Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.
Read the latest monthly column for the Financial Post: Opinion: If Trump’s trade target is a customs union, Canada will have a big decision to make
Summary
There is a bigger threat to Canada than the current tariffs and the lack of an immediate deal with the US: the CUSMA renegotiation scheduled for Summer 2026.
The importance of CUSMA for Canada cannot be overstated. Canada’s effective tariff rate on exports to the U.S. is one of the lowest in the world, primarily due to the CUSMA exemption. What if CUSMA changes drastically following the renegotiation next year?
The Trump administration has referred in the past to the idea of creating a “Fortress North America” as a means of counteracting the threat from China. As such, a major trade irritant for the U.S. has been third countries’ use of Canada and Mexico to circumvent tariffs.
With that in mind, one of the aims of the U.S. administration with the CUSMA renegotiation could be to move from a Free-Trade Agreement to something that more closely resembles a customs union. Such an arrangement would mean that Canada and Mexico would have to commit to match the tariffs the U.S. imposes on every other country.
It would lead to a difficult choice for Canada: further integration with the US or continued independence, but losing its privileged access to the US. And the choice could boil down to either “short-term gains for long-term pain” or “short-term pain for long-term gains.” In the current context of tensions with the U.S., it is unclear where the general opinions, whether from politicians, business leaders or voters more generally, would be on the subject: further integration or increased diversification.