The US Canada trade dispute shakes the North American economic and trade landscape

Recently, the trade dispute between the United States and Canada has rapidly escalated after the last minute breakdown of trade negotiations. On August 22, Canadian Prime Minister Carney immediately announced that Canada's retaliatory tariff plan, which is equivalent to the 50% tariffs imposed by the United States on $20 billion worth of Canadian goods, will officially come into effect on September 8. On August 25th local time, the Canadian federal government officially announced the imposition of countermeasures on over 700 US goods worth 27.6 billion Canadian dollars (approximately 20 billion US dollars), covering multiple fields such as steel and aluminum, dairy products, home appliances, agricultural equipment, pulp and paper, plastics, and electronic products. At the same time, a total aid plan worth 7.5 billion Canadian dollars (approximately 5.4 billion US dollars) was launched to focus on supporting small and medium-sized enterprises affected by the trade war.

For a long time, Canada has had very close economic and trade ties with the United States. By 2025, nearly 72% of Canada's commodity exports will flow to the United States, and the total trade in goods and services between the two countries will reach $880 billion that year. In this context, the potential economic consequences of the breakdown of the negotiations have raised widespread concerns among the business communities and policy research institutions of both countries.

What is more unsettling than short-term economic losses is the deterioration of decades long deeply integrated trade relations between the United States and Canada. Many analysts believe that even if the US and Canada return to the negotiating table, the traditional cooperative relationship between the two countries will be difficult to go back to the past. For over a year, the United States has been continuously using tariff tools and linking trade issues with fentanyl, digital taxes, dairy policies, alcohol sales, and even Canada's domestic cultural policies, making it increasingly difficult for Canada to view the US market as a stable and predictable external economic environment.

Carney has explicitly stated that Canada has recognized that "the United States has changed" and the two countries "will not return to their past relationship". Ma Wei, a researcher at the Institute of American Studies of the Chinese Academy of Social Sciences, said in an interview with reporters, "The US Canada economic and trade relationship will undergo structural changes, and economic and trade cooperation will shift from 'efficiency first' to 'security first'. Canada will strategically reduce its dependence on the United States, and the US Canada relationship will not decouple, but will significantly downgrade

The deterioration of bilateral relations between the United States and Canada inevitably casts a shadow over the prospects of the USMCA agreement.

The USMCA officially came into effect on July 1, 2020. Its predecessor was the North American Free Trade Agreement, which came into effect in 1994. It formed a unified regional economic entity consisting of the United States, Canada, and Mexico, with the vast majority of goods traded between the three countries enjoying zero tariff treatment and highly integrated industrial chains within the region. Data shows that the USMCA covers an annual trilateral trade volume of $1.6 trillion between the United States, Canada, and Mexico.

On July 1st of this year, the US Mexico Canada agreement underwent its first joint review after six years of entry into force. Canada and Mexico had previously formally requested to renew the agreement for another 16 years. However, the United States refused to renew the agreement in its current form and put it into an annual review mechanism. Before the expiration of the agreement in 2036, the three parties can negotiate to determine whether to maintain or revise the agreement. If the renewal cannot be achieved in the end, the agreement will automatically become invalid upon expiration.

At present, the US government has held three rounds of consultations with Mexico on revising the agreement, while negotiations with Canada have not yet begun. The deterioration of US Canada relations has raised doubts about whether the agreement can be successfully renewed, and Carney also stated that the collapse of trade negotiations is "definitely not good news" for the US Mexico Canada agreement.

Ma Wei stated that the US Mexico Canada agreement will not collapse in the short term, but its certainty has been significantly weakened, and it will gradually shift from an "institutional free trade agreement" to a "conditional, annual management framework". Meanwhile, the importance of bilateral negotiations between the United States Mexico and the United States Canada will gradually surpass that of the USMCA itself. Given Canada's performance in this negotiation, the United States may push for the USMCA to shift from a free trade agreement to an economic security agreement, "said Ma Wei.

Whether imposing a 50% tariff on $20 billion worth of Canadian goods or raising tariffs on Mexican steel and aluminum products from 25% to 50% under Section 232 of the 1962 Trade Expansion Act, the United States' practice of circumventing the USMCA framework and frequently using unilateral tariff tools to challenge regional rules is eroding the trust foundation on which the agreement operates. Once the agreement is loosened, the North American regional integration model that has gradually formed over the past 30 years will face the risk of transitioning from deep integration to gradual decoupling.