There goes the neighbourhood. I’m talking about the Western Hemisphere, America’s “backyard” in the now fully operational Donroe Doctrine. Canada-U.S. relations, a constant preoccupation of public debate in this country, just got even edgier.
Prime Minister Mark Carney is under pressure to clarify his government’s position on the illegal abduction of Venezuelan president Nicolás Maduro and First Lady Cilia Flores, or subsequent U.S. threats to Mexican and Colombian sovereignty, or President Trump’s lustful plans to annex Greenland, one way or another.
On Tuesday, Canada did not join France, Italy, Spain and Poland in asserting “only Denmark and Greenland can decide on matters concerning their relations.” The PM claimed to stand with these countries but highlighted “our closest partnership is with the United States.”
Is this walking softly to avoid inflaming U.S. tensions, as Liberal MP Hedy Fry suggested, or simple alignment, at least in Venezuela? Canada has wanted Maduro gone for years. The Trudeau government, alongside Europe, supported vicious and illegal U.S. sanctions while backing the actual narco-trafficking regime of Juan Orlando Hernández in Honduras—who Trump just granted a presidential pardon in December.
Whatever the Carney government’s intentions, fears or strategies with respect to Trump, it may be difficult to disentangle this week’s dramatic events from the CUSMA review.
Trump’s gunboat diplomacy in Venezuela is outrageous, but it follows a common U.S. script. A similar play for Greenland would set in motion events that would render another trade negotiation with the U.S. pointless, if it is not already.
That said, Greenland is still uninvaded and the U.S. is still expecting Canada and Mexico to go through the first CUSMA six-year review. With Canada-U.S. and Mexico-U.S. trade talks set to begin this month, and a possible Supreme Court ruling on Trump’s tariffs this week, it’s a good time to consider some of the possible outcomes.
What should we expect? There are several likely scenarios, ranging from a negotiating stalemate to various forms of compromise or conflict to Trump withdrawing from CUSMA to, in the extreme, Canada withdrawing normal relations with the United States. While some of these scenarios are more likely than others, none can be ruled out.
Before getting to those scenarios, the following table reminds us of what the U.S. government is currently demanding of its neighbours. These action items, many of them drawn from business and labour submissions to the U.S. government on the CUSMA review, come from United States Trade Representative Jamieson Greer’s opening statement in December to the House Ways and Means and Senate Finance Committees.
The specific demands of Canada and Mexico should be fairly straightforward and are more extensive for Mexico. The third column contains politically loaded, more open-ended proposals for aligning North American policy around investment and export screening, forced labour controls, mineral extraction, tariffs and domestic content quotas that the U.S. administration will want to favour U.S. firms.
According to Greer, the ease of the CUSMA review will depend on Mexico and Canada agreeing to all of these proposals. The following scenarios differ based on how rigid or flexible the Trump administration is prepared to be on that point. The outcomes depend on how Canada and Mexico react.
Scenario 1: Stalemate
Earlier this week, the Eurasia Group released a report of top 10 risks to the world in 2026. The USMCA review was one of them, albeit in relatively low ninth place, due to the political risk of continued trade and investment uncertainty.
By the group’s reckoning, there is no chance of the CUSMA review concluding this year. Instead, they see the agreement slouching along like a “zombie,” while the Trump administration pushes for maximum geoeconomic concessions from its northern and southern neighbours, either jointly or in bilateral conversations.
“Canada already scrapped its digital services tax. Mexico is imposing tariffs on China. Both are cracking down on fentanyl flows. Washington gave up nothing in return,” write Ian Bremmer and Cliff Kupchan in their report. “Why lock into an agreement when the current approach keeps delivering for the U.S. president? Neither Canada nor Mexico can afford to walk away.”
According to the group, this scenario weighs heavily on Canada and Mexico, with little impact on the U.S. outside the auto sector. Ontario’s manufacturing sector sputters, putting political pressure on the Ford government, the federal government’s “Buy Canadian” policies and big infrastructure projects can’t fill the hole of the U.S. market, and unrelated sectors “risk becoming collateral damage.”
While the Sheinbaum government in Mexico may want a quick deal, the group proposes, the Carney government appears ready for a longer fight. This is probably true, at the moment, but it does not follow that it will stay true once negotiations commence this month.
It’s also possible we will see a stalemate in which negotiations take longer than expected or are purposely kicked down the road—without the continued hostility assumed in the Eurasia Group report. The downside of this scenario is that it would leave the worst tariffs on Canadian industrial products in place, threatening the viability of those industries in the short term.
Alternately, the U.S. administration may have reasons to choose economic stability over constant attack mode in North America. Though the stalemate/zombie scenario has many adherents—including, to a point, the CCPA in our submission to the government on the CUSMA review—internal factors in the United States may counteract Trump’s belligerent habits.
Scenario 2: U.S. compromise
We learned this week that U.S. manufacturing activity continues to contract and hit a 14-month low in December. This is partly due to Trump’s tariffs on manufacturing inputs weighing on profits, leading firms to draw down inventory rather than invest in new production. This is dragging on employment growth across a number of sectors including construction, warehousing and manufacturing.
Public approval of Trump’s handling of the economy continues to drop as cost-of-living concerns persist. Furthermore, as early as this Friday, the U.S. Supreme Court is expected to rule against all or parts of Trump’s so-called reciprocal tariffs put in place under the International Emergency Economic Powers Act (IEEPA). This isn’t a sure thing, but U.S. customs officials have been figuring out how to pay back importers affected by the global tariffs to this point and the administration has a “Plan B” to substitute in comparable tariffs.
All of this is happening months before a U.S. midterm election in which the Republicans are widely expected to lose the House of Representatives. Should the Trump administration continue to feel pressure to lower consumer costs, or face scrutiny over economic underperformance, or simply want to ensure Congress has no say in the CUSMA review, it may settle for less than what it advertised through Greer’s presentations in December.
In this scenario, Canada and Mexico give ground on some U.S. demands but avoid the anticipated Trump chokehold. For example, Canada could adjust the way it distributes tariff rate quota for dairy imports (to give a little more import quota to retailers), adjust or pause aspects of the Online News Act, and put U.S. alcohol back on store shelves.
The three countries may also, in this scenario, jointly agree to raise North American content requirements for tariff-free treatment within and outside the automotive sector. Some form of enhanced cooperation on industrial supply chains for “critical” minerals is imaginable, though here the Venezuelan example—the U.S. taking what it wants—is not encouraging.
I’m not advocating that Canada should concede on any of these points. In fact, I think it would be very unfortunate to. However, this would seem to be the lowest-friction option, failing which we’re back to stalemate, or worse, a bigger cave-in to U.S. demands.
Scenario 3: Capitulation
A third plausible scenario blends the first two—a combination of a maximalist, take-it-or-leave-it proposal from Trump via Greer and rapid acquiescence from Canada and/or Mexico. In this case, Canada, and possibly Mexico, take a huge hit in the sovereignty and national pride department just to keep CUSMA ticking.
Canada’s big business lobby favours this scenario. There has been a steady trickle of pointless or self-serving opinion pieces recently saying Trump’s pressure on dairy supply management will do this country good. Even the ultraconservative Heritage Foundation in the U.S. can see this is nonsense.
“[M]ore dairy is produced in the state of Wisconsin than there is in all of Canada,” said Andrew Hale of the foundation in a recent National Post article. “Are we really gonna upend (CUSMA) over milk and cheese?”
Capitulation on dairy, procurement, the Online News Act, and potentially poisonous limitations on Canada’s independent foreign and trade policy would also appear to go against the Prime Minister’s intentions to hold off for a good deal. I still wouldn’t rule it out.
Canada and the U.S. are aligned on the desire to expand fossil fuel production and mining through incentives and deregulation. The Ford government in Ontario has advertised its desire for more U.S. involvement in provincial resource development in its Fortress Am-Can. Then, of course, there is the precedent of the Canadian government backing down early by lowering reciprocal tariffs and cancelling the digital services tax.
A final note on capitulation: it’s possible the Trump administration would try to bring investor-state dispute settlement (ISDS—a system of private tribunals in which corporations and investors can directly sue governments for lost profits) back into CUSMA, as proposed by several influential business lobbies in the United States including the National Mining Association. Whatever former deputy prime ministers have said about the evils of ISDS, Canada would probably eagerly accept this proposal.
In her 2025 Freshfields lecture on NAFTA’s role in the development and evolution of ISDS, former Canadian government trade lawyer Meg Kinnear—now a high-priced arbitrator on investor-state disputes against Turkmenistan, Ukraine and the Philippines—excitedly considers the possibility of a re-entry of ISDS into CUSMA. Canada just signed a NAFTA-like investment treaty with the United Arab Emirates, a monarchical dictatorship reasonable people consider brutal.
Recent U.S. actions in Latin America should scare Canada and Mexico away from this idea. Trump’s invasion of Venezuela and appropriation of the country’s oil fields is a kind of investment arbitration enforcement action—the seizure of assets in lieu of payment by the Maduro government for a litany of extremely expensive recent ISDS losses, including several from Canadian mining companies.
Canada typically pays its ISDS awards, even the blatantly unjust ones, but why increase the risk of future invasion in the event we come to our senses and exit the ISDS racket completely?
Scenario 4: CUSMA termination
Similar to the last scenario, Trump could easily decide he’s done with CUSMA, terminate the agreement and pursue bilateral deals with Mexico and Canada. USTR Greer has hinted at this option several times in the past two months.
In this case, Trump uses the maximum pressure of potentially high tariffs across much or all of Canada’s exports to extract a Malaysia, South Korea or EU-style deal focused on increased Canadian investment in the U.S. and and formal geoeconomic alignment on things like supply chain security, Chinese investment, etc. In return, the U.S. lowers but does not entirely remove tariffs on Canadian imports.
Does Canada have any leverage in this scenario to get a better deal than other countries have from the Trump administration? Yes, but leverage is only as good as your willingness to use it. Canada’s oil card is less valuable after the U.S. invasion of Venezuela and may have prompted a similar response from American neocons were we to seriously threaten U.S. supplies. Matching Trump’s “national security” tariffs on metals and other goods could be helpful by compounding cost pressures on U.S. manufacturing at a moment of weakness.
The goal in such a move would be to come to agreement quickly with the Trump administration. But this is not Canada’s only hope. It is not true that a CUSMA termination would leave us without a trade deal with the United States, for example. The WTO agreements, which mirrored NAFTA, still bind both countries. In fact, Canada was more likely to bring trade disputes against the U.S. to the WTO than the NAFTA or CUSMA dispute settlement procedures.
Also, until recently, few North American firms bothered to get certified as CUSMA-compliant—to profit from zero tariff rates—because the WTO most-favoured nation rates were so low. That said, most Canadian firms have now become CUSMA compliant to avoid Trump’s fentanyl and border tariffs, which has limited the damage of the trade war outside of sectors facing higher national security tariffs (automotive, lumber, steel, aluminum, etc.).
The end result of a bilateral negotiation outside of CUSMA would probably be a non-enforceable (for Canada) arrangement involving baseline tariffs on most exports, some kind of commitment to invest in the U.S. or buy U.S. goods (e.g., defence), an import quota regime for steel, aluminum and automotive products, and closer alignment on Trump’s foreign policy—for as long as the Trump administration exists, that is.
Uncertain futures
The above scenarios assume Canada is reacting to circumstances out of its control. This is only true in the extreme case. A U.S. annexation of Greenland would compel the Carney government to sever normal relations with the aggressor United States. The CUSMA review simply wouldn’t happen in this context. Annexation of Canada is still a real possibility, however faint we may hope it is.
“I don’t think they’re musings, I think he’s got a view about who we are and what we’re all about, that is that he can run the country better than us,” said former Canadian ambassador to the United Nations Bob Rae in a recent discussion of Trump’s 51st state threats. “I think we all just sort of shake our heads with a sense of amazement, but we have to go beyond just that amazement and then recognize that this guy is for real, and the real is not pretty or legal.”
Outside of this extreme scenario, we have options. Canadians worried and angry about Trump’s brazen violation of state sovereignty in Venezuela and his police terrorism within the United States may ask why we would negotiate anything with the increasingly fascistic White House. Why don’t we walk away from CUSMA?
It is a reasonable question and, depending on how the review goes, a reasonable choice. It’s a question too big for the Prime Minister and his close advisors alone to answer.
