Canada's moves suggest USMCA is on life support

Over the space of 24 hours, three major figures in Canadian politics and economics have signaled their desire to take steps that will undo the tight coupling of their economy with that of the U.S. This comes as the (U.S. Mexico, Canada) USMCA treaty is up for review, but their pronouncements strongly hint that Canadian officials are thinking of the trade pact as being on life support anyway.

In a speech late Wednesday at a gala in Ottawa, former Conservative Prime Minister Stephen Harper, who held the office from 2006-15, said "Canada must adapt to new geopolitical realities. To be clear, these realities mean we must reduce our dependence on the U.S." He cautioned Canadian businesspeople that to hope for a return to a world where they enjoyed “secure predictable access” to the U.S. market was “not a safe assumption.”

Following up Thursday morning, Bank of Canada governor Tiff Macklem said in a speech that “the era of rules-based trade with the U.S. is over” and described American protectionism as a “structural force.” He noted that Canada could be a “victim of tariffs” or “lean into structural change, expand [its] internal market, and diversify trade.”

And just before Macklem spoke, Prime Minister Mark Carney announced measures to protect the Canadian auto industry, the sector that is most deeply intertwined with its American counterpart. U.S. auto manufacturers have a big presence in the country (there are no Canadian brands anymore), and 90% of vehicles and 60% of parts produced in Canada are exported to the south. The industry is marked by extremely complex supply chains across North America, where parts for a single car might cross the national borders of the three USMCA members multiple times.

However, over the course of the last year, the U.S. has imposed tariffs on imports of cars assembled in Canada and hinted strongly that it wishes to see more auto manufacturing repatriated to the U.S. Companies have responded by favoring plants in America over Canada, a decision made by Stellantis and by GM, among others.

This is the backdrop to Carney's reference this morning to “a world…changing rapidly… reshaping trade relationships and leaving economies, businesses, and workers under a cloud of uncertainty." The response includes maintaining counter-tariffs on imports of automobiles from the U.S., and providing reskilling and financial support for laid-off auto workers. More importantly, it also suggests that Canada sees the technological future of the global auto industry differently from how it seems to be seen in Washington. Carney laid out goals to “diversify… auto exports” and “make Canada a global leader in EVs.”

Among other things, the last goal has seen Canada agree to allow 49,000 Chinese EVs into the country at a low tariff rate of 6.1% in the hope that this drives inbound investment and joint ventures in the EV and battery supply chains. This has led President Trump to threaten 100% tariffs on Canada and Treasury Secretary Scott Bessent to accuse Carney of “virtue-signaling to his Globalist friends.”

Reactions in Washington to Canada’s decision have been driven in part by concerns about the cybersecurity implications of connected vehicles built by Chinese companies. But beyond this, the two countries also appear to be moving in opposite directions on EVs as major U.S. automakers take mammoth writedowns on investments in the related technology as government incentives like tax benefits and charging infrastructure buildouts disappear. Mexico’s President Claudia Sheinbaum (a climate scientist herself) would seem to be a natural supporter of inbound Chinese EV investment but has imposed a 50% tariff on all auto and parts imports from any country with which Mexico does not have a free trade agreement. This presumably reflects a desire not to jeopardize the broader trade relationship with Washington.

Canada’s decision to allow in EVs is far from a formal Free Trade Agreement with China, which would run against a USMCA clause that prohibits any member state from concluding an FTA with a non-market economy (even though Canada, Mexico, and Vietnam are all members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership or CPTPP). Even so, Canada's latest steps suggest not just that negotiations across the 49th parallel over USMCA could become even more acrimonious, but also that Canada might already be planning for the worst.