With Washington refusing to extend the continental trade pact and a fresh tariff threat landing over wildfire smoke, Canada’s push to lift sectoral duties looks set to drag past the U.S. midterms.
Canada’s campaign to win relief from a thicket of American tariffs entered a more uncertain phase this weekend, as a fresh threat from President Donald Trump collided with a continental trade agreement that Washington has just declined to renew. The result is a negotiating landscape in which the rules themselves are in flux, the sectoral duties Ottawa most wants lifted remain firmly in place, and the prospect of a comprehensive deal appears to be slipping beyond the U.S. midterm elections in November.
The immediate spark was the president’s threat, delivered on Friday, July 17, to add the “cost” of Canadian wildfire smoke to the tariffs Canada already pays. Coming on top of an unresolved dispute over steel, aluminum, automobiles and softwood lumber, and just weeks after the United States refused to extend the Canada United States Mexico Agreement, the threat crystallized how far the two neighbors remain from a durable settlement, and how readily new grievances can be injected into an already crowded agenda.
A pact in annual review limbo
The backdrop to the current standoff is the fate of CUSMA itself. Under the terms of the agreement, the three member countries faced a July 1 deadline to decide whether to extend the pact for a further 16 years, which would have carried it through to 2042. The Trump administration declined to do so, citing what it called the deal’s shortcomings. The refusal does not tear up the agreement. CUSMA remains fully in force, and the overwhelming majority of Canadian goods continue to cross the border duty free because they qualify for preferential treatment under its rules of origin.
What the refusal does trigger is a decade of uncertainty. Rather than locking in the agreement to 2042, the three countries must now conduct a joint review every year until they either agree to an extension or reach the pact’s scheduled expiry in 2036. Each annual review becomes an occasion for renegotiation and leverage, replacing the long horizon of stability that businesses had counted on with a rolling series of deadlines. For companies making multiyear investment decisions in automotive plants, aluminum smelters and cross border logistics, the shift from a settled framework to annual reviews is a meaningful increase in political risk.
Canada’s trade minister, Dominic LeBlanc, who leads the file alongside chief negotiator Janice Charette, has framed the annual review process as an opportunity to keep pressing Canadian priorities rather than as a defeat. Following the trilateral review meeting, LeBlanc said Canada would continue to engage constructively with the United States and Mexico while firmly defending Canadian interests, and he singled out the sectoral tariffs on steel, aluminum, automobiles and softwood lumber as the issues Ottawa most wants resolved.
The sectoral tariffs that remain
Beneath the CUSMA umbrella sits a set of tariffs that the agreement does not shield, and these are the duties that actually bite. The United States maintains a 50 percent tariff on steel and aluminum imports under Section 232 of the Trade Expansion Act, a rate in place since June 2025, though goods that qualify under CUSMA rules and products made with a high share of American melted and smelted metal receive carve outs. Automobiles and auto parts face their own sectoral measures, a serious concern given how deeply the North American vehicle industry is integrated across the border.
Softwood lumber illustrates the layering of duties that Canadian producers face. The combined antidumping and countervailing duties on most Canadian softwood have stood at roughly 35.16 percent. Following its latest administrative review, the U.S. Department of Commerce has signaled a reduction, with antidumping duties falling to about 10.66 percent from 20.56 percent and countervailing duties easing to 14.17 percent from 14.63 percent, bringing the combined rate down to about 24.83 percent. The relief is partial at best, because a separate 10 percent tariff imposed in October 2025 under Section 232 sits on top of those duties, leaving the effective burden near 34.83 percent. Commerce announced post preliminary results of its seventh administrative review at the end of June, with final results not expected until August at the earliest, and potentially as late as October if the timeline is fully extended.
Taken together, these sectoral tariffs impose real costs on some of Canada’s most important export industries, and they are the reason Ottawa has been unwilling to declare the trade relationship stable despite the broad duty free access that CUSMA still provides. The gap between the headline picture, in which most trade flows tariff free, and the sectoral reality, in which strategic industries face steep duties, is the central tension in the current negotiations.
The deal that keeps slipping
Hopes for a comprehensive settlement have repeatedly run ahead of reality. When Prime Minister Mark Carney met the president at the Group of Seven summit in Kananaskis, Alberta, the two leaders spoke of reaching a tariff agreement within about 30 days. That window has come and gone without a deal, and the events of the past few weeks have pushed the timeline further out.
Steve Verheul, who led Canada’s negotiating team during the renegotiation of the North American trade pact in the president’s first term and now works as a principal at the public affairs firm GT and Co., offered a sober assessment of the odds. Speaking to a business audience as the CUSMA review process opened, Verheul said he did not expect Ottawa to reach a tariff deal with Washington before the American midterm elections. He allowed that there could be a window in which the president and his administration look for a political win before voters go to the polls, but said it was more likely the discussions would continue past the midterms and possibly into next year. Canada’s foremost objective, he noted, is relief from the tariffs on steel, aluminum, automobiles and softwood lumber, the same sectors LeBlanc has emphasized.
The pace of talks reflects that caution. The United States has held bilateral rounds with Mexico and scheduled another for the week of July 20, focused on automobiles, steel, aluminum, agriculture and economic security. Washington has not yet announced a first round of formal bilateral talks with Canada, a sequencing that some in Ottawa read as a sign Canada has slipped down the administration’s priority list, at least for now.
Reactions and posture
Canadian officials have worked to project steadiness rather than alarm. The prime minister has emphasized the human toll of the wildfires burning across the country, and provincial leaders have pushed back on the president’s characterization of Canadian forest management while stressing the long history of cross border cooperation on firefighting. One premier called the wildfire tariff threat unacceptable, and Ontario Premier Doug Ford, whose province is among the hardest hit by the fires, underscored that Canadian and American jurisdictions routinely come to one another’s aid during emergencies.
The measured tone is deliberate. Throughout the second Trump term, Ottawa has calculated that avoiding escalatory rhetoric, while holding firm on substance, offers the best chance of eventually securing tariff relief. That strategy has drawn criticism from some quarters at home, where business groups and opposition politicians have at times urged a tougher line, but the government has largely stuck to it, betting that patience and constructive engagement will outlast the current turbulence.
The economic stakes
The economic significance of the standoff is hard to overstate. The United States remains by far Canada’s largest trading partner, and the integrated supply chains that link the two economies mean that tariffs on Canadian steel, aluminum and auto parts ripple through factories on both sides of the border. American manufacturers that rely on Canadian inputs have absorbed higher costs, and those costs are ultimately reflected in the prices American consumers pay, a dynamic economists consistently emphasize when analyzing the incidence of tariffs.
For Canada, the sectoral tariffs threaten investment and employment in regions that depend on the affected industries. Steel and aluminum communities in Ontario and Quebec, forestry dependent towns in British Columbia and across the country, and the automotive corridor of southern Ontario all have a direct stake in the outcome. The uncertainty introduced by the shift to annual CUSMA reviews compounds the problem, since firms weighing whether to build or expand capacity must now factor in the possibility that the rules could change every year.
The currency and equity markets have taken the developments in stride so far. The Canadian dollar hovered around 1.40 to the U.S. dollar over the weekend, and Canadian stocks were little changed, suggesting investors are treating the latest threats as part of an ongoing pattern rather than a sudden rupture. But market calm can mask slower moving damage, and analysts warn that the persistent uncertainty has already weighed on capital spending in trade exposed sectors, as companies delay decisions until the policy fog lifts.
Pressure on a second front
Canada’s trade challenges are not confined to its southern border. On the same day the CUSMA review opened, China imposed a preliminary anti dumping tariff of 73.5 percent on Canadian pea starch, part of a broader dispute that has also seen Beijing levy a preliminary 75.8 percent duty on Canadian canola seed. Those measures trace back to Canada’s earlier tariffs on Chinese electric vehicles, and although relations warmed somewhat after Prime Minister Carney visited Beijing in January and reached an initial understanding to lower some tariff rates, the pea starch decision shows that friction persists. Fighting a trade battle on two fronts, with the United States to the south and China across the Pacific, stretches Canadian negotiating resources and underscores the vulnerability of an economy heavily reliant on exports.
The automotive fault line
No sector illustrates the stakes of the standoff more vividly than automobiles. Vehicles and their components cross the Canada United States border repeatedly during assembly, with individual parts often traveling back and forth several times before a finished car rolls off the line. That integration, built up over decades and formalized under successive continental trade agreements, means that tariffs on autos and auto parts do not fall neatly on one country. They raise costs at every stage of a shared production system, and they threaten the competitiveness of an industry that supports hundreds of thousands of jobs across southern Ontario and the American Midwest.
The inclusion of automobiles on the agenda for the bilateral round the United States scheduled with Mexico for the week of July 20 signals how central the sector is to the broader negotiation. For Canada, which has not yet been given a date for its own formal bilateral round, the concern is that decisions shaping the future of North American auto production could take form in talks to which it is not yet a party. Canadian officials have stressed that the country’s automotive interests must be addressed directly, and the sector is one of the four LeBlanc has repeatedly named, alongside steel, aluminum and softwood lumber, as a priority for relief.
The documentation that protects trade
The reason most Canadian goods still cross the border duty free, despite the sectoral tariffs and the periodic threats, is that they qualify for preferential treatment under the continental agreement’s rules of origin. Establishing that a product qualifies is not automatic. It requires exporters to trace the origin of inputs, calculate regional value content and maintain records that can withstand scrutiny by customs authorities. As the tariff environment has grown more contentious, the value of that documentation has risen sharply, because preferential origin status is what stands between a shipment and the duties that would otherwise apply.
Trade advisers now treat rigorous origin documentation as the single most important defensive measure a Canadian exporter can take. A firm that can prove its goods qualify preserves duty free access even amid the turbulence, while one whose paperwork is incomplete may find itself exposed to tariffs it could otherwise have avoided. The shift to annual CUSMA reviews raises the stakes further, since any future changes to the rules of origin would ripple through every exporter’s compliance calculations. What was once a routine administrative task has become a frontline strategic concern.
Signs of diversification
The strain in the relationship with Washington has sharpened Canada’s longstanding interest in reducing its dependence on a single market. Exporters have looked with renewed urgency toward Europe and the Indo Pacific, and the government has signaled a willingness to deepen commercial and industrial ties beyond North America. A marker of that shift came on July 18, when Canada selected the German firm ThyssenKrupp Marine Systems, rather than a South Korean competitor, to build a new fleet of submarines, a decision framed in part around strengthening ties with European and NATO partners at a moment of tension with its southern neighbor.
Such moves illustrate both the appeal and the limits of diversification. Building new trading and industrial relationships takes years, and no combination of alternative markets can quickly substitute for the scale, proximity and integration of the United States, which will remain Canada’s indispensable economic partner for the foreseeable future. Diversification is best understood as a gradual hedge rather than a rapid escape, a way of reducing vulnerability over time rather than a solution to the immediate tariff pressures. Even so, the direction of travel is clear, and each new step reinforces a strategic reorientation that the trade tensions of the past 18 months have accelerated.
Implications for importers and exporters
For Canadian exporters, the practical guidance in this environment has been consistent. The single most valuable step a firm can take is to document its CUSMA eligibility meticulously, since preferential origin status is what keeps the bulk of cross border trade flowing duty free even as sectoral tariffs and new threats accumulate. Beyond that, advisers have urged companies to stress test their exposure to the specific sectoral duties, to build tariff scenarios into their financial planning, and to pursue market diversification where feasible, even as they acknowledge that the sheer scale of the American market limits how quickly alternatives can be developed.
For importers in the United States, the annual review structure means that the terms of continental trade are now subject to yearly renegotiation, a source of planning uncertainty that did not exist under the previous long horizon. American firms that depend on Canadian metals, lumber and auto components face the same layered duties as their Canadian suppliers, and they have a shared interest in seeing the sectoral tariffs eased. That alignment of interests across the border may ultimately prove one of the more powerful forces pushing the two governments toward a settlement, even if the politics of the moment keep pulling them apart.
Where the pain lands
The burden of the sectoral tariffs is not spread evenly across the country, which shapes both the economics and the politics of Ottawa’s response. Quebec, home to much of Canada’s aluminum smelting capacity, has a direct stake in the Section 232 metals tariffs. British Columbia and other forestry dependent provinces feel the softwood lumber duties most acutely. Ontario carries exposure on multiple fronts at once, as the heart of both the steel industry and the automotive corridor. And the Prairie provinces, while less affected by the American sectoral tariffs, bear the brunt of the separate dispute with China over canola and pea starch. That geographic spread means the federal government must weigh competing regional interests as it decides where to concentrate its negotiating capital.
The uneven distribution also helps explain why Ottawa has been reluctant to accept a narrow deal that resolves one sector while leaving others exposed. A settlement that lifted steel and aluminum tariffs but left softwood lumber untouched, or that addressed autos while ignoring the metals, would satisfy some regions while disappointing others, creating political strains within the federation. Canadian negotiators have accordingly insisted on treating the four priority sectors as a package, even though doing so makes agreement harder to reach. The alternative, a piecemeal series of sector by sector arrangements, risks leaving parts of the country feeling abandoned in a dispute that touches the whole.
Outlook
The most likely path, on the evidence of the past few weeks, is a prolonged period of managed friction rather than either a clean break or a comprehensive deal. CUSMA will continue to function, preserving duty free access for qualifying goods, while the sectoral tariffs remain a running sore and each annual review offers a fresh opportunity for leverage and dispute. The wildfire tariff threat, whatever becomes of it, is a reminder that new grievances can surface at any time and complicate the core negotiations.
Ottawa’s wager is that steady engagement, rigorous defense of Canadian interests and the passage of time will eventually deliver relief on the tariffs that matter most. Verheul’s assessment suggests that relief, if it comes, may not arrive until after American voters have had their say in November, and perhaps not until well into next year. Until then, Canadian businesses will continue to operate in a landscape defined less by settled rules than by the expectation of continued uncertainty, adapting as best they can to a trading relationship that has become the defining economic challenge of the year.