International Trade: Navigating The Rapidly Changing Landscape

Key takeaways

• In 2026, Canadian trade policy will remain driven by U.S. tariffs, plus CUSMA/USMCA renegotiations, which will impact sectors like automotive production and agriculture.
• Companies should prepare for increased scrutiny of their tariff mitigation strategies by tax and customs authorities.
• Government efforts to address the new trade realities by reducing internal barriers, diversifying trade relationships, and protecting domestic sectors will pose their own challenges.

2025 was notable for the dramatic shifts in Canadian trade policy that have been driven in large part by often-fluctuating U.S. tariffs. The legal landscape for trade in Canada in 2026 will continue to be shaped by tariff-centric U.S. trade policy. This policy has undermined not just the premise of a North American market that has guided Canada's trade policy for nearly 40 years, but the global rules-based trading system that has developed since the end of World War II.

Clients will need to closely monitor legal and political developments in the U.S., as well as Canada's responses to global trade dynamics, as they adapt to this new environment.

U.S. developments are ongoing

Challenge to IEEPA tariffs

The Trump Administration (Administration) has relied heavily on the International Emergency Economic Powers Act (IEEPA) to impose worldwide tariffs, including on Canada, through executive, instead of legislative, actions based on declared national emergencies. In November 2025, the U.S. Supreme Court considered whether the IEEPA grants these tariff-making powers to the President.

A finding against the Administration would somewhat improve Canada's position in the impending Canada-United States-Mexico Free Trade Agreement (CUSMA) negotiations. However, there are other tariff-making powers that the Administration will continue to wield against key sectors of the Canadian economy.

Other tariff powers

The U.S. has used section 232 of the Trade Expansion Act of 1962 to levy tariffs in the name of national security on steel and aluminum, copper, autos and auto parts, and lumber and derivative products, including from Canada. Other pending section 232 investigations may lead to additional tariffs on critical minerals and pharmaceutical goods. While some of these actions may themselves be the subject of legal challenges, U.S. courts have given the Administration wide discretion to determine what may constitute a national security concern.

Canadian businesses should therefore expect further expansive U.S. tariff measures in 2026. An important variable that could constrain new tariff measures is the Congressional mid-term elections in November 2026. If the Democrats obtain a majority in the House of Representatives, or if the economic consequences of the Administration's tariff policies prove unpopular with voters in key swing states, Congress, with the support of some Republicans, could quickly seek to reclaim its constitutional power over tariffs and terminate many of the Administration's trade measures.

Tariffs on services?

Announcements from President Trump of upcoming "tariffs" on movies produced outside of the U.S. signal that cross-border services trade may be the next front in the U.S. reshoring efforts. Given large U.S. services trade surpluses, including with Canada, it is unclear how extensive these efforts will be or how other countries will respond. Nevertheless, Canadian businesses should not assume that the targets of U.S. trade policy will be limited to goods.

The Canadian impact

CUSMA renegotiations

The terms of the CUSMA require that the parties review it by July 1, 2026. While the review is not intended to be a negotiation, the U.S. has clearly indicated its intention to use the review as an opportunity to renegotiate key elements of this agreement in furtherance of its efforts to repatriate manufacturing — notably in the automotive sector — to the U.S. from Canada and Mexico, and to gain additional access for its exports in sectors such as dairy. U.S. market access objectives also may extend to protected Canadian services sectors such as telecommunications and financial services. U.S. negotiators have mused about resiling altogether from a tripartite agreement in favour of separate bilateral trade deals with Canada and Mexico.

The Administration likely lacks the authority to fundamentally reshape the CUSMA without Congressional approval. It could, however, seek to leverage tariff threats to conclude informal "deals" like it has made with the United Kingdom, the European Union, Japan and others. One outcome could be sector-specific managed trade arrangements involving quotas on Canadian exports and market access commitments for U.S. imports.

The negotiations represent a broader shift in Canada's evolving relationship with the U.S. That relationship, and potentially Canada's relationship with other trade partners, will become more strategic. Relations will likely be closer where parties' national interests happen to overlap, and dramatically less close where they do not.

Tariff mitigation strategies

As tariff policies fluctuate, transfer pricing will remain a focus for multinational groups selling to and from Canada and elsewhere. Because tariff mitigation strategies must be supported by real operational changes to manage risk and maintain compliance under Canada's Income Tax Act and Customs Act, audit scrutiny by tax and customs authorities is expected to increase. There will be increasing emphasis on proactively reviewing — and if necessary, updating — intercompany agreements to ensure that the terms (including pricing of goods and services, allocation of tariff costs and risk-sharing) are consistent with what would be agreed to by arm's length parties in similar circumstances.

Inter-provincial trade: getting our own house in order

Canada will continue to grapple with entrenched regulatory and other barriers to domestic trade. At the federal level, Canada enacted the Free Trade and Labour Mobility in Canada Act in 2025. This Act recognizes provincial and territorial requirements for goods, services and labour certifications as meeting comparable federal regulatory requirements. Canada has also withdrawn its reservations from the Canada Free Trade Agreement. While both measures demonstrate the federal government's symbolic willingness to "lead by example," the provinces will need to follow suit for meaningful change to occur. While some change is happening and has been proposed, it will undoubtedly take time to materialize.

An important question in the coming year will be whether the provinces are willing to change their positions on this issue. If they are not, there is little indication that the federal government would have the appetite to take unilateral action to remove inter-provincial trade barriers that are not in the national interest. Such a step would, for example, require the federal government to invoke its emergency powers under section 91 of the Constitution Act, 1867 to regulate in areas of provincial jurisdiction.

Trade diversification efforts

Because Canada's domestic market is insufficient to offset lost access to the U.S. market, the federal government has recommitted to deepening Canada's relationships with other trade partners. This may result in new trade agreements being announced and a resumption of free trade negotiations that have languished. However, in light of Canada's existing agreements with major economies such as the EU, Japan and Korea, new agreements are likely to produce limited returns.

Canada is therefore likely to attempt to repair ties with other large economies, such as China and India. Doing so, particularly with China, will require careful navigation. The U.S. will seek to keep Canada in its sphere of influence, while China is likely to seek to exploit cracks in the Canada-U.S. trade relationship.

Trade protection, retaliation and at-home support: buy Canadian

The federal government has announced it will adopt a Buy Canadian Policy for federal procurement, favouring Canadian suppliers for federally funded infrastructure projects and through other federal funding streams. Details were released on November 10 following the November 2025 federal budget. Specific regulations will follow in 2026.

Canada has also imposed tariff-rate quotas on imported steel products, including from its non-North American free trade agreement partners. The quotas were announced as part of efforts to help central Canada's industrial base.

This nationalist approach is in tension with Canada's trade diversification strategy. It may result both in legal challenges under trade agreements and knock-on effects if Canada's trade partners respond by protecting their own domestic industries from Canadian imports.

Separately, in 2025, Canadian provinces responded to U.S. tariffs by restricting procurement from U.S. businesses. Some provinces, such as Alberta, have since lifted those restrictions. Others, including Ontario, British Columbia and Québec, have been especially hard hit by U.S. section 232 tariffs. Accordingly, they have shown no sign that they will revoke their measures while those tariffs remain.

More change expected in 2026 and beyond

U.S. trade policies are expected to continue to affect Canadian trade policy in 2026, creating uncertainty for market participants seeking to mitigate the impact of these ongoing changes. It remains to be seen whether Canada's existing and proposed mitigation measures — including negotiations with new and existing trade partners, efforts to reduce interprovincial trade barriers and the launch of "Buy Canadian" initiatives — will bear fruit.

Clients will need to closely monitor legal and political developments in the U.S., and Canada's responses to global trade dynamics, as they adapt to this new and rapidly evolving environment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.