Can Canada rely on CUSMA?

RBC senior economist Claire Fan says CUSMA remains a critical backstop for Canadian trade with the U.S., even though the joint review process is likely to prolong uncertainty.

In a July 2 report, Fan said CUSMA has helped shield most Canada-U.S. trade from the U.S. administration’s tariff measures. Product-specific tariffs on steel, aluminum, autos and lumber have hurt, but about 90% of U.S. imports from Canada have remained duty-free, largely because of CUSMA.

Fan said the lack of a July 1 agreement to extend CUSMA does not change tariff rates or end the deal, which does not expire until 2036. The current review process was designed to begin a decade before expiry because renewal was expected to be politically difficult.

“Non-renewal isn’t a termination,” Fan said.

She said near-term trade risks have not disappeared, since Article 34.6 allows any member country to leave with six months’ written notice. But RBC continues to view outright termination as unlikely if economic logic holds, given the depth of North American supply-chain integration and the incentives for exporters and importers in Canada, the U.S. and Mexico to preserve the agreement.

Fan said losing CUSMA protections would still be a major shock, but less broad than it would have been under earlier U.S. tariff rules. If CUSMA lapsed, U.S. imports from Canada would face 10% tariffs under current Section 122 and proposed Section 301 measures, compared with 35% previously under IEEPA tariffs.

Outside CUSMA, Fan said other U.S. tariff exemptions cover about half of Canadian exports to the U.S. over the last 12 months. That means about one-third of CUSMA-exempted exports would be vulnerable to a 10% tariff increase if the agreement were terminated, rather than almost 90% of Canadian exports now crossing duty-free.

Without CUSMA protections, RBC estimates the average effective U.S. tariff rate on Canadian exports could rise to 6.6% from 3.2% in April. Fan said auto parts, machinery and parts, plastics, aluminum and wood products would be among the most exposed sectors.

RBC’s base case assumes the joint review proceeds while CUSMA and related exemptions remain in place. Fan said rules of origin could become a focus, with potential pressure for more North American or U.S. content. More than 90% of U.S. imports from Canada in 2024 already had North American content, including 73% Canadian-origin and 19% U.S.-origin.

Fan said proposals to align Canada and Mexico more closely with U.S. trade restrictions could also emerge, potentially limiting Canada’s ability to diversify trade beyond North America.

Even in a best-case scenario, she said trade uncertainty is unlikely to disappear. The U.S. has already shown a willingness to impose tariffs on top of free trade agreements through Section 232 measures.

“Businesses seeking immediate resolutions will be disappointed, but the review remains relevant,” Fan said.

The economist said RBC does not expect CUSMA or the effectiveness of its tariff exemptions to meaningfully change this year, but the review will set an important precedent for future U.S. free trade agreement reviews.

-30-