A new report from Deloitte Canada discusses the potential impact of a U.S. withdrawal from the North American trade pact on Canada’s economy. The findings indicate that while boosting trade with a more diverse set of international partners would help mitigate some economic losses, it would not fully compensate for the negative effects of such a withdrawal. The report emphasizes that Canada must look beyond trade diversification to bolster its economy.
The report, titled “Tariffs: A Rough Road Leads to New Destinations,” outlines both best- and worst-case scenarios for Canada's domestic economy amidst ongoing trade uncertainties. Co-author Matthew Stewart, a partner at Deloitte Canada, highlights the need to assess the potential ramifications if the Canada-United States-Mexico Agreement (CUSMA) were to dissolve.
The worst-case scenario outlined in the report suggests that the complete failure of the CUSMA is a realistic possibility. In this scenario, projections show that the U.S. accounted for approximately 70 percent of Canada’s exports as of 2025. Should the agreement fall apart, Canada’s real Gross Domestic Product (GDP) could decline by 1.6 percent, translating to a reduction of $402 billion over the next decade compared to a status quo that includes existing U.S. tariff levels and CUSMA. Additionally, this scenario could result in the loss of about 163,000 jobs annually, thereby reducing wages and consumer spending across the country.
The report notes that the most adversely affected sector would be manufacturing. For instance, the motor vehicles and parts industry could see a significant dip of 28 percent in real GDP relative to the baseline. Other sectors such as electronics, machinery, and equipment might experience a 21 percent decline, while rubber and plastics products could see a 20 percent drop, and chemicals a 13 percent fall by the year 2036.
The implications extend to the oil and gas sector as well. Without the protection of CUSMA, Canadian oil exports to the U.S. could drop by 11 percent, while natural gas exports may plummet by 30 percent due to a 10 percent global tariff from the U.S.
Conversely, the report presents a best-case scenario where Canada maintains its existing free-trade agreements, including CUSMA, while also pursuing new trade deals. In this optimistic outlook, Canada's real GDP could rise by 0.6 percent, equating to an increase of $141 billion over the next decade. Such a scenario would create nearly 53,000 jobs each year, with agriculture and various manufacturing sectors anticipated to benefit most from greater trade opportunities with countries like China and India.
However, the authors contend that Canada must not only focus on uncovering new markets for its products but also needs to pursue policies aimed at enhancing self-sufficiency. This includes breaking down internal trade barriers and developing new areas of specialization to competitively engage in global markets.
The report underscores that significant government initiatives in areas like defense and export infrastructure, along with efforts to refine critical minerals, are positive steps forward. Research indicates that completely eliminating interprovincial trade barriers over a five-year period could potentially yield an additional $881 billion in economic output by 2040 and create approximately 133,000 new jobs.
Matthew Stewart expresses optimism about the feasibility of achieving at least half of these potential gains. He asserts that with a combination of internal trade improvements and diversification efforts, Canada could offset a significant portion of the economic decline predicted from a negative shift in relations with the United States.
