Canada’s trade problem could become an investment problem

The economic relationship between Canada and the United States is in the spotlight. After a few months of tariff disputes and increasingly testy negotiations (with jawboning and posturing from both sides), the latest round of U.S.-Canada talks broke down in August, followed on short order by 50% U.S. tariffs on roughly $20 billion of Canadian goods and a Canadian commitment to retaliate beginning September 8. The immediate tariffs are significant but manageable relative to the enormous volume of bilateral trade. The larger question is whether repeated escalation begins to undermine something more valuable: the long-standing assumption that companies investing in Canada can reliably serve the U.S. market on preferential terms.

That matters because Canada’s trade problem could metastasize into an investment problem. That may not happen overnight, but the more consequential risk may be that uncertainty over future U.S. market access changes where companies invest, and therefore where they invest for future production.

Manufacturers may be looking ahead.

A July KPMG survey of 275 Canadian manufacturers points to what could be at stake. Forty-two percent had already moved production to the United States or were considering doing so, including 29% that had moved at least some production. Fifty-seven percent had paused, reduced or cancelled capital spending, while 42% had cut or paused R&D. Most strikingly, 61% said their businesses could not survive without access to the U.S. market. And this survey, of course, was undertaken before the most recent tumult.

This matters because investment decisions are forward-looking. Manufacturers do not have to wait for CUSMA/USMCA to disappear before changing their plans. If preferential access to the American market becomes less certain, the expected return on incremental Canadian capacity falls. Plants, suppliers, research spending and eventually employment can migrate before the full effect becomes visible in trade statistics.

Canadian equities have had a good year, but the wind could change.

It is important to note that Canadian financial markets are hardly signaling a crisis—yet. Canadian equities have actually outperformed their U.S. counterparts this year: through August 21, the S&P/TSX 60 had returned 16.3%, compared with 12.5% for the S&P 500. But the comparison also reflects very different market composition. The Canadian market is heavily weighted toward financials, energy and materials and has benefited from strength in commodities, particularly gold, while the S&P 500 has substantially greater exposure to technology and other growth industries. Strong Canadian equity returns therefore coexist quite comfortably with weakness in trade-sensitive manufacturing, and caution against interpreting the trade dispute as a generalized Canadian economic collapse. But, at the same time, the reason Canadian equities have outperformed thus far is arguably priced in and reflect the inflationary backstory. This new chapter hasn’t been printed.

Mexico is different.

Mexico provides an interesting contrast. Its government has pursued a more accommodative strategy toward Washington, with repeated bilateral negotiations focused explicitly on strengthening North American manufacturing and supply chains.

Mexico’s advantage is not new, although it would be a mistake to attribute it simply to diplomacy. U.S. Census Bureau data show that American goods imports from Mexico already exceeded those from Canada before the current dispute. But the recent divergence is notable. From 2022 through 2025, U.S. imports from Canada declined from approximately $437 billion to $382 billion, or 13%. Imports from Mexico increased from approximately $455 billion to $534 billion, or 17%.

Mexico benefits from lower manufacturing costs, nearshoring and a different industrial structure, among other advantages. The data therefore do not establish that its approach to Washington caused its relative success. Although maybe at the margin? They do illustrate the strategic stakes. Mexico is working to reinforce its position within the U.S.-centered North American manufacturing system just as Canada’s relationship with Washington has become considerably more contentious.

The longer-term risk

Canada’s other free-trade agreements will not disappear if USMCA is weakened or ultimately replaced. But the greater risk is more insidious: Canada becomes incrementally less attractive as a location for investment intended to serve the enormous American market.

The KPMG survey suggests that manufacturers are already contemplating precisely that calculation. If trade uncertainty persists, the ultimate cost to Canada may be measured less by today’s tariff revenue than by tomorrow’s factories that are built somewhere else. And that will be reflected in the Canadian economy and Canadian markets sooner or later.

Important disclosures