Canada: Investment Risks and USMCA Reliability – Societe Generale

Societe Generale analyst Dev-Ashish recently warned that the U.S. threat to impose 50% tariffs on Canadian automobiles and auto parts is not an isolated event, but part of Washington's broader push to redirect manufacturing investment back to the United States. This policy shift is fundamentally challenging the reliability of the United States-Mexico-Canada Agreement (USMCA), heightening tensions in the North American free trade system.

**Tariff Threats Undermine the Pact's Foundation**

The Trump administration's targeting of the auto sector, a core industry, directly strikes at the bedrock of USMCA. Previously, the pact was seen as a "protective shield" for Canadian exports, but Richard Ouellet, an international law professor at Laval University, noted that the U.S. decision to shift from renewing the agreement to annual reviews starting July 1 is "opening a gap" that leaves Canada feeling "fearful." Although over 80% of Canadian products currently remain exempt from U.S. tariffs, highly targeted sectoral tariffs have significantly impacted the aluminum, steel, and automotive industries, even briefly pushing the Canadian economy into a technical recession in the first quarter of this year.

**Trade Talks at an Impasse**

The latest breakdown in trade negotiations has added to uncertainty. According to AFP and Reuters reports, the U.S. side accuses Canada of refusing to finalize the deal under agreed terms, while Canadian Prime Minister Carney counters that the U.S. changed conditions at the last minute, calling into question the reliability of any agreement. In response, Canada has announced it will take "reciprocal" countermeasures. The U.S. remains Canada's most important trading partner, absorbing about 70% of its total exports, leaving Canada in a highly sensitive position in trade disputes.

**Canada Accelerates Diversification**

Facing the loosening of the USMCA framework, Canada is being forced to accelerate the diversification of its economic partners. Since taking office in March 2025, Prime Minister Carney has actively pursued a strategy of seeking new markets and launching major projects to reduce dependence on the U.S. However, real-world challenges remain severe: Canadian exports to the EU accounted for only about 4% of its total exports in June, making it difficult to replace the vast U.S. market share in the short term. Market analysts believe that amid tariff headwinds, the Canadian economy and the Canadian dollar will continue to face pressure, hindering the process of mean reversion.