Trade Policy Uncertainty Puts Canadian Investment and Jobs at Risk
In recent months, business organizations across both the United States and Canada have issued urgent calls for the renewal of the Canada-U.S.-Mexico Agreement (CUSMA), which is scheduled for review on July 1 of this year. The business community is eager to proceed with what they do best: making strategic investments and hiring personnel to generate profits for stakeholders. However, this forward momentum is being severely hampered by what economists term trade policy uncertainty (TPU), a phenomenon that creates a chilling effect on economic activity.
The Crippling Effect of Policy Ambiguity
Trade policy uncertainty wreaks havoc on corporate investment decisions. When faced with unpredictable trade rules, businesses often choose to delay making irreversible capital commitments rather than charging ahead and risking substantial financial losses. Recent economic studies confirm that investment levels and overall GDP decline significantly in environments characterized by TPU. Even when some firms proceed with investments in new technologies or market expansions, the broader economic impact remains negative. These analyses further indicate that while low tariffs are not as beneficial as completely free trade, they represent a preferable alternative to the persistent ambiguity that currently plagues cross-border commerce.
The Trump Tariff Conundrum
The primary source of contemporary trade policy uncertainty stems from the on-again, off-again tariff policies associated with former President Donald Trump. While Trump maintains that his tariff strategies have been effective, and they have not triggered the widespread recession and inflation many economists predicted, these levies function as taxes that inevitably impose economic costs. The current U.S. administration has signaled its intention to maintain these tariffs for three key reasons: they generate substantial revenue (approximately US$287 billion in 2025), they encourage reindustrialization by attracting foreign investment, and they provide diplomatic leverage to open foreign markets and reduce the American trade deficit.
Canada's Specific Trade Vulnerabilities
American trade officials have identified several Canadian policies as particular points of contention. These include supply management systems for dairy, eggs, and poultry; new digital services legislation; alcohol distribution practices that sometimes ban U.S. products; Alberta's energy market regulations; and customs registration processes. Among these, supply management stands out as a politically sensitive but economically restrictive policy that many argue Canada should have reformed long ago.
In any renewed CUSMA agreement, the United States is likely to insist on maintaining certain tariffs to bolster federal revenue and strengthen strategic manufacturing sectors, particularly automobiles, aluminum, steel, and semiconductors. Additionally, North American security and defense cooperation will be a priority, with Canada's Arctic region playing a crucial role. Potential Canadian decisions, such as opting for Swedish fighter jets over American F-35s, could become significant negotiating points.
Political Leadership and the Path Forward
Most Canadians support Prime Minister Mark Carney's assertion that Canada must strengthen its domestic economy and diversify its export markets. Conservative Leader Pierre Poilievre has expressed similar views, though he proposes different approaches to stimulating economic growth and managing relations with China. However, neither political leader has clearly articulated a strategy for stabilizing Canada's trading relationship with its southern neighbor.
Given widespread Canadian antipathy toward Donald Trump, politicians face a delicate balancing act. They must define negotiating objectives without appearing to capitulate to an aggressive America First agenda. Carney has stated that "no deal is better than a bad deal," but the critical question remains: what specific conditions would make no agreement the preferable outcome? Neither leader has publicly established these red lines.
A Global Pattern of Uncertainty
Canada is not alone in grappling with trade policy uncertainty vis-à-vis the United States. The United Kingdom, the European Union, and several Asian nations are similarly perplexed by shifting American tariff policies. To resolve this ambiguity, most have negotiated bilateral agreements with the U.S.—India being the latest example this week—which, while not eliminating tariffs, at least provide a framework that minimizes uncertainty and allows for more predictable planning.
As the CUSMA review deadline approaches, Canada faces a stark choice: allow the agreement to lapse into uncertainty or negotiate a new framework that includes some tariffs but provides the stability businesses desperately need to invest and create jobs. The path forward requires clear political leadership and a pragmatic assessment of economic realities.
