VIDEO The collapse of trade talks between Canada and the United States this past weekend and the ensuing fallout have stoked debate about whether the entwined economic relationship between the countries — held up around the world as a model of economic cooperation — will survive and, if so, in what form.
Canada-U.S. free trade has evolved over decades through a series of deals, from the 1965 Auto Pact to the current Canada-U.S.-Mexico Agreement , leading to about $1.3 trillion in two-way trade per year, according to the Canadian Chamber of Commerce.
But the abrupt end of talks, followed by a week of finger pointing and name-calling on both sides, is driving home the realization that what once felt like an ironclad partnership that Canadian businesses and consumers could rely on, will never be the same again.
“The uncertainty was always there. What changed is that it became visible, and visible risk can be priced,” said Barry Appleton, managing partner of Appleton & Associates International Lawyers LP in Toronto, who believes Canadian businesses will bear the brunt of the change. “Pricing Canada correctly means pricing it lower than it has been.”
Fen Hampson, a professor of international affairs at Carleton University and co-chair of the expert group on Canada-U.S. relations, said that while negotiators could hammer out an interim deal to lower some sectoral tariffs punishing Canada’s steel and automotive sectors, it is hard to see the broader trade relationship surviving, especially with CUSMA already subject to 10 years of annual reviews that could significantly change its terms.
“To talk about CUSMA going forward, well, they’re in the process of killing it right now,” Hampson said, pointing to the Trump administration’s full-on assault on Canada’s automotive sector, which was at the heart of the original economic agreement between the two countries.
The best-case scenario of persistent tariffs in the now-paused talks would have slowly crippled the Canadian side of the deeply integrated sector, he said, while the last-minute demands would have sped up its demise, something that he believes factored in to Prime Minister Mark Carney ‘s decision to walk away.
“The way I look at it is if Carney had agreed, he would have his hand on the stake that they’re driving into the heart of CUSMA, and he said, ‘Thanks, but no thanks. I’m not going to be part of the execution party’,”’ Hampson said.
Carney has acknowledged the new tenuousness of the trade relationship with the U.S. In a statement on Aug. 21, when he told Canada’s team to pack their bags and walk away from the negotiating table, he said the 11th-hour demands by the U.S. were not only unfair and uneconomic, but “called into question the reliability of any deal” with the United States.
At a news conference Monday, Carney said Canada would return to the bargaining table only if the U.S. side came back first with a changed attitude towards Canadian industries and a desire for “a true partnership” between the two countries. He said CUSMA works and that any changes made would have to benefit Canada along with the two other nations.
What Canada will not accept, he said, is “an attitude at the negotiating table that Canada is a subsidiary of the United States, that Canadian industry is going to be disadvantaged relative to American industry, that we’re going to set up terms so that, over time, Canadian industry is going to face constant headwinds.”
Even those who are not predicting a doomsday scenario see painful times ahead for some industries, businesses and workers.
Carlo Dade, director of the centre for international policy and the New North America Initiative at the University of Calgary’s school of public policy, said he sees a future for CUSMA and even the possibility of completing an interim deal to reduce Trump’s tariffs as more than 20 other countries have done — some of them after last minute disputes that were not dissimilar to Canada’s decision to walk out on negotiations.
“Trade with the U.S. isn’t going to go away,” he said. “How we manage trade will have to adapt to the new reality.”
Dade said there are parallels to the early 1970s when U.S. President Richard Nixon’s government threatened to cancel the North American auto pact and, within four months, forced major trading partners including Canada to deal with demands in service of Nixon’s New Economic Policy, which prioritized domestic economic wellbeing in the United States.
“We did it in 1971, and we’re going to have to make that similar sort of change again,” Dade said. “Business is still going to trade…. You can’t walk away from the U.S. market.”
He acknowledged that this adjustment and new terms of the engagement with the U.S. will come with costs, and those will have to be priced in on the Canadian side.
“Businesses that can’t afford the new price of uncertainty or the higher tariffs with the U.S. are going to be at a loss, at least in the near term,” he said. “It’s going to be terribly painful. But the reality of being so close to the U.S. and trading so much with the U.S. means that we’re going to have to find a way to make this work.”
Tough negotiations with the Americans are nothing new, said Donald Campbell, Canada’s former senior assistant deputy minister for U.S. affairs who was a key player in the negotiation of the 1988 Free Trade Agreement between Canada and the United States. But a key element he no longer sees on the U.S. side is good faith, characterized by give and take and a shared goal of more efficient economies for all parties.
“Unfortunately, the way that Mr. Trump and his acolytes operate, it’s we win, you lose, and that’s a very different concept,” he said.
While he isn’t prepared to declare the death of CUSMA, which replaced NAFTA, he sees a future where it could limp along.
“We’re not going to go back to where we were,” he said. “The path forward is going to be different.”
The worst thing he could say about American negotiators in the 1980s is that they treated their Canadian counterparts with “benign neglect” at times. However, they listened when it mattered, and were persuaded by a U.S. legal opinion obtained by the Canadians that they would not be compromising Congressional power by agreeing to include a binding resolution mechanism. That was something Canada could not do without when striking a trade pact with a much larger partner by many measures.
“The difference that I see this time is the demands that they are making and continue to make are not ones that are going to go away,” Campbell said.
Appleton, the international trade lawyer who is also a senior fellow at the Center for International Law at New York Law School, said he doesn’t think free trade with the United States is dead — but only because it was never alive in the way that Canadians came to believe.
“What Canada had was preferential access, granted by treaty, revocable on terms Canada itself agreed to,” he said, adding that CUSMA was always subject to annual reviews if not renewed and could be dissolved by any party giving six months’ notice.
“Canada signed a structure that reverts to permanent renegotiation the moment agreement breaks down. Nobody hid that. It was in the text in 2020.”
What that means, he said, is that while Canada retains advantages such as resources, energy, an educated workforce and rule of law, any premium applied to Canadian goods and businesses because of cheap, easy access to the United States could disappear.
“They are simply worth less than resources plus guaranteed access to the largest consumer market on Earth, which is what people thought they were buying,” Appleton said. “An investor who understood this in 2019 would have made better decisions than one who is learning it this month.”
Businesses should understand that new risks have been introduced and that qualifications under CUSMA rules won’t necessarily protect the sector or the firm, he said, adding that tariff exposure has become more than a trade compliance issue.
“If your investment case depends on the certificate of origin holding, that case has a risk in it that was not there in June,” he said.
“The firms that come through this well will be the ones that stop asking when the relationship returns to normal and start asking what they would build if it never did.”
Carney has been pushing diversification of trade and Appleton said companies need to be honest about what their product allows.
Quebec’s aluminum sector, for example, was able to find buyers in Europe and cut the American export share from around 95 per cent to about 63 per cent in a year.
“That is real, and it happened in the middle of a trade war in an industry everyone assumed was captive,” he said.
“But aluminum is close to the easiest possible case.”
That won’t help a parts manufacturer in Windsor whose components cross the border three times during assembly, a softwood lumber company that competes with suppliers closer to the customer, or companies that ship perishable goods, he said.
“For a great many Canadian firms, the honest answer is that diversification is partial at best and the real question is whether the North American position can be made defensible rather than replaced.”
With annual CUSMA reviews in the mix for the next 10 years, there are likely to be more tariff costs passed through to customers than has been modelled, Appleton said, adding that Bank of Canada research has shown firms were more likely to pass through costs when they expected tariffs to persist over a longer duration.
He said Ottawa should be doing more than punishing the U.S. with counter tariffs, which is a short-term plan at best. Getting rid of interprovincial trade barriers that have very real costs for business, rebuilding trade advisory infrastructure that was dismantles in 2013 are high on his list. He also points to Mexico’s opposition to the onslaught of fresh tariffs imposed by the U.S. over the past year or so as a possible path forward.
“Mexico publishes thirteen written demands and asks weekly, on the record, for a standstill on new measures,” Appleton said, pointing to that country’s formal rejection of the tariffs as a violation of the core premise of CUSMA and, as Carney has also argued, the weaponization of trade. Moreover, he said, Mexico can use the U.S. rejection of these formal demands, which include economic data demonstrating damage to U.S. interests in heavily integrated sectors, as leverage in future trade talks.
In contrast, by announcing retaliatory tariffs to take effect in September, “Canada has a dollar figure and a date. That is a response, not a position,” Appleton said.
In his view, Canadian companies integrated because their governments spent sixty years building the policy architecture that told them to, from the Auto Pact through to CUSMA.
“That was a national strategy, and companies executed it rationally,” said Appleton.
“What was never built alongside it was a hedge, and that omission was a policy choice, not a private sector failure.”
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