CUSMA compliance rush: Will it shield Canada from U.S. tariffs?

The U.S. administration’s decision to exempt Canada-United States-Mexico Agreement (CUSMA) compliant goods from recent tariffs exalts it as the cornerstone of Canada’s trade relationship with the United States, maintaining preferential market access for a broad range of goods.

However, presidential executive orders have slapped hefty duties on Canadian exports of steel, aluminum and some autos entering the U.S. As a result, we estimate roughly 86% of Canadian exports to the U.S. should ultimately be able to cross the border duty free, provided those exports meet North American rules of origin requirements.

However, only about 38% of U.S. imports from Canada were traded under CUSMA provisions in 2024. We believe this low percentage was largely due to the administrative burden of meeting its rules of origin requirements when a large share of U.S. general tariff rates was already zero outside of the North American free trade agreement.

This is expected to transform as the wave of new U.S. trade measures take effect and force more Canadian businesses to prove that their goods are compliant with the agreement to avoid tariffs.

We take a closer look at the latest U.S. trade measures, how they interact with CUSMA, and what they mean for Canadian businesses navigating a more unpredictable trade environment.

Most Canadian merchandise trade should be CUSMA compliant

Under new U.S. measures imposed in early March, Canadian exports deemed non-compliant with CUSMA face significant penalties: a 25% tariff on most non-compliant goods, while non-compliant energy-related and potash products are subject to 10%. Though, we think it’s likely that the bulk of energy and potash exports are compliant given they are predominantly produced in Canada and covered in the CUSMA zero tariff product list.

We’ve previously noted that about 38% of total U.S. goods imports from Canada valued at US$156 billion were traded under CUSMA in 2024. But a much larger share of trade could be compliant relatively quickly.

The U.S. product list of zero tariff rates in the 2020 CUSMA agreement covered about 94% of Canadian exports in 2024 by our count—including most energy products and potash fertilizer. We believe the reason CUSMA/USMCA tariffs were not used in most cases last year was, because many Canadian exporters rely on U.S. general tariffs that were already very low or zero under World Trade Organization rules without the administrative burden imposed by CUSMA’s rules of origin.

Some exporters face higher duties even if goods are CUSMA compliant

However now, product specific tariffs have also been imposed, including a 25% duty on steel and aluminum products, and 25% tariffs on the non-U.S. content of auto exports. These developments add more complexity for Canadian exporters, including those already aligned with CUSMA.

Tariffs introduced under the International Emergency Economic Powers Act (IEEPA) and Section 232 in March and April place new duties on Canadian exports across several key sectors:

Under Section 232 tariffs, even vehicles with 75% North American content—previously eligible for duty-free treatment under CUSMA—could still face tariffs if a significant portion of its value originates outside the U.S. By our count, about 49% of the value of finished motor vehicles exported from Canada to the U.S. originates in the U.S., leaving the remaining portion potentially subject to the 25% duty. Notably, Section 232’s 25% duties on steel and aluminum products apply regardless of CUSMA status.

Steel and aluminum products (4.1% of Canadian exports to the U.S.), non-U.S. content of finished motor vehicles (4% of Canadian exports to the U.S.), and our estimate of roughly 1.2%¹ worth of total exports from softwood lumber products already facing significant duties due to a longstanding trade dispute brings the total share of Canadian exports to the U.S. not covered by zero-duty trade under CUSMA to just under 14%².

Meanwhile, Canadian softwood lumber producers could see more disruptions since the U.S. Commerce Department has proposed raising the average combined duty rate—including both anti-dumping and countervailing duties—with a final decision on the new rate expected in August. This increase could be compounded by the possibility of further tariff hikes following the conclusion of the U.S. Section 232 investigation into lumber.

Rules of origin should be manageable for most exporters

Canadian exports must meet specific rules in the origin criteria to benefit from CUSMA’s preferential tariff treatment. These rules determine whether a good qualifies as “originating” from the CUSMA region.

Generally, goods must either be wholly obtained or produced in the CUSMA region or meet detailed product-specific requirements. These may involve minimum regional value content thresholds, required tariff classification changes, or designated production processes. For example, vegetables or minerals harvested in Canada typically qualify under the wholly obtained rule, because they are entirely sourced within the CUSMA region.

Most CUSMA regional value content thresholds range from 50% to 60% depending on the calculation. There are exceptions, but for most industries those thresholds should not be an issue. Among Canada’s top exporting industries to the U.S., much of the value is already created within the CUSMA region—particularly between Canada and the U.S.—supporting eligibility.

The automotive sector faces more stringent set of rules of origin. Vehicles must meet a 75% CUSMA regional value content requirement, have at least 70% of a producer’s annual steel and aluminum procurement originating from North America, and derive 40%–45% of its value from facilities paying workers at least US$16 per hour. Notably, 90% of Canadian auto exports to the U.S. in 2024 already used CUSMA/USMCA, meaning that trade is already largely compliant.

Trade disruptions will leave their mark on the economy

We assume meeting the rules of origin requirement for goods wholly obtained or produced in the CUSMA region should be generally straightforward, but some industries will need to comply with required tariff classification changes or designated production processes for their goods to receive preferential tariff treatment.

In either case, exporters, producers, or importers will need to certify that goods meet origin requirements or demonstrate sufficient transformation has taken place through the minimum data elements in CUSMA’s Annex 5-A.

And, the risk of further trade disruption remains high. Ongoing U.S. trade investigations into copper, pharmaceuticals, semiconductors, critical minerals, and lumber could lead to additional sector-specific tariffs.

The broader economic consequences of these measures are significant. Growing uncertainty around U.S. trade policy is eroding business and consumer confidence, delaying investment and spending decisions, imposing real economic costs.

As we highlighted earlier this month, we expect the trade war will slow growth in the U.S. and Canada, but not tip them into recessions. Top concerns for the Canadian economy have shifted from crushing tariffs to the more traditional worry about the impact from slower U.S. growth.

1. The estimate is derived from the proportion of Canadian exports classified under Harmonized System (HS) codes as outlined here.
2. There is some uncertainty in our estimate that 4.4% of Canadian exports are not covered by CUSMA. This figure was based on the original 2020 USMCA U.S. tariff schedule. However, updates to the U.S. harmonized tariff schedule in 2022—including renumbered and newly added product codes—have affected coverage. For example, about 2.1% of this “non-compliant” share consists of aerospace products listed under HS code 88. The total share of exports not covered by CUSMA falls to 2.3% after adjusting the original USMCA tariff schedule to account for renumbered products and new additions.

Salim Zanzana is an economist for RBC. He focuses on emerging macroeconomic issues, ranging from trends in the labour market to shifts in the longer-term structural growth of Canada and other global economies.

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