U.S. President Donald Trump‘s tariff campaign appeared to move at a breakneck pace towards Canada’s economy this year.
But beyond threats of double-digit tariff rates and sharp pain in manufacturing-heavy industries, a key exemption has allowed the majority Canadian goods to continue to cross the southern border duty-free.
Experts who spoke to The Canadian Press warned this saving grace for the economy is at risk in 2026 as North American trade officials prepare for a review of the Canada-U.S.-Mexico agreement, or CUSMA.
“It would be a worst-case scenario of the (CUSMA) deal basically being eliminated or not renewed,” said Tony Stillo, director of Canada economics at Oxford Economics.
“And that would put the full weight of the current tariffs — without compliance or exemptions or carve-outs — on the economy.”
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.
But 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 90 per cent of Canadian goods entered the States tariff-free as of July.
That’s because goods that are compliant with CUSMA are exempt from those blanket tariffs from the United States.
William Pellerin, international trade lawyer at McMillian LLP, said CUSMA compliance can be a straightforward or a “very, very complicated process.”
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In essence, businesses can demonstrate their compliance with the trade pact by proving their product — a screwdriver, a sweater, a cabinet — was substantially made in Canada.
Pellerin said 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.
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.
“U.S. trade policy remains unpredictable, and tariffs could increase or broaden in the near term. The upcoming review of CUSMA is also an ongoing uncertainty,” the central bank’s third-quarter monetary policy report read.
Oxford Economics pegs the average tariff rate a little higher at 6.3 per cent, Stillo said.
Earlier in 2025, the firm was forecasting a sharp recession would hit Canada in the wake of tariff disruption. But Stillo said the CUSMA exemption and Ottawa ending the bulk of its counter-tariffs in September pulled the economy out of quicksand.
If the CUSMA exemption were to end, Stillo said Canada’s economy would face “longer-term scarring.”
“The size of the economy would be lower for several years, probably permanently,” he said.
Pellerin said the 2026 CUSMA review is meant to be just that — a review, not a renegotiation. It’s intended to be a chance for the parties to rectify a few issues with the agreement, 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.
Pellerin said with ongoing tariffs already running against the spirit of the agreement, the CUSMA exemption itself “absolutely could be at risk” in talks next year.
“I view that very much as a nuclear option,” he said.
Pellerin said he expects 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.
Carney said last week he doesn’t expect to secure any separate deals on sectoral tariffs in the near future, believing those talks will run up against the CUSMA review process.
Stillo, too, said Oxford Economics’ baseline forecast for 2026 calls for a renegotiation that leaves lower but ongoing U.S. tariffs on steel, aluminum and agricultural industries in Canada.
Both Stillo and Pellerin said 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.
“These negative implications of the higher tariffs are starting to hit home and maybe they’re starting to soften their view on tariffs as a blunt instrument for their industrial strategy,” Stillo said.
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