Canada Seeks Business Input on CUSMA Ahead of 2026 Joint Review

August 26, 2024

Written By Sabrina A. Bandali, Alison FitzGerald, George Reid, Laurie Wright, Jessica Horwitz, Quinn Scarlett and Kathleen Wang

On August 17, 2024, the Government of Canada initiated a public consultation on the operation of the Canada–United States–Mexico Agreement (CUSMA or the Agreement). The Government is seeking views on what is working well with CUSMA and on potential areas for improvement, in advance of the first joint review of CUSMA in 2026. Businesses and other stakeholders have until October 31, 2024, to submit their views.

This is an important early opportunity to influence Canada's approach to the negotiations and should not be missed by Canadian companies whose operations depend on the smooth functioning of trade in North America.

The Significance of the 2026 Joint Review for Canadian Businesses

The CUSMA will terminate on June 30, 2036, 16 years after its coming into force unless it is continued for an additional 16-year term, with or without amendment, following a joint review in 2026 by Canada, the United States and Mexico (the Parties). The Government of Canada's consultations are intended to help the Government prepare for the 2026 joint review, including by identifying CUSMA provisions that have either benefited or harmed Canadian businesses. This is an important opportunity for businesses to make their views known and to help shape Canada’s joint review proposals on potential amendments to the CUSMA.

Canadian businesses have a vested interest in maintaining and improving a stable rules-based framework for free trade in North America to ensure their future economic prosperity, effective business planning and return on investments. The possibility of CUSMA’s termination, or its continuation on unfavourable terms, are real and significant business risks that merit engagement by the Canadian business community to preserve and increase both access to the United States and Mexican markets and the attractiveness of the Canadian market to investment.

The CUSMA Sunset Clause and Joint Review Process

The CUSMA entered into force on July 1, 2020, replacing the North American Free Trade Agreement (NAFTA), which had been in force since January 1, 1994. The CUSMA safeguards Canada's preferential access to the United States and Mexico while promoting deeper integration within the broader North American market.

The United States plunged the North American market into uncertain waters in 2018 when it unilaterally re-opened negotiations with the NAFTA Parties for a new free trade agreement on terms more favourable to its interests. Negotiations among the Parties were contentious as the Parties grappled to reset the terms of trade established by the NAFTA over almost 30 years of regional integration. The uncertainty that accompanied the re-opening of negotiations also caused significant disruptions and strategic planning challenges for businesses.

The negotiation of CUSMA’s 16-year expiry terms was particularly contentious. The NAFTA had no term limits or sunset clause. In the negotiations, the United States pushed to limit the CUSMA to a five-year term that could be extended for successive five-year terms. Canada and Mexico stringently opposed this proposal out of concern that it would create long-term uncertainty in the business environment that would significantly undermine the intended benefits the economic integration promised by the CUSMA. Integrated supply chains are not easy to uproot on a dime. The Parties ultimately agreed that the CUSMA would operate for 16-year terms and that the agreement would only be renewed for a successive term, with or without amendment, upon the agreement of each Party.

Under Article 34.7 each party must confirm whether it wishes to extend the CUSMA for a 16-year term as part of a joint review process. The joint review is held on the sixth anniversary of the entry into force of the Agreement, which falls in mid-2026. The review process provides a forum for Parties to negotiate changes to the Agreement.

If one or more of the Parties choose not to renew the Agreement, then pursuant to Article 34.7.4 an annual review is triggered for the remainder of CUSMA's 16-year term. If no agreement is reached, the CUSMA terminates.

Given what is at stake, and regardless of the outcome of the upcoming presidential election in the United States, we anticipate that the United States will adopt an aggressive stance and use its significant market leverage to maximize its own interests. Although the CUSMA review clause originated during the Trump administration, the current United States Trade Representative (USTR), Ambassador Katherine Tai, recently affirmed that the Biden administration views the clause as enabling renegotiation, as "the whole point of the joint review is to maintain a certain level of discomfort, which may involve a certain level of uncertainty, to keep the Parties motivated to do the really hard thing, which is to continue to reevaluate our trade policies and our programs to ensure that they are responding to the changes that are happening around us."

Mexico's governing Morena party remained in power after its recent election although with a new President, Claudia Sheinbaum, whose views on the CUSMA are not clearly known. However, in the joint review, Mexico will likely seek to pursue terms that will sustain the "nearshoring" boom it has experienced in recent years as firms have relocated production to Mexico from overseas (notably China) to take advantage of Mexico's preferred access to the U.S. market and (relatively) lower risk of unfavourable protectionist trade measures. Mexico overtook China in 2023 as the top exporter to the United States.

The Expanding List of Trade Irritants

The first joint review of the operation of the CUSMA will occur on June 30, 2026, the sixth anniversary of its entry into force. This review is an opportunity for Canada to confirm that it wishes to extend the Agreement by another 16 years and to advocate for modifications to existing provisions and/or the introduction of new measures, aimed at enhancing trade relations and improving market access. The United States and Mexico will similarly advocate for their own proposals. The stakes are therefore high for Canadian businesses when it comes to from the outcome of the joint review.

It will not be surprising if the United States seeks to leverage its more dominant economic position to advocate for changes to its advantage. Despite CUSMA only having been in force for four years, significant issues and points of friction have arisen among the Parties that will likely influence the course of the joint review.

1. Energy: In 2021, Canada requested consultations with the United States over its imposition of safeguard measures on imports of solar panels, arguing that the measures were inconsistent with the Agreement’s trade remedies chapter. Canada and the United States reached an agreement to resolve the solar panel dispute, but in 2022, the United States and Canada both requested consultations over Mexico's energy policies, arguing that they were inconsistent with CUSMA. Energy is likely to remain a point of contention in 2026.
2. Autos: Mexico (joined by Canada) requested consultations with the United States in 2021 over its interpretation of the Agreement’s rules of origin for auto parts and finished vehicles. Despite losing the dispute, the USTR has maintained its view that the US interpretation of the autos rules of origin is correct, and the United States launched its own internal review of the economic desirability of trade in automotive goods under CUSMA. Electric vehicles remain a significant policy issue that will require the Parties to consider how to align national and regional interests in the shade of the US's ongoing efforts to contain China's dominance of the sector. Canada and Mexico each face pressure to impose market access or investment restrictions on Chinese EV manufacturing in order to better align with US goals, which may be required in order to secure other favourable trade terms.
3. Agrifood: Dairy remains a perennial irritant, with the United States requesting consultations with Canada in 2021 and 2022 for separate disputes over Canada’s dairy tariff-rate quota policies, arguing that Canada’s policies are inconsistent with its obligations in the Agreement’s chapter on Agriculture. While the United States prevailed in the first case before a CUSMA dispute settlement panel, it lost its second case. In 2023, the United States requested consultations with Mexico regarding measures enacted by Mexico pertaining to agricultural biotechnology, arguing Mexico has violated provisions of the Agreement’s Sanitary and Phytosanitary and Market Access chapters. A decision of the Chapter 31 panel constituted to hear this dispute is expected this Fall. In addition, country of origin labelling remains a point of contention between the Parties notwithstanding previous WTO dispute settlement, with the US Department of Agriculture announcing in March 2024 new rules for "Product of USA" or "Made in the USA" labels on meat, poultry and eggs that will apply by January 1, 2026.

In addition to the above topics, other longstanding contentious areas that could resurface in the joint review include trade in steel and aluminum (and protections on same), digital services taxation, softwood lumber, and labour. As this (incomplete) list demonstrates, the landscape of North American trade remains complex. Not only are the different national priorities of Canada, the US, and Mexico apparent, but the Parties negotiate in the shadow of other trading relationships, particularly the many strategic issues relating to China.

Canada needs to be prepared for joint review negotiations over serious changes to CUSMA, and to bring its own well-crafted proposals to the table. It is crucial that businesses provide concrete input to the Government of Canada to ensure that the issues and solutions that matter to Canadian industry are put at the top of Canada's negotiating agenda.

Conclusion and Next Steps

As the Canadian government prepares for the first joint review of CUSMA in 2026, Canadian businesses are encouraged to actively engage in the consultations before October 31, 2024. This is an unstructured consultation with no pre-formulated questions, which increases the significance of the opportunity for Canadian businesses to shape the future trajectory of the Agreement. By participating in the consultations, Canadian businesses will not only have an opportunity to advocate for the safeguarding of their interests, but also play a critical role in enhancing the overall effectiveness of CUSMA for the benefit of the Canadian economy.

Bennett Jones' experts in International Trade and Investment Law have a long and proven track record of expertise in international trade law, including providing advice on the consistency of laws, regulations and practices with Canada's treaty obligations. In addition, our Public Policy group members have exceptional knowledge of and experience with Canadian government processes and consultations. We are well positioned to assist businesses with the preparation of their formal consultation submissions through legal and strategic advice.

Contact the authors or any member of the Bennett Jones International Trade and Investment or Public Policy groups to discuss how we can assist.

Authors