Canada does not need CUSMA to collapse for trade risk to matter. A less dramatic outcome may be enough.
Over the past several weeks, investors have been focused on the conflict between the U.S. and Iran. That was understandable. Energy prices, inflation expectations, and geopolitical risk moved back to the centre of the market conversation.
That conflict has now subsided, at least for the moment, after the U.S. and Iran signed an interim agreement outlining terms to end the war and reopen the Strait of Hormuz, with negotiations set to continue over the next 60 days. Market attention may now shift quickly to another deadline that matters for Canada: the July 1 CUSMA review.
This is not a side issue for Canadian investors. It goes directly to the reason we remain underweight Canadian equities.
The July 1 review was supposed to be a checkpoint. It now looks more like the start of a recurring negotiation. If the agreement is not extended by the deadline, it does not disappear. It remains in force. But the review process shifts into annual negotiations until a 16-year extension is eventually agreed, or until the agreement reaches the end of its original term in 2036.
There is no immediate cliff edge. There is, however, a new layer of uncertainty.
For investors, that may be the more important point. Trade agreements are not just about the tariff rate on today’s exports. They shape investment decisions. They influence where companies build capacity, where supply chains are located, and where foreign capital decides it has enough visibility to commit for the next decade.
Rolling annual reviews do not break North American trade. They tax it.
That tax belongs in the risk premium for Canadian assets.
The risk may be underpriced
Markets do not appear to be panicking over CUSMA. That may be the problem.
While investors were focused on Iran, the CUSMA review received less attention than the scale of the exposure would suggest. One estimate places annual North American trade at roughly US$1.8 trillion, while United States Trade Representative data show U.S. goods trade with Canada and Mexico alone totalled roughly US$1.6 trillion in 2025. [1] For Canada, the exposure is direct: Global Affairs Canada reports that the U.S. accounted for 71.7% of Canadian goods exports in 2025, while media intensity around USMCA remains roughly four times lower than its peak during President Trump’s first term. [2]
That is a strange disconnect.
North American trade is large enough to matter, and for Canada the exposure is not theoretical. A large share of Canadian exports depends on the agreement. Several key sectors are directly tied to North American trade integration.
Now that the Iran conflict has moved into a negotiation phase, investors may start paying closer attention to the July 1 deadline. That does not mean CUSMA becomes the next crisis. It does mean the market may begin to price a risk that has been sitting in plain sight.
Markets do not need a final outcome to reprice. Headlines can be enough.
A threat of withdrawal, a demand for major concessions, a tougher stance on rules of origin, or a failure to extend the agreement could all raise the risk premium for Canadian assets. That risk premium may show up in equities. It may show up in the Canadian dollar. It may show up in delayed business investment.
That is why the CUSMA review matters even if the agreement survives.
The underweight is deliberate
Our underweight to Canada is not a call that Canadian equities cannot perform. They can. Canada has high-quality companies, strategic resources, world-class banks, and an important role in North American energy and industrial supply chains.
The issue is not whether Canada has good companies. It does.
The issue is whether the Canadian market offers enough compensation for its risks relative to other markets. We do not believe it does.
Canadian equities face a difficult combination of structural and cyclical headwinds. The market is heavily concentrated in Financials, Energy, Materials, and Industrials. It has less exposure to the sectors that have driven global equity leadership, particularly Technology and Health Care. The economy remains sensitive to housing, rates, commodity prices, and external demand. Productivity growth has been weak. Business investment has not been strong enough.
CUSMA uncertainty makes that mix less attractive.
A renewed agreement would help. It would remove a major overhang and support Canada’s claim as a stable access point into the U.S. market. But a failure to extend by the deadline would do the opposite. It would leave the agreement in place while making its durability a recurring question.
That is not a reason to abandon Canada. It is a reason to require a higher expected return for owning it.
At the moment, we do not believe Canadian equities offer that return relative to other opportunities, particularly the U.S.
The risk is delay
The most likely outcome still appears to be a modified version of CUSMA that ultimately looks similar to the current agreement. The agreement remains popular with many U.S. companies. A unilateral withdrawal would almost certainly face legal challenges. Congress may not be willing to watch the administration destabilize North American supply chains heading into an election cycle. And the White House can still frame a revised agreement as a political win.
That is the reassuring part.
The less reassuring part is that “ultimately” can still do damage.
If the extension is not agreed this year, businesses are left operating under an agreement that remains legally intact but politically unsettled. A manufacturer considering new North American capacity has choices. It can build in Canada. It can build in Mexico. Or it can reduce the uncertainty and build in the United States.
That does not mean all investment migrates south. It means the hurdle rate for Canadian investment rises.
This is where policy risk shows up first. Not in a dramatic market break. Not necessarily in a recession. It shows up in delayed projects, reduced capital formation, and slower productivity growth. It shows up quietly, then persistently.
Capital Economics estimates that if withdrawal is blocked pending a Supreme Court ruling or if an extension is not reached this year, rolling negotiations would weigh on business investment and could knock roughly 0.2% to 0.3% off GDP growth in Canada and Mexico. [3] That is not a crisis forecast. It is the cost of friction.
Canada has spent years trying to attract investment by arguing that it offers stable access to the U.S. market. Rolling CUSMA reviews weaken that argument. Access may still be there, but the stability discount is larger.
That matters for our regional positioning. When capital faces a choice between a large, deep, innovative U.S. market and a smaller, narrower Canadian market with recurring trade uncertainty, the bar for overweighting Canada should be high.
Today, that bar is not being met.
Our base case is friction
We believe there are three broad paths from here.
The benign path is a revised agreement that is extended for another 16 years. That would support confidence and reduce the trade overhang. It would not solve Canada’s structural growth challenges, but it would remove one source of uncertainty.
The middle path is the one that now appears more likely in the near term. No extension by the deadline. Annual reviews. Continued uncertainty. The agreement survives, but the negotiation never really ends.
The adverse path is withdrawal. That remains a tail risk, but not a zero-probability risk. Legal challenges would likely follow any attempt at unilateral withdrawal, and the agreement could remain in force while courts decide the issue. But the threat alone would matter. If the U.S. were to withdraw without replacement bilateral agreements, the damage to Canada and Mexico would be significant. Canada would likely have more fiscal capacity to cushion the blow than Mexico, but cushioning an economic shock is not the same as avoiding one.
Our base case is not collapse. It is friction.
That matters because protectionism is not a temporary market narrative. It is a structural feature of the investment environment. Tariffs, sector-specific exemptions, rules of origin, domestic content requirements, supply chain security, and geopolitical alignment are now part of the cost of capital.
CUSMA is simply the next venue where that reality is being priced.
The U.S. wants more than trade
The review is unlikely to be limited to traditional trade issues.
The U.S. is expected to push for greater access to Canada’s dairy market, tighter labour enforcement in Mexico, reduced regulatory burdens for U.S. technology companies, and tougher auto rules of origin. The key shift is not simply more North American content. It is the possibility of a U.S.-specific content requirement, which would move the agreement away from North American integration and toward U.S.-domestic production.[4] Canada and Mexico will likely seek relief from sector-specific tariffs in exchange for concessions. Preserving tariff-free access for most U.S.-bound exports may be the more realistic prize.
There is also a fiscal incentive for the U.S. to push harder.
If tariff authority is constrained elsewhere, the incentive to extract concessions through CUSMA rises. One estimate suggests the U.S. currently collects tariff revenues of only US$25 billion to US$30 billion annually on goods coming from Canada and Mexico combined, but that amount could rise materially if USMCA exemptions were removed.[5] That does not make withdrawal the base case. It does make a tougher negotiation more likely.
The U.S. is no longer treating CUSMA as just a trade agreement. It wants a North American industrial bloc. That is a very different negotiation for Canada.
The agenda is broader: external trade alignment, transshipment, strategic goods, Chinese investment, critical minerals, defence, Arctic security, and the broader concept of “Fortress North America.”
For Canada, that creates both opportunity and constraint.
Canada has resources the U.S. wants. Energy. Critical minerals. Agricultural capacity. Industrial linkages. Geographic relevance in the Arctic. These are strategic assets, not just export categories.
But Canada also has red lines. Energy is one. Sovereignty is another. Any effort to constrain Canada’s oil industry or pull domestic political fault lines into U.S. negotiations would be met with strong resistance.
That does not mean those issues disappear. It means they may become part of the bargaining theatre.
Why this matters for Canadian equities
The Canadian equity market already has a structural challenge. It is concentrated in Financials, Energy, Materials, and Industrials. It lacks the depth in Technology and Health Care that has driven much of the U.S. equity market’s earnings growth.
That has been central to our regional allocation view. Our portfolio management team at Canada Life Investment Management has preferred the U.S. because of its deeper market structure, stronger exposure to innovation, broader earnings base, and greater ability to attract capital. Canada offers a narrower set of return drivers and a higher sensitivity to policy, commodities, housing, and cross-border trade.
CUSMA uncertainty reinforces the underweight.
This is not an abstract exposure. Global Affairs Canada reports that the U.S. accounted for 71.7% of Canadian goods exports in 2025, while a Government of Canada briefing notes that roughly 70% of Canada’s exports to the U.S. are incorporated into U.S. supply chains.[6] The pressure points are concentrated in sectors that matter for the Canadian economy, particularly autos, rules of origin, dairy, and cross-border manufacturing.
The timing is also not ideal. Net exports have already weakened, and business investment has been soft. That makes the CUSMA review less of a future risk and more of an extension of an existing problem.
The autos issue is not cosmetic. A shift toward U.S.-specific content requirements would challenge the integrated supply chains that have defined North American manufacturing for decades. Parts and components often move across the border several times before final assembly. That system depends on rules that make cross-border production efficient. If the rules change materially, the economics change with them.
In an adverse scenario, one estimate suggests U.S. content requirements in autos, including a 50% U.S. made threshold [7], could reduce Canadian GDP by 2% to 3%.[8] That is not our base case. It is a reminder that rules of origin are not technical details. They are the operating system of North American manufacturing.
Dairy is smaller in economic terms, but politically sensitive. Energy is much larger and strategically important. Critical minerals could be an opportunity, but only if Canada can turn strategic importance into actual capital investment and production.
That last point matters. A strategic label does not automatically create shareholder value. Permitting, infrastructure, environmental approvals, Indigenous consultation, and capital discipline still matter. Canada has many strategic assets. It has not always been good at turning them into timely projects and durable returns.
Recent developments in Canadian infrastructure policy reinforce the point. Even where projects are being labelled as nationally important, the path from designation to construction remains slow, uncertain, and dependent on unresolved funding decisions. That matters because Canada’s investment case increasingly rests on turning strategic assets into productive capital. If infrastructure policy cannot move quickly enough to offset the drag from CUSMA related uncertainty, the case for a higher Canadian equity allocation becomes harder to make.
Financials face the second-round effects. If business investment weakens and growth remains sluggish, banks do not need a trade crisis to feel the impact. A slower economy, cautious borrowers, and weaker capital spending are enough.
Canadian equities may continue to look inexpensive relative to the U.S. But cheap is not the same as mispriced. A market can deserve a discount if earnings visibility is lower, sector concentration is higher, and policy risk is harder to diversify.
That is the point behind the underweight. We are not saying Canada is uninvestable. We are saying the Canadian market needs more than valuation support to justify a larger allocation.
The Canadian dollar is part of the adjustment
The currency is another pressure point.
If trade uncertainty weighs on growth and pushes the Bank of Canada toward a more dovish policy path, the Canadian dollar could become part of the adjustment mechanism. A weaker Canadian dollar can cushion parts of the economy. It can support exporters and increase the Canadian dollar value of foreign assets. But it can also signal declining confidence, weaker domestic growth, and a lower expected return on Canadian capital.
Currency weakness is not automatically bad for diversified Canadian investors. It can help portfolios with meaningful foreign exposure. But for Canadian assets, it is another reminder that trade uncertainty does not stay neatly contained inside the trade file.
It moves through capital flows, interest rate expectations, corporate confidence, and relative equity performance.
Canada Life Investment Management Portfolio implications
This is not an argument to abandon Canada. It is an argument to be selective and appropriately sized.
The more uncertain the trade environment becomes, the less comfortable we are with broad, passive exposure to Canada as a standalone macro bet. We prefer to think in terms of quality, balance sheet strength, free cash flow, and sensitivity to policy risk. The companies that can fund themselves, protect margins, and adapt supply chains have a different profile than those that need a clean policy outcome to justify the current share price.
That is why our Canadian equity underweight is paired with a preference for better-diversified regional exposure. We continue to see stronger relative opportunities outside Canada, especially in the U.S., where market depth, earnings leadership, innovation exposure, and capital attraction remain more compelling.
In fixed income, the implication is different. Trade uncertainty can weigh on growth, which supports the role of high-quality bonds as a portfolio stabilizer. At the same time, fiscal support, industrial subsidies, and tariff-related price pressures can complicate the inflation and rate outlook. We continue to believe duration has value as a risk mitigator, but credit selection matters. Tight spreads leave little room for complacency if growth disappoints.
More broadly, this is another reminder that diversification is not about owning more things. It is about owning different sources of resilience. Liquidity matters. Flexibility matters. The ability to rebalance when markets overreact matters.
CUSMA uncertainty is not the only risk facing Canada. It sits alongside weak productivity, a narrow equity market, housing sensitivity, fiscal constraints, and a global economy increasingly shaped by industrial policy. But it is a meaningful risk because it touches the one area Canada cannot afford to lose: reliable access to the U.S. market.
The most likely outcome is still a revised CUSMA. That matters. A renewed agreement would remove a major overhang and could support Canadian exports and business investment. But investors should not confuse survival with certainty.
The annual review process creates a recurring negotiation premium. It gives political actors repeated opportunities to reopen old issues and introduce new ones. It makes corporate planning harder. It encourages some investment to move toward the largest, deepest, and most politically protected market in the region.
That market is the United States.
For Canada, the investment challenge is clear. Canada needs to be more than a low-cost access point into someone else’s market. We need to be indispensable to North American energy, critical minerals, food, infrastructure, and security. That is where Canada has leverage. That is where the investment opportunity may still exist.
But leverage is not the same as an investment case.
Until that opportunity is matched by better earnings visibility, stronger capital formation, and a more compelling risk premium, our underweight to Canada remains appropriate.
CUSMA is not ending. But the assumption that North American trade is a stable backdrop for Canadian assets deserves to end.
The agreement may survive. The complacency around it should not.
Sincerely,
Corrado Tiralongo (he/him)
Vice President, Asset Allocation & Chief Investment Officer
Canada Life Investment Management Ltd.
Notes
[1] Office of the United States Trade Representative: United States-Mexico-Canada Agreement | United States Trade Representative
[2] State Street Markets, “USMCA Review: How investors should trade around this risk?”, 22 June 2026.
[3] Capital Economics, “A primer on the USMCA joint review,” 18 February 2026.
[4] Current rules require North American content. They do not require a fixed U.S. specific minimum. This is why a proposed U.S. made content threshold would be a major shift from North American integration and toward U.S. domestic production.
The views expressed in this commentary are those of Canada Life Investment Management Ltd. as at the date of publication and are subject to change without notice. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax or legal advice. Prospective investors should review the offering documents relating to any investment carefully before making an investment decision and should ask their financial security advisor for advice based on their specific circumstances.
This material may contain forward-looking information that reflects our or third-party current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed herein. These risks, uncertainties and assumptions include, without limitation, general economic, political and market factors, interest and foreign exchange rates, the volatility of equity and capital markets, business competition, technological change, changes in government regulations, changes in tax laws, unexpected judicial or regulatory proceedings and catastrophic events. Please consider these and other factors carefully and not place undue reliance on forward-looking information. The forward-looking information contained herein is current only as of June 29, 2026. There should be no expectation that such information will in all circumstances be updated, supplemented or revised whether as a result of new information, changing circumstances, future events or otherwise.
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