What Would a Tariff Truce Be Worth?

All eyes will be on Washington next week as the August 19 deadline approaches for new tariffs on Canadian goods to take effect. Since the July 21 announcement of tariffs of up to 50% under Section 338 of the Tariff Act of 1930, Ottawa and Washington have been negotiating an arrangement whose contours have gradually come into focus. Canada would agree to remove its retaliatory tariffs on automobiles, return US alcohol to store shelves, revise the allocation of dairy quotas and ease restrictions on government procurement. In return, negotiators have revived a proposal that would establish quotas on steel and aluminum in exchange for lower tariffs than the current 50% rate imposed under Section 232.

Several sources of tension bear watching. First, Canadian negotiators, already facing criticism over recent concessions, would give up additional bargaining leverage immediately in exchange for only partial and managed relief on metals. Meanwhile, one of the most consequential files, autos, would be deferred to the next CUSMA review without a firm commitment from Washington. Discussions on the sector also appear considerably less advanced, with the US administration so far putting forward only broad demands. That sequencing sits uneasily with Ottawa’s objective of securing tariff relief for autos as well as steel and aluminum. The US proposal would effectively remove part of Canada’s negotiating leverage without guaranteeing relief for one of the sectors most exposed to the trade dispute.

Canada’s federal structure adds another layer of complexity. Alcohol policy falls under provincial jurisdiction. Ontario, British Columbia and Quebec have indicated that US products will remain off store shelves until an agreement they consider satisfactory is reached. Dairy, meanwhile, remains particularly politically sensitive in Quebec. The fragmentation of authority within the Canadian federation could arguably provide Ottawa with some negotiating leverage in the Schelling sense: credibly tied hands can force the other side to adjust when the federal government can plausibly argue that some of the concessions being sought are simply not under its control. But those constraints also come with coordination costs. When concessions depend on provincial cooperation, Ottawa cannot readily guarantee their delivery. The lack of a common provincial position on US alcohol already illustrates the problem: Alberta and Saskatchewan have lifted their restrictions, while Quebec, Ontario and British Columbia continue to maintain theirs.

Whatever the difficulty of reaching an agreement, any deal would at best amount to a truce of uncertain duration. Canada already faces one of the lowest effective tariff rates among major US trading partners, even before any additional relief. The more consequential drag increasingly comes from uncertainty. And the predictability Canadian businesses are looking for is unlikely to emerge from next week’s outcome. Tariff relief granted under Section 232 or Section 338 can subsequently be reversed through the same executive channels. There is no durable floor protecting whatever market access Canada manages to preserve. Legal challenges add another source of uncertainty. The Supreme Court’s February 2026 decision invalidating the IEEPA tariffs pushed the administration toward Section 232 and Section 338, with the latter having little precedent in modern use and its legal durability still untested. Even the negotiating channel has proved fragile: talks were suspended in the fall of 2025 following an Ontario advertising campaign. Any agreement reached in this environment therefore needs to be discounted for a meaningful probability that tariffs could return, whether for political or legal reasons. For Canadian businesses, that probability translates directly into a higher risk premium on investment.

The concern is amplified by the fact that these measures increasingly erode the protection that CUSMA is supposed to provide. Unlike the initial rounds of tariffs, which largely spared CUSMA-compliant goods, the latest measures bypass that exemption. This extends a trend that first emerged as sectoral tariffs on metals were broadened to cover downstream manufactured products. The implication is increasingly clear: CUSMA compliance provides considerably less certainty over market access than it did a year ago.

The framework intended to anchor that access has itself become less stable. With the United States declining to extend the agreement, CUSMA has entered a cycle of annual reviews. A provision originally intended to provide periodic opportunities for adjustment now creates a recurring opportunity for renegotiation. Each review therefore opens another window for political volatility. The distinction between flexible stability and managed instability is becoming increasingly narrow. If these reviews remain largely technical, their economic cost should be limited. If instead they become an annual venue for renewed tariff threats and demands for concessions, they will embed a higher risk premium into the cost of capital for trade-exposed sectors. Over time, that uncertainty premium could matter more for investment than tariffs that are imposed or reduced for a matter of months.

From an economic outlook perspective, the key question is therefore how much value to assign to partial tariff relief on metals, with autos deferred, when that relief comes without an enforcement mechanism or a credible guarantee against future reimposition and sits within a trade framework now subject to recurring renegotiation. An agreement in the coming days would reduce near-term downside risk and provide meaningful relief to some sectors. Its value in restoring medium-term predictability would be considerably smaller. For the broader Canadian outlook, that distinction matters: lower tariffs can improve near-term sectoral conditions, but investment decisions depend on firms’ confidence that those conditions will persist.

The outcome would therefore look much more like a tariff truce than the restoration of a stable trade regime. And ultimately, the economic value of a truce may depend less on the concessions it contains than on how long businesses expect it to last.