The first Joint Review of CUSMA is underway. With U.S. tariffs still in place and trade tensions high, there's significant anxiety about what happens next.

The good news: No extension on July 1 doesn't mean a termination. CUSMA won't expire until 2036, and meantime, the agreement and its related exemptions will keep functioning as is. What follows is likely a lengthy negotiation with key trade irritants like Rules of Origin requirements and potential demands for strategic alignment with U.S. trade goals emerging as focal points.

In this episode of the 10-Minute Take, RBC Economics' Carrie Freestone and Claire Fan discuss:

• How much protection CUSMA is currently providing Canadian exporters.
• Why the worst-case scenario of a termination has grown less damaging to Canada's economy.
• Key pain points that could surface during the negotiations.
• What this review means as a precedent for future U.S. trade agreement renewals.

INTRO

Claire: Hello and welcome back to the 10-Minute Take. I'm your host, Claire Fan.

Carrie: And I'm Carrie Freestone.

Claire: The Canada-U.S.-Mexico free trade agreement is undergoing its first joint review this year. With U.S. tariffs still in place and trade tensions high, there's a lot of anxiety about what happens next.

Claire: What’s follows is likely a lengthy negotiation. Key trade irritants like the Rules of Origin requirements, and potential proposals for strategic alignment with U.S. trade goals could become focal points. At the same time, the agreement functions as is.

Carrie: In this episode, we break down key pain points and bottom lines with CUSMA review, and explain why the worst-case scenario for Canada’s economy actually looks a little bit better today.

Claire: Lert’s jump right in!

Carrie: Let's start with the big picture. CUSMA has been holding the line on Canada-U.S. trade even with all the tariff chaos we've seen. How much protection is it providing right now?

Claire: Here's the key stat: as of April, around 90% of U.S. imports from Canada have remained duty free thanks to CUSMA. The rest are either not compliant with the free trade agreement, or faced product-specific Section 232 tariffs on steel, aluminum, autos, lumber, and other goods.

Carrie: So why did the July 1 date matter at all?

Carrie: But could the agreement be terminated before 2036?

Claire: Yes. Although this has little to do with this year’s review. Article 34.6 allows any party to terminate at point in time, with six months’ written notice. We view outright termination as unlikely. Here's why: decades of free trade have left North American supply chains extremely integrated, and exporters and importers across all three countries with huge incentives to keep the deal alive.

And that's already showing up in policy. Later this month, U.S. is set to replace current Section 122 tariffs with newly proposed Section 301 tariffs. Here, once again, we see the CUSMA exemptions are preserved. In fact, the U.S. administration has repeatedly chosen to uphold the free trade agreement in pretty much all rounds of tariffs, and Section 301 is no exception.

Carrie: Okay, so termination is unlikely. But losing CUSMA protections would still hurt Canada's economy, right?

Claire: Absolutely. It would be a significant shock. But—and this is where it gets interesting—the pain might be less severe than it would have been a few months ago.

Carrie: How so?

Claire: The tariff rate that would replace CUSMA exemptions for Canadian goods has gotten smaller. Back under the IEEPA measures, that rate was 35%. But those IEEPA measures were struck down by the US Supreme Court in February, and replaced by Section 122 measures that’s down to 10%. That's a major difference.

Secondly, outside of CUSMA, there’s a separate list of exempted products that applies to all U.S. trade partners relative to the latest 10% tariff. By our count, it covers about half of Canadian exports to the U.S. in the last 12 months, which would be protected regardless of CUSMA status.

Carrie: So if CUSMA disappeared tomorrow, what’s the share of Canada's duty-free exports that would face tariffs?

Claire: It’s not 90%. Auto, aluminim and lumber products already charged with product specific tariffs would see no change if CUSMA lapses. Accounting for that plus these separate exemptions, we counted roughly one-third of tariff free exports currently would be vulnerable to a 10% tariff hike.

Carrie: Which is still significant, but much more manageable than people fear.

Claire: Exactly. That will see the average effective U.S. tariff rate on Canadian exports rise from about 3.2% in April to roughly 6.6%—a substantial increase but still relatively low compared to most other U.S. trade partners.

For sectors the most at risk, there’s some overlap with sectors already hurting from tariffs. Auto parts are an example. Auto industries are already severely impacted by Section 232 tariffs but parts that are CUSMA compliant, or satisfy north American content requirements are exempt.

If CUSMA went away, those would see the largest dollar tariff increase. Elsewhere, you'd also see significant impacts on machinery and parts, plastics, aluminum, and wood products. Again, some of these are products already charged with tariffs but also still have CUSMA shielding remaining exports.

Carrie: Okay so the bottom line in the worst-case scenario is a little bit better for Canada.

Claire: Yes. And again, that’s not our base case, which assumes the review proceeds, CUSMA continues functioning as-is, and we see incremental changes, not overhauls.

But there are a few things that could come into focus. One of which is Rules of Origin, or ROO requirements. These establish minimum North American production thresholds for goods to qualify for CUSMA treatment. They're effective guardrails against transshipment—keeping non-member goods from being rerouted through CUSMA to avoid tariffs.

Carrie: Are most Canadian exports already meeting these requirements?

Again, bottom line here is most of what Canada exports to the U.S. already qualifies if not exceed these content rules. So that shouldn't be a flashpoint. Still, a push for increased North American, or U.S. content during the review—could prove disruptive for businesses.

Carrie: What else could come up?

Claire: Trade alignment with the U.S.

The CUSMA agreement already restricts parties from signing free trade agreements with non-market economies—including China. But the U.S. could push further and require commitments from Canada and Mexico to align export controls, restrict offshore trade and investment, and coordinate trade restrictions more broadly. Similar provisions have appeared in recent U.S. trade agreements.

These could constrain Canada's ability to expand and diversify trade beyond North America. Right now, excluding energy and gold, 72% of Canada's goods exports go to the U.S.—down from 76% a year ago, which is progress. But there's still huge dependency. Stricter restrictions on offshore trade could limit opportunities to rebalance that portfolio.

Carrie: Okay before we wrap up, what does our base case forecast assume with CUSMA this year?

Claire: We assume neither CUSMA's specifics nor the effectiveness of exemptions will meaningfully change as a result of the review this year. The more important point here is probably that we don’t expect a big change in the trade environment regardless of the outcome.

Even in the best-case scenario where CUSMA is renewed fully, trade uncertainty could still persist. The U.S. has already demonstrated both willingness and capacity to impose tariffs on top of free trade agreements, overwriting CUSMA protections last year with Section 232 tariffs.

Carrie: But the review still matters, right?

Claire: Procedurally, yes. This is the first such review for any U.S. free trade agreement. How it's structured, how long it takes, what Congress's role turns out to be, and what kinds of changes get negotiated will set precedents for future reviews of other U.S. agreements. CUSMA is the test case.

OUTRO

Carrie: CUSMA is safe for now, and the worst-case scenario of a termination is slightly less bad for Canada than it used to be. To us, the real risk isn't just termination—it's also that gradual erosion of protections and increasing demands for alignment that make it harder for Canada to diversify its trade footprint.

Claire: Thanks for tuning in. Hope this was a helpful discussion for business owners and other listeners facing uncertainty. We'll catch you again in two weeks!