Canada-US Trade Relations Under the New Administration

Introduction

The Canada-US relationship represents one of the most integrated economic partnerships in the world, with approximately $2.5 billion in goods and services crossing the border daily. This vital trade corridor supports millions of jobs on both sides of the border and represents a cornerstone of prosperity for both nations.

With changes in the US administration, this relationship faces both new challenges and opportunities. This article examines the current state of Canada-US trade relations, recent developments in key policy areas, and what Canadian businesses can expect in this evolving trade landscape.

The Economic Significance of the Relationship

Before delving into specific policy issues, it's worth highlighting just how significant the bilateral relationship is:

• The US is Canada's largest trading partner, accounting for approximately 75% of Canadian exports.
• Canada is the US's second-largest trading partner after China and its largest export market.
• Approximately 9 million US jobs depend on trade and investment with Canada.
• The two countries share deeply integrated supply chains, particularly in sectors like automotive manufacturing, energy, and agriculture.
• Cross-border investment totals over $800 billion, representing the largest bilateral investment relationship in the world.

This economic interdependence means that policy changes on either side of the border can have substantial ripple effects throughout both economies.

Current Trade Framework: CUSMA/USMCA

The Canada-United States-Mexico Agreement (CUSMA), known as USMCA in the United States, replaced NAFTA in 2020 and currently governs trade relations between the three North American countries. Key provisions include:

Automotive Rules of Origin

CUSMA increased North American content requirements for duty-free automotive trade:

• 75% of auto content must be made in North America (up from 62.5% under NAFTA)
• 40-45% of auto content must be made by workers earning at least $16 USD per hour

These provisions were designed to increase production in North America, particularly in the United States. For Canadian auto parts manufacturers and assembly plants, this has meant adjusting supply chains and ensuring compliance with the new rules.

Dairy Market Access

Under CUSMA, Canada agreed to provide expanded market access to US dairy products, including fluid milk, cream, butter, cheese, and other products. This represented a concession from Canada, which has traditionally protected its dairy industry through supply management. The implementation of these provisions has been a source of ongoing friction, with the US claiming Canada isn't fully honoring its commitments.

Sunset Clause

Unlike NAFTA, CUSMA includes a 16-year sunset clause, with a review after six years. This means the agreement will expire in 2036 unless all three countries agree to extend it. The first review is scheduled for 2026, which will be an important milestone for evaluating the agreement's effectiveness and potentially negotiating adjustments.

Digital Trade Provisions

CUSMA includes modernized provisions for digital trade, prohibiting customs duties on digital products, protecting cross-border data flows, and limiting data localization requirements. These elements have become increasingly important as the digital economy grows.

Recent Developments and Emerging Issues

Several specific issues have emerged as focal points in the bilateral relationship:

Buy American Policies

The current US administration has emphasized "Buy American" provisions in government procurement, potentially limiting Canadian access to US government contracts. While CUSMA doesn't cover government procurement (that was removed from the original NAFTA provisions), the WTO Government Procurement Agreement still provides some protections for Canadian suppliers.

The Canadian government has been actively engaging with US counterparts to secure exemptions or accommodations for Canadian businesses, emphasizing the integrated nature of supply chains and the potential damage to both economies from strict procurement limitations.

Softwood Lumber Dispute

The long-running softwood lumber dispute continues to be a point of contention. The US maintains countervailing and anti-dumping duties on Canadian softwood lumber, claiming that Canada's forestry sector receives unfair government subsidies. Canadian producers have consistently challenged these duties through CUSMA and WTO dispute settlement mechanisms.

Recent developments include:

• In January 2024, the US Department of Commerce lowered combined duty rates slightly to an average of 8.05% (down from 8.59%)
• Canadian officials continue to press for a negotiated settlement, though progress has been limited
• The dispute has contributed to higher lumber prices in the US, affecting housing affordability

Electric Vehicle Incentives

The US Inflation Reduction Act (IRA) includes tax credits for electric vehicles, with requirements that final assembly occur in North America and that battery components and critical minerals come from the US or countries with free trade agreements with the US. After extensive lobbying from Canada, the final rules were adjusted to include Canadian and Mexican production in the North American assembly requirement.

However, concerns remain about battery component and critical mineral sourcing requirements, which could disadvantage Canadian manufacturers if they source materials from countries without US free trade agreements. Canada has responded by enhancing its own EV incentives and investing in battery manufacturing capacity.

Energy Integration and Climate Policy

Energy trade remains a crucial component of the bilateral relationship:

• Canada is the largest foreign supplier of energy to the US, including oil, natural gas, electricity, and uranium
• Cross-border electricity grids are highly integrated, particularly in the Northeast and Midwest
• Pipeline politics continue to influence the relationship, with ongoing debates about capacity and environmental concerns

The US administration's climate policies, including the goal of a carbon-neutral electricity sector by 2035, present both challenges and opportunities for Canada. Canadian clean electricity exports could increase, but fossil fuel exports may face headwinds as US policy shifts toward decarbonization.

Supply Chain Resilience

The COVID-19 pandemic exposed vulnerabilities in global supply chains, prompting both countries to emphasize resilience and security of supply for critical goods. This has led to discussions about "friend-shoring" or regionalizing supply chains within North America.

Key sectors where Canada-US supply chain cooperation is increasing include:

• Critical minerals and rare earth elements essential for clean energy technologies
• Semiconductor manufacturing and advanced technologies
• Medical supplies and pharmaceuticals
• Food security and agricultural products

The Canada-US Supply Chain Working Group, established in 2021, continues to address bottlenecks and enhance coordination between the two countries.

Regional and Sectoral Impacts

The evolution of Canada-US trade relations affects different regions and sectors of the Canadian economy in varying ways:

Automotive Sector

Ontario's automotive manufacturing sector is deeply integrated with US production networks. The transition to electric vehicles presents both opportunities and challenges, with significant investments being made on both sides of the border. Canadian parts suppliers are adapting to changing content requirements under CUSMA and the shift toward EV production.

Agriculture and Food

Agricultural trade remains strong, though specific issues like dairy market access continue to create friction. Canadian agricultural exports to the US, including livestock, grains, and processed foods, have generally performed well under CUSMA, though periodic disputes arise over specific products or regulatory measures.

Energy

Alberta, Saskatchewan, and Newfoundland and Labrador are particularly affected by energy trade policies. While oil exports to the US remain strong, long-term climate policies could affect future demand. Meanwhile, provinces with significant hydroelectric capacity, like Quebec, Manitoba, and British Columbia, may benefit from increased clean energy cooperation.

Technology and Services

Digital services trade is growing rapidly, with tech clusters in Toronto, Vancouver, and Montreal increasingly connected to US markets. CUSMA's digital trade provisions provide a framework for this growing sector, though issues like digital taxation and privacy regulations continue to evolve.

Strategies for Canadian Businesses

Given the evolving trade landscape, Canadian businesses can consider several strategies:

Supply Chain Mapping and Diversification

Understanding your complete supply chain, including vulnerability to policy changes, is essential. While the US market remains crucial, exploring opportunities in other markets through agreements like CPTPP can reduce risk exposure.

Compliance and Documentation

CUSMA's rules of origin and other requirements demand thorough documentation. Investing in compliance systems can prevent costly delays or duties. This is particularly important in sectors with complex rules, like automotive manufacturing.

Policy Engagement

Working through industry associations to engage with policymakers on both sides of the border can help ensure Canadian business perspectives are considered in policy development. The integrated nature of many industries gives legitimate weight to Canadian concerns in US policy discussions.

Innovation and Adaptation

Policies promoting clean energy, advanced manufacturing, and digital services create new opportunities. Canadian businesses that align with these priorities may find new market openings and potential support from both governments.

The Path Forward

Several key developments will shape Canada-US trade relations in the coming years:

CUSMA Review in 2026

The mandated six-year review of CUSMA will provide an opportunity to address implementation challenges and potentially negotiate improvements. Preparation for this review is already beginning in both countries.

Economic and Security Integration

Increasing global competition, particularly from China, is driving closer economic security cooperation between Canada and the US. This includes initiatives on critical minerals, technology protection, and infrastructure security.

Climate and Energy Transition

As both countries pursue decarbonization goals, energy trade and carbon border adjustments will become increasingly important policy areas. Alignment on carbon pricing and clean energy standards could prevent trade friction while advancing climate objectives.

Border Modernization

Efforts to streamline border procedures through technology and trusted trader programs continue, with the potential to reduce costs and delays for businesses operating across the border.

Conclusion

Canada-US trade relations are entering a period of both challenge and opportunity. While specific policy disputes will inevitably arise, the fundamental economic integration between the two countries creates strong incentives for cooperation and pragmatic solutions.

For Canadian businesses, staying informed about policy developments, maintaining flexibility in supply chains, and engaging constructively with policymakers will be key to navigating this evolving relationship successfully.

The resilience of the Canada-US trade relationship over decades suggests that, despite periodic tensions, the deep economic ties and shared interests between the two countries will continue to support one of the world's most successful bilateral economic partnerships.