Despite escalating trade threats on both sides, Moody’s Ratings expects that negotiations between the U.S. and Canada will eventually resume, with the trading relationship ultimately undergoing limited changes.
In a new report, the rating agency said that the imposition of new U.S. tariffs will complicate the ongoing review of the U.S.-Mexico-Canada Agreement (USMCA), also known as the Canada-United States-Mexico Agreement (CUSMA).
“These levies point to tougher bilateral talks and greater fallout risk for the USMCA agreement, although their narrow scope limits direct effects and near-term costs,” the report said. It noted that the new U.S. tariffs only affect 5% of total Canadian exports to the U.S., and just 2% of total trade.
While escalating trade conflict and U.S. political uncertainty increases risks to the USMCA review, the report said that Moody’s baseline expectation is “that preferential trade access to the U.S. market for Canada and Mexico will likely continue, supported by deep supply-chain integration, previous tariff relief for USMCA-compliant goods, and the progress on U.S.–Mexico bilateral negotiations.”
That said, some tariffs will remain, and certain sectors face elevated risks from the USMCA negotiations — including the auto industry, heavy manufacturing, and agriculture, it said.
In the meantime, elevated policy uncertainty will pressure Canada’s export performance and private investment, the report said.
“Canadian retaliation would exacerbate uncertainty around future market access, eroding business confidence and capex planning,” it noted.
Ultimately, while further deterioration in the cross-border trade relationship could damage Canada’s economic strength, Moody’s said that its baseline assumption remains that “trading relationships between Canada and the U.S. will eventually converge broadly to existing arrangements, even if the configuration of treaty arrangements changes.”