Why Canada Walked Away, And What to Consider for the Future

To: Trade Observers

From: Steve Verheul

Re: Why Canada Walked Away, And What to Consider for the Future

Summary of remarks made by the author at a special webinar for C.D. Howe Institute members, August 25, 2026

As late as Tuesday August 18, there was an outline of a proposal which looked like both Canada and the United States could agree to. This emerging deal would have already been difficult for Canada to accept. It was a major dilution of its principled view that tariff-free trade should apply to all goods meeting the CUSMA rules, agreed with the first Trump Administration in October 2018, and subsequently approved by the US Congress.

As part of such a deal, the US would have stood down on its immediate threat of section 338 tariffs, along with Canada removing its 2025 retaliatory tariffs on US autos, steel, aluminum and other products. But the relief on offer from section 232 tariffs – formally on grounds that US imports of autos, steel, and aluminum from Canada threaten US national security – that had triggered the Canadian retaliation, was partial.

Then it transpired that this relief would have been limited to only a subset of the goods initially covered by the section 232 tariffs, further making production of certain goods in Canada uneconomic.

These questionable gains on tariffs stirred a lot of resistance in certain provinces which saw little relief from the potentially existential threat to these key sectors, especially as Canada would have dropped its initial counter-tariffs, which to some extent protected Canadian facilities from the impact of the initial 2025 US tariffs.

In addition, the Administration brought up issues well beyond those covered by the complaints and issues that had triggered its section 338 tariffs and the tit-for-tat around section 232 tariffs, which Canada’s proposal would have addressed. These were mostly not new issues for the United States to bring up – for example with respect to regulations applying to online streamers that apply to large US owned businesses. But they broadened the required concessions by Canada well beyond the expected trade-offs on tariffs (in addition to the removal of provincial liquor bans and the allocation of dairy quotas).

Whether a deal could really have been had on those stingy terms was a hard enough question to resolve. But the Administration pushed further to make any agreement frankly impossible for Canada to accept, by demanding, as the price for its “concessions” that would still have meant economic harm to Canada and North American economic competitiveness generally, an automatic alignment by Canada on its own tariffs towards the outside world in goods on which the United States imposed, more or less at will, section 232 tariffs. This would have required Canada to be in breach of its other trade agreements, such as with the European Union and countries across the Pacific, which are the foundation of its strategy to de-risk with the United States.

Egregiously, Canada would still have faced tariffs for these same products in the United States market – for any economy to function competitively as part of such a “customs union,” abiding by the common external tariffs only works if there is free trade within the union itself.

Combined with the proclivity of the United States under the current Administration to demand that signatories stick to their side of any deal, while feeling free itself to revisit its own commitments – including its inability to commit to the stability of the tariff structure that would have resulted from this new agreement – the outcome would truly have been a “Fortress North America” where one ruler would have dictated what other inhabitants of the fortress could have done with the outside world, while feeling free to impose restrictions at will on them within the fortress.

Canada’s options are limited. It does not have “dominance” in an escalating tariff war with the much larger US market – they can hurt us more than we can hurt them.

Canada’s main leverage rests in it being a significant export market for the United States finished manufacturing and services sectors, in a context where US economic growth, outside of the AI boom, is getting wobblier. For good reasons, US economic actors – a large majority of them – support the general continuation of free trade with Canada. They are becoming more vocal as they become concerned with the prospects of reduced North American competitiveness due to the higher costs of critical inputs, and potential losses in a significant market. The US consultative and democratic processes may yet force reason to prevail and prompt the US to come armed with more workable proposals next time.

Canada’s second main source of leverage is its potential to de-risk its bilateral relationship with the United States, by working more closely with like-minded economies, including Mexico which also has a huge stake in fostering North American cooperation. Canada must continue to build “East-West” economic bridges with governments across the Pacific and Atlantic Oceans, as well as internally. It should resist any attempt to limit options to that effect (for example, vis-à-vis nonmarket economies) unless, maybe, it can restore reasonable access to the United States by Canadian producers.

Steve Verheul is principal, GT Executive Advisors, former Assistant Deputy Minister for trade negotiations, former CUSMA chief negotiator for Canada, former CETA chief negotiator for Canada, Co-chair of the Coalition for North America Trade (CNAT) and Co-Chair of the C.D. Howe Institute International Economic Policy Council.