Economists say failure to renew North American trade pact could trigger tariffs and recession risk
The future of the Canada–United States–Mexico Agreement (CUSMA) represents one of the most significant economic risks facing Canada this year, according to a new analysis from Scotiabank Economics.
Scotiabank economist René Lalonde (with additional input from Olivier Gervais, Patrick Perrier, and Farah Omran) warns that while the collapse of the trilateral trade deal is unlikely, the economic consequences would be severe, potentially pushing Canada into recession and disrupting trade flows across North America.
The research, titled Low Probability, High Cost: The Macroeconomics of a CUSMA Breakdown, examines the possible fallout if the agreement fails to be renewed during its scheduled 2026 review.
The economists state that “the future of CUSMA is the single most consequential macro uncertainty facing the Canadian economy this year.”
The review process could unfold in several ways. The three countries may agree to extend the pact for another 16 years, allow the deal to remain in place but subject it to annual reviews until 2036, or terminate the agreement entirely if one member withdraws.
While the final scenario is considered improbable due to legal and political barriers, Scotiabank’s economists emphasize that the downside risks warrant careful attention. They describe a full breakdown as a “low probability event,” but one that would carry a “high impact” for Canada, Mexico and—though to a lesser degree—the United States.
Using the bank’s integrated US–Canada macroeconomic model, the research team tested how escalating trade barriers might affect both economies. The model incorporates cross-border trade flows and potential responses from monetary and fiscal policy to capture the broader macroeconomic effects.
Two possible disruption scenarios were considered.
In the first, a moderate escalation in trade tensions would see tariffs applied to goods that currently move duty-free under CUSMA. Under that scenario, Canada’s economy would slow but remain in positive territory, with growth weakening rather than contracting.
A more severe outcome would involve significantly higher tariffs on Canadian exports, sharply increasing effective trade barriers. In that case, Canada’s gross domestic product could drop nearly two percentage points and unemployment could climb above 7%, pushing the country into recession.
The United States would also feel the effects, though less dramatically. Economic growth there would be trimmed slightly, while inflation could rise modestly—potentially forcing the Federal Reserve to tighten monetary policy at an inopportune time.
The bank’s economists stress that their base case remains a successful renewal or extension of the agreement with only limited changes.
They argue that the underlying economic logic for maintaining the pact remains strong because all three countries benefit from integrated supply chains and relatively frictionless trade. Recent rhetoric from Washington may therefore reflect negotiating tactics rather than a signal that the deal will be dismantled.
Another complicating factor is a recent U.S. Supreme Court decision limiting the president’s ability to impose tariffs under the International Emergency Economic Powers Act, which adds new legal uncertainty to potential trade disputes.
Even so, Scotiabank says the upcoming review process will remain a critical moment for North American economic stability.
Given the scale of cross-border trade and investment under CUSMA, the economists conclude that preserving the agreement—or replacing it with a similarly open framework—will be essential to maintaining economic momentum in Canada and across the continent.
