Canada would face a severe economic setback if the United States withdrew from the North American trade agreement, but the impact would stop short of becoming a full-scale economic catastrophe, according to a new Deloitte Canada report.
The report, titled “Tariffs: A Rough Road Leads to New Destinations,” argues that expanding trade with a broader range of international partners could help cushion the blow, but would not be sufficient on its own to replace the economic activity generated by preferential trade with the United States.
The authors say Canada would therefore need to look beyond export diversification. Removing barriers to trade between provinces and developing new domestic industries would also be essential to narrowing the potential economic gap.
The study examines two possible paths for the Canadian economy as uncertainty continues to surround cross-border trade.
“What we wanted to do is to get a better picture around what’s the impact if the worst happens and the (Canada-U.S.-Mexico) agreement falls apart, and then how much can we offset of the negative impact?” said Matthew Stewart, a partner at Deloitte Canada and co-author of the report, in an interview.
CUSMA collapse would weigh heavily on manufacturing
The report identifies the dissolution of the Canada-U.S.-Mexico Agreement (CUSMA) as its worst-case scenario, describing it as “a possibility that cannot be dismissed.”
The potential consequences are significant given Canada’s reliance on the U.S. market. The United States accounted for approximately 70 per cent of Canadian exports in 2025.
If CUSMA were to collapse, Canada’s real gross domestic product would be 1.6 per cent lower over the next decade compared with the report’s baseline scenario. That represents an estimated $402 billion decline by 2036.
The economic deterioration would also affect the labour market. Deloitte projects an average reduction of 163,000 jobs annually, with lower employment expected to put additional pressure on wages and consumer spending.
“The bottom line is a severe but not cataclysmic impact on Canada’s overall economy, although perhaps cataclysmic for some sectors,” Stewart and co-authors Danielle Bochove and Trevin Stratton wrote.
Manufacturing would be among the industries hardest hit.
By 2036, real GDP in motor vehicles and parts could fall 28 per cent compared with the baseline. Electronics, machinery and equipment would decline by 21 per cent, rubber and plastics products by 20 per cent, and chemicals by 13 per cent.
The analysis also factors in the consequences for Canada’s oil and gas industry. Without CUSMA protections, the sector would no longer be shielded from a 10 per cent global tariff imposed by the United States.
Under that scenario, Canadian oil sales to the U.S. would decline by 11 per cent, while natural gas exports would fall by 30 per cent.
Diversification could provide a partial cushion
Deloitte’s more favourable scenario assumes Canada retains its existing free-trade agreements, including CUSMA, while simultaneously securing additional trade agreements with international partners.
The results are positive, but considerably smaller than the losses associated with a breakdown in preferential trade with the United States.
“The model suggests that the gains from export diversification, while encouraging, are smaller in scale than the consequences of the breakdown in preferential trade with the U.S. envisioned in Scenario One.”
Under this scenario, Canada’s real GDP would increase by 0.6 per cent, equivalent to $141 billion, over the next decade. The economy would also generate almost 53,000 jobs each year.
Agriculture would be among the sectors positioned to benefit, particularly through expanded trade with China and India. Various manufacturing industries would also see gains.
However, the report cautions that simply finding new international buyers for Canada’s existing products will not be enough.
Canada urged to strengthen its domestic economy
The authors argue that Canada needs a broader strategy that combines international trade diversification with stronger domestic economic capacity.
“It also needs to lean into policies that enable greater self-sufficiency … by breaking down internal barriers and developing new areas of specialization at home that lay the basis to competitively serve world markets.”
Ottawa’s substantial investments in defence, along with its support for new export infrastructure and critical-minerals refining, are identified in the report as positive steps in that direction.
Deloitte research published in 2025 also points to the potential economic value of removing barriers to trade between Canada’s provinces.
According to that research, completely eliminating interprovincial trade barriers over a five-year period could generate an additional $881 billion in economic output by 2040 and create 133,000 new jobs.
Stewart acknowledged that achieving the full potential identified in the research would be difficult, but said a significant portion could still be within reach.
“I don’t think all of this would be easily attainable, but I think we could at least achieve half of that,” he said.
Combined with greater export diversification and more open internal trade, such measures could allow Canada to absorb most of the economic damage resulting from a further deterioration in its trading relationship with the United States.
