The US-Mexico-Canada Agreement on trade, or USMCA, remains a key safeguard for Canadian exporters and any US withdrawal would be a significant blow to Canada's economic outlook, according to CIBC Economics.
Higher U.S. tariffs have already weighed on exports in sectors such as autos and lumber, while Canada's heavy reliance on the American market leaves it more exposed than many peers, chief economist Avery Shenfeld said in a Friday note.
Canadian manufacturers also face a growing risk of shifting production to the United States if trade barriers continue to rise, the bank said.
USMCA, or CUSMA as it's known in Canada, has not fully shielded Canada from sector-specific tariffs, but it has exempted most compliant goods. Without the agreement, Canada could face broader tariffs and trade restrictions as the United States. expands its use of trade and national security measures, CIBC added.
The July 1 deadline to extend CUSMA passed without an agreement.
A USMCA extension remains the more likely outcome, preserving integrated trade between the United States, Canada and Mexico, according to the bank. Keeping the agreement and easing trade barriers would be far more supportive for Canada's economy than further escalation.