What Is At Stake In The Upcoming Canada-U.S. Trade Negotiations

With bilateral negotiations set to start later this year, the war of words is well  underway, not only between the two nations,but ,domestically,as political opponents put their case to their respective publics .

US  Commerce Secretary Lutnick started off by blasting Canada’s trade strategy and claiming  they suck. He followed up in  a heated exchange in a Congressional hearing,  saying it was  “insulting and disrespectful” to the US  when Canada introduced specific trade barriers on US exports.  Specific Congress members claimed that the Administration has alienated Canadians, resulting in a loss of cross  border business with Canada. Lutnick demanded that Canada accede to several concessions prior to opening trade talks, which was dismissed by Canadian officials immediately.

Canadian official Opposition leader, Pierre Poilivre, attacked  the  Carney government  for “ losing the trade war”  And, the Canadian media wanted to know Canada’s negotiation strategy and wanted more transparency regarding the whole process . Finally, Prime Minister Carney, in response to reporters, made it clear that Canada had a list of  “irritants” related to US tariffs . At the same time, he made it clear that Canada  is in no rush to sign a deal in response to the US bully tactics.

Legal Framework

To better understand what is governing the US and Canadian positions, we first have to look at the legal framework that governs the talks to renew the existing trade arrangement. McCarthy Tetrault, a leading Canadian legal firm, issued a report on the history and review mechanism of CUSMA, saying that:

 “ CUSMA entered into force on July 1, 2020, replacing the North American Free Trade Agreement (NAFTA). It governs trade between Canada, the United States and Mexico,..... The 2020 update, negotiated in the first Trump Administration, largely preserved tariff-free access across the North American market, while modernizing the rules to reflect then-current trade issues….

“CUSMA includes a built-in “review and term extension” mechanism in Article 34.7, often referred to as the “sunset clause.” The agreement is set to expire automatically after 16 years (in 2036) unless the parties agree to extend it. To prevent expiry, a formal joint review must occur in year six after implementation, which will be 2026.”,  and

Put differently, there is no “do or die” moment come July 1, 2026. Rather, the agreement does not expire immediately, but it will be subject to “probationary” annual reviews. Annual reviews only generate considerable anxiety within most manufacturing businesses which  face decisions to invest billions over a long term. The automotive and energy industries, which dominate the bilateral trade  flows, run up against a set of policy risks in making investment decisions should the trade agreement not contain adequate timeframes allowing for safe investment decision-making.   

Canadian officials do not see July 1st as anything other than “a checkpoint, not a cliff”. It will likely pass uneventually and the process of annual reviews will come into effect.

Trade Issues at Stake

Canada and Mexico oscillate between the number one and two spots  for US exports of goods and services. Overall, approximately 90% of the two-way trade is covered by duty-free provisions under CUSMA. However, there  are  irritants today that will dominate future negotiations, such as:

• Chinese investment in Canada and Transshipment; the US harbours a  fear that Chinese manufacturing, especially in the auto sector, will use Canada as place to set up shop or as intermediate port of call gaining access to  the US market; but Canada has already opened up to Chinese auto imports, having agreed to allow 49,000 Chinese-made EVs into Canada, as part of an overall trade package;

• Rules of Origin relates to the way  industry classifies whether a good was produced with sufficient production in the CUSMA region to be eligible for a preferential tariff treatment; it is a source of irritation within the auto industry, since most automotive vehicles made in North America undergo  transhipment numerous times across the border as various plants offer  specialization in parts and assembly. The rules have prompted various challenges from within the auto sector, and continue to be a source of dispute.

• Tariffs  . The US Supreme Court struck down the Administration’s authority to impose tariffs under the International Emergency Economic Powers Act (IEEP) in February this year. The Court was specific to IEEP, but allowed  the imposition of heavy duties on steel , aluminum and cars, even though these goods comply with rules of origin; Canada has called these sectoral tariffs a  “violation of our bilateral trade agreements”; in 2025, Canadian steel exports fell by 55%, aluminum exports by 12%, and finished auto exports by 24%

• Supply Management.  Canada has long used a system of quotas to manage its agricultural sectors, especially with dairy and poultry products. The US has formally objected to this supply management  system over the years, and it continues to be a source of dispute. 

In sum, there is a lot at stake in these upcoming negotiations. It takes two parties to sit down and negotiate in earnest. Canadian officials have been  systematically  preparing for these  negotiations for some time. Meanwhile, the Trump Administration which continues to thrash around, makes demands that are clearly non-starters and behaves  in a fashion that alienates Canadians.