, a key exemption has allowed the majority of Canadian goods to continue to cross the southern border duty-free. This exemption, made possible by the Canada-U.S.-Mexico agreement (CUSMA), has been a saving grace for the economy. Experts warn, however, that this exemption is at risk in 2026 as North American trade officials prepare for a review of the agreement.
The Current State of Tariffs
Over the course of 2025, the Trump administration levied waves of tariffs on different goods using various mechanisms and justifications. The current blanket tariff on Canadian goods heading to the United States stands at 35 per cent. However, the vast majority of Canadian businesses exporting to the United States are not paying this tariff rate. According to data from the U.S. Census Bureau, 90 per cent of Canadian goods entered the States tariff-free as of July. This is because goods that are compliant with CUSMA are exempt from those blanket tariffs from the United States.
CUSMA Compliance
William Pellerin, an international trade lawyer at McMillian LLP, explains that CUSMA compliance can be a straightforward or a "very, very complicated process." Businesses can demonstrate their compliance with the trade pact by proving their product was substantially made in Canada. Pellerin notes 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. Currently, only the 35 per cent blanket tariffs, not sectoral-specific tariffs on the steel or aluminum industries, for example, are eligible for the CUSMA exemption.
Economic Implications
The Bank of Canada has factored in the CUSMA exemption and ongoing tariffs on hard-hit industries, and pegs the effective or average U.S. tariff rate on Canada at 5.9 per cent, up from near-zero at the start of the year. Oxford Economics pegs the average tariff rate a little higher at 6.3 per cent. Tony Stillo, director of Canada economics at Oxford Economics, warns that if the CUSMA exemption were to end, Canada’s economy would face "longer-term scarring." The size of the economy would be lower for several years, possibly permanently.
The 2026 CUSMA Review
The 2026 CUSMA review is meant to be a review, not a renegotiation. It’s intended to be a chance for the parties to rectify a few issues with the agreement. However, the Trump administration has signalled a willingness to walk away from the agreement if the U.S. doesn’t secure certain concessions from Canada and Mexico. Pellerin notes that with ongoing tariffs already running against the spirit of the agreement, the CUSMA exemption itself "absolutely could be at risk" in talks next year. He views this as a "nuclear option" and expects some form of permanent tariffs are "possible if not likely" at the end of the 2026 review.
Future Outlook
Stillo notes that the Trump administration appears to be wising up to the pain tariffs are inflicting on U.S. industry and consumers. In November, the United States rolled back tariffs on coffee, beef, and other consumer staples facing sharp inflation in recent months. This could be a sign that the U.S. is starting to soften its view on tariffs as a blunt instrument for their industrial strategy. Prime Minister Mark Carney has held up the CUSMA exemption as one of the factors giving Canada, as he has called it, "the best trade deal of any country with the U.S." However, with the 2026 CUSMA review looming, the future of the exemption and the Canadian economy remains uncertain.