The US-Canada trade agreement is difficult to dispel the haze: the Canadian economy will still be mired in uncertainty
2025-07-30 11:21:55
As the global trade landscape continues to shift, the trade relationship between Canada and the United States has once again become a focal point. While the two countries are working toward a new trade agreement to ease the current tariff dispute, economists warn that Canada's economic outlook remains shrouded in uncertainty. Even if a deal is reached in the short term, future challenges—particularly the review of the United States-Mexico-Canada Agreement (USMCA)—could have a profound impact on the Canadian economy.
As a key trading partner of the United States, Canada's economy is highly dependent on exports to the US. In 2024, bilateral trade between Canada and the US reached $761 billion, accounting for approximately one-fifth of Canada's GDP. However, the recent tariff policy promoted by US President Trump has cast a shadow over this relationship. Although Canadian Prime Minister Mark Carney is actively negotiating with Trump to reach an agreement before the August 1st deadline, the negotiations are progressing unevenly. Trump has publicly stated that trade talks with Canada are "not going well," while Carney has emphasized that he will not reach a deal "at any cost." This impasse has left Canadian businesses and households concerned about the future economic outlook.
Economists point out that even if the US and Canada can reach a tariff agreement in the short term, trade uncertainty will not dissipate. This is because the upcoming USMCA review in 2026 will pose a greater challenge. The USMCA, the 2018 US-led replacement for the North American Free Trade Agreement (NAFTA), was hailed by President Trump as "the best deal ever negotiated by the United States." However, the agreement will face formal review next year, and the US may use this opportunity to impose new trade demands on Canada. This uncertainty is making business executives more cautious in their investment plans and dampening household consumer confidence.
The USMCA provides Canada with significant trade advantages. Under the agreement, Canadian goods (excluding steel, aluminum, and automobiles) that meet regional value content rules enjoy duty-free access to the US market, benefiting approximately 80% of Canadian exports. In contrast, goods from other major economies, such as China and the European Union, face tariffs of at least 15%. However, this advantage is not permanent. If the 2026 USMCA review fails to extend the agreement, Canadian exporters could face higher tariff barriers, threatening capital expenditure and economic growth.
Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce Capital Markets, said: "If the USMCA is not extended, Canadian exporters will face significant risks. This uncertainty will cast a shadow on investment decisions in the coming quarters." Companies may postpone or cancel large projects, and the risk of capital outflow is also increasing. Some exporters may even choose to invest more funds in the US market to avoid potential tariff costs.
The current state of the Canadian economy also complicates trade uncertainty. Recent economic data suggests that economic activity is slowing, though not as sharply as initially feared. The International Monetary Fund forecasts Canada's economic growth to be 1.4% in 2025, rising slightly to 1.6% in 2026. However, high inflation and pockets of strength in the labor market mean the Bank of Canada is expected to maintain its benchmark interest rate in the near term. Bank of Canada Governor Tiff Macklem has warned that if the tariff dispute persists, economic growth will come under further pressure.
Meanwhile, Trump's tariffs are driving up costs for manufacturers and forcing companies to restructure their supply chains. This not only increases operational complexity but also potentially leads to higher prices, ultimately passed on to consumers. Structural issues in the Canadian economy, such as weak business investment and low labor productivity, are further exacerbating growth pressures. Prime Minister Mark Carney has pledged to address these issues, but significant progress is unlikely in the short term.
Despite the challenging long-term outlook, a short-term tariff agreement could still provide a shot in the arm for the Canadian economy. Carl Gomez, chief economist for CoStar Group's Canada division, said a temporary agreement would provide an immediate boost to consumer and investor confidence. For example, the auto tariff reductions negotiated between Japan and the European Union offer a possible template for Canada. Charles St-Arnaud, chief economist at Alberta Central, believes such an agreement would support economic growth in the short term but would not offset long-term structural damage. Some projects could be permanently canceled, and exporters could shift more capital to the United States to hedge against future uncertainty.
Saint-Arnold further pointed out: "The August 1 agreement may just be a Band-Aid. The real test will come during the review of USMCA next year. We should start thinking now about where the United States wants to take USMCA." This view reflects the deep concern of the Canadian business community about the future trade environment.
Overall, while trade negotiations between Canada and the United States may achieve some progress in the short term, trade uncertainty will remain a long-term challenge for the Canadian economy. The future of the USMCA, Trump's tariff policies, and Canada's own structural issues together create a complex economic landscape. To address these challenges, Canada needs to maintain strategic focus during the negotiations while accelerating domestic economic reforms to boost business investment and labor productivity. Only through comprehensive preparation and flexible response can Canada maintain a firm foothold in a volatile global trade environment and pave the way for future economic growth.
In the short term, progress in US-Canada trade negotiations will directly impact the Canadian dollar. Given Canada's high reliance on US exports (accounting for approximately one-fifth of its GDP), any news of a tariff agreement could trigger significant swings in market sentiment. If a temporary tariff reduction agreement is reached before August 1st, such as the auto tariff exemptions similar to those between Japan and the EU, the Canadian dollar could appreciate slightly due to the boost in market confidence. Carl Gomez, chief economist at CoStar Group, noted that such an agreement would instill confidence in consumers and investors, reducing pressure to sell the Canadian dollar.
However, the current unsuccessful negotiations and Trump's tough stance have heightened market unease. The Canadian dollar may face depreciation pressure, especially against the backdrop of a strong US dollar. The Bank of Canada's policy of maintaining its benchmark interest rate has also limited the Canadian dollar's ability to attract capital through its interest rate advantage. If the tariff dispute remains unresolved in the short term, market expectations of slower Canadian economic growth will further weaken the Canadian dollar. Especially in an environment of high inflation, investors may prefer to hold safe-haven currencies such as the US dollar.
At 11:20 Beijing time, the USD/CAD exchange rate was 1.3761/63.
The continued presence of trade uncertainty
As a key trading partner of the United States, Canada's economy is highly dependent on exports to the US. In 2024, bilateral trade between Canada and the US reached $761 billion, accounting for approximately one-fifth of Canada's GDP. However, the recent tariff policy promoted by US President Trump has cast a shadow over this relationship. Although Canadian Prime Minister Mark Carney is actively negotiating with Trump to reach an agreement before the August 1st deadline, the negotiations are progressing unevenly. Trump has publicly stated that trade talks with Canada are "not going well," while Carney has emphasized that he will not reach a deal "at any cost." This impasse has left Canadian businesses and households concerned about the future economic outlook.
Economists point out that even if the US and Canada can reach a tariff agreement in the short term, trade uncertainty will not dissipate. This is because the upcoming USMCA review in 2026 will pose a greater challenge. The USMCA, the 2018 US-led replacement for the North American Free Trade Agreement (NAFTA), was hailed by President Trump as "the best deal ever negotiated by the United States." However, the agreement will face formal review next year, and the US may use this opportunity to impose new trade demands on Canada. This uncertainty is making business executives more cautious in their investment plans and dampening household consumer confidence.
USMCA: A Double-Edged Sword for Canada's Economy
The USMCA provides Canada with significant trade advantages. Under the agreement, Canadian goods (excluding steel, aluminum, and automobiles) that meet regional value content rules enjoy duty-free access to the US market, benefiting approximately 80% of Canadian exports. In contrast, goods from other major economies, such as China and the European Union, face tariffs of at least 15%. However, this advantage is not permanent. If the 2026 USMCA review fails to extend the agreement, Canadian exporters could face higher tariff barriers, threatening capital expenditure and economic growth.
Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce Capital Markets, said: "If the USMCA is not extended, Canadian exporters will face significant risks. This uncertainty will cast a shadow on investment decisions in the coming quarters." Companies may postpone or cancel large projects, and the risk of capital outflow is also increasing. Some exporters may even choose to invest more funds in the US market to avoid potential tariff costs.
Concerns about economic slowdown
The current state of the Canadian economy also complicates trade uncertainty. Recent economic data suggests that economic activity is slowing, though not as sharply as initially feared. The International Monetary Fund forecasts Canada's economic growth to be 1.4% in 2025, rising slightly to 1.6% in 2026. However, high inflation and pockets of strength in the labor market mean the Bank of Canada is expected to maintain its benchmark interest rate in the near term. Bank of Canada Governor Tiff Macklem has warned that if the tariff dispute persists, economic growth will come under further pressure.
Meanwhile, Trump's tariffs are driving up costs for manufacturers and forcing companies to restructure their supply chains. This not only increases operational complexity but also potentially leads to higher prices, ultimately passed on to consumers. Structural issues in the Canadian economy, such as weak business investment and low labor productivity, are further exacerbating growth pressures. Prime Minister Mark Carney has pledged to address these issues, but significant progress is unlikely in the short term.
The promise and limitations of short-term agreements
Despite the challenging long-term outlook, a short-term tariff agreement could still provide a shot in the arm for the Canadian economy. Carl Gomez, chief economist for CoStar Group's Canada division, said a temporary agreement would provide an immediate boost to consumer and investor confidence. For example, the auto tariff reductions negotiated between Japan and the European Union offer a possible template for Canada. Charles St-Arnaud, chief economist at Alberta Central, believes such an agreement would support economic growth in the short term but would not offset long-term structural damage. Some projects could be permanently canceled, and exporters could shift more capital to the United States to hedge against future uncertainty.
Saint-Arnold further pointed out: "The August 1 agreement may just be a Band-Aid. The real test will come during the review of USMCA next year. We should start thinking now about where the United States wants to take USMCA." This view reflects the deep concern of the Canadian business community about the future trade environment.
Conclusion: The road ahead is long, and Canada needs to prepare for a rainy day
Overall, while trade negotiations between Canada and the United States may achieve some progress in the short term, trade uncertainty will remain a long-term challenge for the Canadian economy. The future of the USMCA, Trump's tariff policies, and Canada's own structural issues together create a complex economic landscape. To address these challenges, Canada needs to maintain strategic focus during the negotiations while accelerating domestic economic reforms to boost business investment and labor productivity. Only through comprehensive preparation and flexible response can Canada maintain a firm foothold in a volatile global trade environment and pave the way for future economic growth.
In the short term, progress in US-Canada trade negotiations will directly impact the Canadian dollar. Given Canada's high reliance on US exports (accounting for approximately one-fifth of its GDP), any news of a tariff agreement could trigger significant swings in market sentiment. If a temporary tariff reduction agreement is reached before August 1st, such as the auto tariff exemptions similar to those between Japan and the EU, the Canadian dollar could appreciate slightly due to the boost in market confidence. Carl Gomez, chief economist at CoStar Group, noted that such an agreement would instill confidence in consumers and investors, reducing pressure to sell the Canadian dollar.
However, the current unsuccessful negotiations and Trump's tough stance have heightened market unease. The Canadian dollar may face depreciation pressure, especially against the backdrop of a strong US dollar. The Bank of Canada's policy of maintaining its benchmark interest rate has also limited the Canadian dollar's ability to attract capital through its interest rate advantage. If the tariff dispute remains unresolved in the short term, market expectations of slower Canadian economic growth will further weaken the Canadian dollar. Especially in an environment of high inflation, investors may prefer to hold safe-haven currencies such as the US dollar.
At 11:20 Beijing time, the USD/CAD exchange rate was 1.3761/63.
- Risk Warning and Disclaimer
- The market involves risk, and trading may not be suitable for all investors. This article is for reference only and does not constitute personal investment advice, nor does it take into account certain users’ specific investment objectives, financial situation, or other needs. Any investment decisions made based on this information are at your own risk.
