Will CUSMA be renewed?

Key Concepts

• CUSMA (Canada-United States-Mexico Agreement): The trilateral trade agreement currently under mandatory review.
• Annual Review Process: The mechanism triggered if a formal agreement is not reached by the July 1st deadline, allowing the existing deal to persist through yearly assessments for a decade.
• Effective Tariff Rate: The actual tax rate applied to imported goods; a key metric for measuring trade competitiveness.
• Managed Uncertainty: The strategic shift in business mindset from seeking absolute stability to operating within a volatile, unpredictable trade environment.
• Trade Friction: Specific sectoral disputes (e.g., auto, dairy, steel, aluminum, lumber) that persist despite broader trade agreements.

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1. The CUSMA Review Process and Strategic Outlook

The mandatory review of CUSMA, beginning July 1st, does not signify an expiration of the agreement. Lochlan Wolfers of KPMG Law emphasizes that the agreement remains in effect even if a new deal is not reached. If negotiations stall, the parties enter an annual review cycle for the next ten years.

• Strategic Patience: Canada is advised not to be fixated on reaching a deal by the July 1st deadline. Given the current US administration's focus on tariff revenue, Canada may benefit from waiting out the current political cycle rather than rushing into a potentially unfavorable or unstable agreement.

2. Data-Driven Trade Advantage

Canada currently maintains a significant competitive advantage regarding US trade policy:

• Tariff Comparison: The average effective tariff rate imposed by the US on global goods is approximately 12%, whereas the rate on Canadian goods is only 4.5%.
• Status Quo Value: Maintaining the status quo is objectively better for the Canadian economy than risking a renegotiation that could lead to higher tariffs or the erosion of existing exemptions.

3. Lessons from Recent US Trade Agreements

Wolfers argues that even if a new deal is reached, its long-term validity is questionable.

• Narrow Scope: Recent US trade agreements (e.g., with the UK, India, and China) are described as "very narrow" and specialized.
• Lack of Enforcement: These deals often contain future promises that lack immediate, binding obligations, leading to a cycle of constant renegotiation rather than long-term stability.

4. Business Sentiment: The "Five Stages of Grief"

Canadian businesses have transitioned through a psychological process regarding trade relations with the US:

• Progression: From denial, anger, and bargaining to a state of "acceptance."
• Managed Uncertainty: Businesses are increasingly accepting that trade volatility is the "new normal" under the current US administration. While sectors like the auto, dairy, steel, aluminum, and lumber industries face significant "roller coaster" volatility, the broader economy is learning to manage operations within this environment of uncertainty.

5. Political Posturing vs. Economic Reality

A significant concern is the conflation of trade negotiations with unrelated political issues.

• The Gordie Howe Bridge Example: Wolfers warns against "bucketing" non-trade issues into the CUSMA discussion.
• Prime Minister’s Strategy: While the Prime Minister is open to a "narrow deal" to resolve specific trade frictions in sectors like dairy and auto, he is maintaining a measured approach. The primary challenge is balancing the political pressure to "get a deal done" with the economic reality that a rushed deal may not provide the long-term certainty businesses actually require.

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Synthesis and Conclusion

The core takeaway is that Canada should prioritize trade stability over the optics of a signed agreement. Because the current CUSMA framework provides a superior tariff environment compared to the rest of the world, there is little incentive to rush into a new, potentially narrow, or unstable agreement. Canadian businesses are advised to shift their focus from seeking total certainty to developing strategies for "managed uncertainty," recognizing that trade friction in specific sectors is likely to persist regardless of the outcome of the current review.