In this Counsel Views double feature, RBC PH&N Investment Counsel's Chief Investment Strategist Tasneem Azim-Khan covers two important and timely analyses: the first on the upcoming CUSMA 2.0 negotiations, and the second on the U.S. Federal Reserve.
High-stakes trade drama unfolds as economic lifeline hangs in the balance
The curtain is rising on what promises to be one of the most consequential trade negotiations in North American history. With formal CUSMA review discussions on the horizon ahead of the July 2026 deadline, Canada finds itself walking a diplomatic tightrope that could reshape its economic future.
The stakes couldn't be higher. CUSMA currently serves as Canada's economic shield, with approximately 90% of U.S. imports from Canada remaining tariff-free in Q2 2024 – a critical buffer in an era where average U.S. tariff rates have skyrocketed from under 3% to nearly 15%, the highest since the 1930s. This protection has kept Canada's effective tariff rate in the low-to-mid single digits, a competitive advantage that could vanish if negotiations falter.
Canada has already begun making strategic concessions to smooth the path ahead, boosting military and border security spending, scrapping the Digital Services Tax on major U.S. tech companies, and eliminating retaliatory tariffs on CUSMA-compliant goods. These moves address key Trump administration concerns, but bigger battles loom.
Expect fierce debates over Canada's supply management system for dairy, eggs, and poultry – long a target of U.S. criticism. The Trump administration may also push for higher North American auto content requirements beyond the current 75%, demand specific portions of vehicles contain U.S.-made parts, and challenge what they perceive as the "insular" nature of Canada's banking sector.
The geopolitical dimension adds another layer of complexity. With China squarely in Washington's crosshairs, the U.S. may leverage CUSMA's "non-market economy" clause to further curtail Chinese investment in North America. This could force Canada to choose between its diversification goals and maintaining crucial U.S. trade relationships.
Interestingly, CUSMA's preservation matters enormously to the U.S. as well. The agreement exempts 95% of U.S. goods exported to Canada from tariffs, with Canada serving as the top export market for 32 U.S. states. Should CUSMA exemptions disappear, average U.S. tariff rates could hit 20%, imposing significant costs on American importers and consumers.
Adding to the drama, the Supreme Court will soon rule on the legality of Trump's sweeping tariff authority, potentially forcing refunds of tens of billions in collected duties and reshaping the entire trade landscape.
While history provides mixed signals – the volatility of President Trump's negotiation style versus his successful NAFTA renegotiation – political incentives may favor a deal. With U.S. midterm elections approaching in fall 2026, Trump will likely want to showcase a "winning" agreement to his voter base.
The coming months promise market volatility and economic uncertainty, but the fundamental logic of North American economic integration remains compelling for all three nations.
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