After a turbulent 2025, senior advisor Drew Fagan sheds light on what’s to come for Canada-U.S. relations and Canada’s policy response. Drew is also a University of Toronto professor, now on leave as a visiting professor at Yale University.
In 2025, Canada was threatened with annexation and buffeted by protectionism. It elected a new government with a new strategy: The United States can no longer be counted on, so Canada must lean more on the other two legs of the economic stool – searching out new markets and building the domestic economy.
Will it work? It can, but it’ll take tenacity and time. Meanwhile, 2026 is likely to be the real test of what Canada faces with the United States.
The formal review of CUSMA – the new NAFTA that went into effect in 2020 – starts on July 1. But the process is underway with the three countries consulting with key sectors and others.
An interview published on Dec. 5 with U.S. Trade Representative Jamieson Greer makes clear that everything is on the table, including triggering the CUSMA six-month exit clause. “(R)evise it, review it, or exit it,” he said, pointing also to a fourth option: separate agreements with each of Canada and Mexico.
Greer later contextualized U.S. trade policy as akin to concentric circles – with the Western hemisphere (and, presumably, CUSMA partners especially) on the inside, allies like the European Union next, then others, and finally China on the outside.
It may not feel like the inside, but Canada does retain the opportunity to do a mutually beneficial deal. Ottawa emphasized in the wake of the interview that a renewed CUSMA remains its goal and expectation. But any such deal would almost certainly be one more tilted toward Washington than the 1989 bilateral free-trade agreement and the 1994 NAFTA.
If so, what about timing? President Donald Trump still refuses to make the connection between his tariff policy and inflation. But his resolve ultimately will depend on where he stands politically as the summer draws near, given the midterm elections in November. His polling numbers are low now, but there is still little to suggest a Democratic wave.
The present state-of-play and trendlines could point to a deal in summer or early fall which reduces but doesn’t eliminate tariffs and gives Trump a win or two – such as promises of new investment, terms for expanded energy trade, tighter rules of origin in auto trade, and reduced Canadian dairy protectionism. A renewed CUSMA, such as it is, remains fundamental to Canadian economic prospects and long-term growth. But who really knows? It’s not what Canada signed up for with free trade, but it’s likely the best the Canadian negotiating team – senior, experienced, tight – will achieve.
More broadly, is Canada putting itself on a steadier path after the shock of it all from Washington? On the international side, Prime Minister Mark Carney has succeeded in building new ties with Europe and the Gulf, and cooling tensions and relaunching ties with China and India. In fact, the pace of progress has been remarkable. The dealmaking includes a nuclear pact with South Africa and the expansion of economic ties with Chile and South Korea.
The strategy is to pursue sectoral agreements where these make the most sense and full free-trade pacts where these do, as in accelerated negotiations with the 11-member Association of Southeast Asian Nations.
As impressive as the global progress is, however, other markets are no alternative to the U.S. market. Canada’s trade with the United States has grown more slowly since 2015 than with the rest of the world. In a sense, Carney has a head start. But the imbalance remains huge. Consider an example: Canada recently signed a free trade agreement with Indonesia. The Indonesian economy is slightly larger than Illinois’s. But distance matters in trade. The farther away, the weaker the ties and potential ties due to shipping costs and the difficulty of face-to-face interaction. Canada’s trade with Illinois is 15 times that with Indonesia.
The domestic economy is the bigger factor for Canada in terms of the planned rebalancing. It dwarfs trade with countries beyond the United States.[i] East-west ties eroded in recent decades. This was a natural outgrowth of free trade. Now, it’s only natural to look within.
Ottawa’s focus on resource development, especially accelerated infrastructure construction, fits with domestic opportunity. The recently signed “grand bargain” between Ottawa and Alberta on energy production is the most pointed example. This may be the biggest test yet for whether the country has really changed. The two-way deal is one thing, but what about a four-way deal also involving the B.C. government and Indigenous governments and peoples? This is the real way forward, possibly at the price of less controversial routes for pipelines to the West Coast and shipments beyond to meet global demand. Canada may have evolved little from its “staples” history, but few countries are as blessed with natural resources as Canada.
Carney notes frequently that “nostalgia is not a strategy,” but nostalgia is not yet relegated to the past, so to speak. Ottawa and the provinces are cutting down on systems friction, such as overlapping environmental regulation. But the centrifugal forces of Confederation remain strong. The pledge to build a true economic union in months fell short, and this is only the most pointed example of provincial thinking – in both senses of the word. Again, 2026 will speak volumes.
Ultimately, Canada must guard against what’s known in the social sciences as confirmation bias – you hope something will come to pass, so you interpret evidence in this light.
Canadians look at the United States and see a country on fire – the undermining of democratic norms, the growth of policy-based cruelty and violence, the sense that the centre cannot hold. They hope the Trump administration will do a U-turn on trade policy and more besides.
But the United States is on fire in another sense, too. Its economy has outpaced Canada’s in almost every way since the Great Recession and shows few signs of letting up. The Trump administration is investing in and encouraging investment in industries from autos to energy, where Canada has positioned itself on the safer side of a “coordinate when you can, compete when you must” approach. Galloping U.S. investment in AI research and infrastructure may well prove to be a bubble. But it is a sobering statistic that the market capitalization of Canada’s top 10 corporations is not even 5 per cent of that of the top 10 U.S. ones.
Carney is on the money when he says Canada should focus on what it can impact. Canada is primarily a price-taker with the United States – not entirely, but seldom more than now. It would be nice to have a well-balanced stool where all three legs do their part. 2026 will be a year of constant measuring, cutting, and building.
WHAT’S NEXT ON THE TRADE FRONT: Greer is required to submit an assessment of CUSMA to Congress on Jan. 2 and recommend actions for the CUSMA review, including after recent public hearings. The U.S. Supreme Court is also expected to decide soon on the constitutionality of the tariffs. However, alternative policy scenarios might blunt the impact of a negative decision for the president.
AS FOR FEDERAL POLITICS IN 2026: Carney will continue to govern as if he has a House of Commons majority. He’s just one seat short after two Conservative MPs crossed the floor.
AND THEN THERE’S QUEBEC: The Quebec election is scheduled for October 5. Premier François Legault’s ruling CAQ is hugely unpopular, and the separatist Parti Québécois (PQ), which has governed for all of 19 months over the past 22 years, has been the primary beneficiary. The PQ has a significant lead over the second-place Quebec Liberal Party (QLP) though PQ leader Paul St-Pierre Plamondon has promised another referendum if the PQ takes power. This may limit their chances, as polling shows support for separation is below 30 percent.
Insights like these are what McMillan Vantage is all about. If you need guidance and advice as you head into 2026 – navigating trade, evaluating investment, or pursuing opportunity – our team is here to help you plan, adapt, and seize the right opportunities. Contact us at info@mcmillanvantage.com.
[i] Canadian GDP in 2024 was about $2.2 trillion. Total Canada-U.S. trade in goods and services in 2024 was about $900 billion. Total Canadian trade with countries other than the United States in 2024 was about $450 billion. (All figures USD.)
