Key Takeaways
- The Canada-U.S.-Mexico agreement (CUSMA) exemption has allowed the majority of Canadian goods to continue to cross the southern border duty-free, despite threats of double-digit tariff rates.
- The CUSMA exemption is at risk in 2026 as North American trade officials prepare for a review of the agreement.
- 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, probably permanently.
- 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 the U.S. doesn’t secure certain concessions from Canada and Mexico.
Introduction to the CUSMA Exemption
The U.S. President Donald Trump’s tariff campaign has been moving at a breakneck pace towards Canada’s economy this year. However, beyond threats of double-digit tariff rates and sharp pain in manufacturing-heavy industries, a key exemption has allowed the majority of Canadian goods to continue to cross the southern border duty-free. This exemption is part of the Canada-U.S.-Mexico agreement (CUSMA), which has been a saving grace for the Canadian economy. Experts who spoke to The Canadian Press warned that this exemption is at risk in 2026 as North American trade officials prepare for a review of the CUSMA.
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. In addition to steep sectoral specific tariffs on key industries like steel, aluminum, and softwood lumber, 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 that tariff rate. Data from the U.S. Census Bureau showed that 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, said that 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 said 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.
The Impact of the CUSMA Exemption
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." Factoring in the CUSMA exemption and ongoing tariffs on hard-hit industries, 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 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. Earlier in 2025, the firm was forecasting a sharp recession would hit Canada in the wake of tariff disruption. But experts said that the CUSMA exemption and Ottawa ending the bulk of its counter-tariffs in September pulled the economy out of quicksand.
The Risks of the CUSMA Review
The 2026 CUSMA review is meant to be a review, not a renegotiation. 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. Experts said that the CUSMA exemption itself "absolutely could be at risk" in talks next year. 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, probably permanently. Experts said that they expect 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.
The Future of Tariffs
Experts said 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. Experts said that the negative implications of the higher tariffs are starting to hit home and maybe the Trump administration is starting to soften its view on tariffs as a blunt instrument for their industrial strategy. The future of tariffs remains uncertain, and the outcome of the 2026 CUSMA review will have a significant impact on the Canadian economy.