The Canadian government failed to reach a trade deal with the United States before the Aug. 1 deadline. As a result, U.S. President Donald Trump increased the blanket tariff on imports of Canadian goods from 25 per cent to 35 per cent, while tariffs on steel, aluminum and some automotive imports have remained unchanged. Crucially, the so-called “

CUSMA exemption ” on goods that are compliant with the existing Canada-U.S.-Mexico trade agreement has also remained in place.

Many have pointed out that the lack of a deal makes Canada an outlier among U.S. trading partners. The EU, the U.K., South Korea, Japan and many others managed to clinch a deal before the deadline. Even Mexico, which did not reach a deal, was given a formal 90-day extension.

But looking at the U.S. agreements with other countries, one can genuinely question whether Canada could have successfully lowered its effective tariff rate, even with a deal. So far all the trade deals reached by the U.S. include some tariffs. More importantly, no country has escaped the 50 per cent tariffs on steel and aluminum, except for the U.K., which faces 25 per cent tariffs. With little chance that Canada could have avoided tariffs on steel and aluminum, reducing the effective tariff rate would have been a tall order.

Moreover, the extreme focus on the state of current negotiations and the need for an immediate deal to avoid tariffs overlooks a much bigger threat to Canada: The CUSMA renegotiation scheduled for Summer 2026. Considering that, any deal reached now might only be a band-aid that will be ripped off next year — and it may hurt.

The importance of CUSMA for Canada cannot be overstated. Canada’s effective tariff rate on exports to the U.S. is one of the lowest in the world, primarily due to the CUSMA exemption.

What if CUSMA changes drastically following the renegotiation next year?

President Trump is likely to use this opportunity to tackle the trade irritants that have been bothering him, notably Canada’s supply management.

However, I think Canadian negotiators need to consider that the U.S. approach to the negotiations could be much broader.

The Trump administration has referred in the past to the idea of creating a “Fortress North America” as a means of counteracting the threat from China.

As such, a major trade irritant for the U.S. has been third countries’ use of Canada and Mexico to circumvent tariffs, with China, for example, making significant investments in manufacturing in Mexico, evidenced by the foreign direct investment data.

With that in mind, one of the aims of the U.S. administration with the CUSMA renegotiation could be to move from a Free-Trade Agreement to something that more closely resembles a customs union. Such an arrangement would mean that Canada and Mexico would have to commit to match the tariffs the U.S. imposes on every other country, potentially leading to a difficult choice for Canada.

In addition, further integration between Canada and the U.S. is likely still an objective for President Trump, even though he has stopped referring to Canada as the 51st State. Nevertheless, it’s important to remember that the European Customs Union, established in 1968, was a cornerstone in the creation of what is now the European Union.

A customs union would mean further integration with the U.S., guaranteeing access to its market, but it would come at the expense of lost independence. As such, Canada’s current free-trade agreements with other countries, such as CETA, the TPP and others, would no longer be valid. Moreover, Canada would lose its ability to negotiate free trade deals with other countries, and would likely face retaliatory tariffs from international partners, similar to the ones China has imposed on canola after Canada matched U.S. tariffs on the imports of Chinese electric vehicles.

If the government chooses this option, Canada would be doubling down on its reliance on the U.S. and forgoing the opportunity to diversify trade away from the Americans.

On the other hand, if Canada rejects a customs union, we would remain in control of our trade destiny, with the ability to pursue free trade deals with other countries. However, that freedom would likely come at the cost of facing the same kind of blanket U.S. tariffs that other countries are facing, leading to a sharp rise in our effective tariff rate. With exports to the U.S. representing about 20 per cent of Canadian GDP, the economic impact would be significant.

Basically, the choice boils down to either “short-term gains for long-term pain” or “short-term pain for long-term gains.”

In the current context of tensions with the U.S., it is unclear where the general opinions, whether from politicians, business leaders or voters more generally, would be on the subject: further integration or increased diversification.

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There are likely to be strongly opposed views across provinces and industries.

Charles St-Arnaud is the chief economist at Alberta Central.