The review of the Canada–United States–Mexico Agreement

The future of Canada’s trade agreement with the United States and Mexico is unclear. A review of the agreement could lead to many possible outcomes, and these can have a wide range of impacts on the Canadian economy.

The Canada-United States-Mexico Agreement (CUSMA) is a trilateral trade deal that came into effect in 2020. The agreement is up for review in 2026.1 The outcome of the review is an important risk to the outlook (see the Risks section).

The range of possible outcomes is wide

How CUSMA negotiations will unfold is uncertain. Possible outcomes include the following:

• CUSMA is extended, with limited changes, for a new term of 16 years until 2042. The current regime is maintained, which reduces uncertainty for exporters and around integrated supply chains. The extension of CUSMA is the outcome assumed in the base-case projection.
• CUSMA is significantly renegotiated. This could make trade more expensive. For example, stricter rules around proving where a product was made (rules of origin) or a smaller discount on CUSMA-compliant goods (reduced tariff preferences) would increase effective trade costs. At the same time, as part of the negotiations, some sectoral tariff rates could be lowered, reducing trade costs.
• Members withdraw from CUSMA. This could result in a significant increase in trade barriers. Alternatively, parties could agree to bilateral trade deals.
• No agreement is reached, and CUSMA is reviewed every year until an extension is negotiated or the agreement expires in 2036. This would prolong uncertainty.

Canada’s economy could be on a lower path

Nearly all of Canada’s exports are compliant with CUSMA, and this has helped preserve the competitiveness of Canadian exports overall. An unfavourable outcome of the review would weaken the competitiveness of Canadian exports, lowering export volumes. Faced with weaker demand, exporters would reduce production, investment and hiring. This would spill over into the broader economy, weighing on sectors such as services and putting Canadian gross domestic product on a lower path.2

The implications for inflation are mixed. Higher import costs, potential counter-tariffs, supply chain disruptions and a weaker Canadian dollar would push up consumer prices. At the same time, softer demand and the associated excess supply would dampen consumer prices.

Endnotes