Uncertainty surrounding the renegotiation of the Canada–United States–Mexico Agreement (CUSMA) is the single biggest risk facing this country’s economy in 2026, says former Bank of Canada deputy governor Paul Beaudry, adding that trade instability could derail a still-fragile recovery.

“It’s really hard to predict what this U.S. administration wants and what it is ready to do,” he said.

Canada has so far avoided the steep tariffs imposed on other U.S. trading partners, but Beaudry said that may change.

“We’re relatively in a good situation and we kind of want to stay there, and that’s not assured,” he said.

The mandatory review of CUSMA will intensify next year as U.S. President Donald Trump continues his push to reshape global trade and shift key industries to the U.S. and away from Canada and Mexico, among other countries.

The U.S. held public consultations on CUSMA in September, and the Trump administration is expected to submit a report detailing the changes it wants to Congress early next year. The formal review begins in July, though

Dominic LeBlanc , the federal minister responsible for Canada–U.S. trade, is expected to visit Washington in January to start talks with his U.S. counterparts.

Beaudry said some industries face challenges, but trade between Canada and the U.S. continues relatively smoothly.

“I see some of those sectors, especially the automobile sector, where it would be very hard to turn those around,” he said. “At the same time, there’s a lot of trade going on between Canada and the U.S. right now at very low tariffs.”

Products such as grains, pulses and dairy — though subject to certain quotas — generally face low tariffs compared with other international markets, while energy exports and machinery cross the border with minimal barriers.

Beaudry said he’s also noticing that U.S. Republicans are struggling in polls because of rising prices, which suggests that adding more tariffs isn’t politically popular right now, giving Canadians some reason for optimism.

“The good scenario is we get a renegotiation of CUSMA that allows us to stay in a similar place to where we are now … still quite a bit of open trade with the U.S.,” he said.

Yet predicting whether Trump will negotiate in good faith is difficult, Beaudry said, despite

Prime Minister Mark Carney ’s efforts to maintain personal ties with the U.S. president.

“I kind of actually see this as a strength,” he said. “Anyone who gets success in Washington seems to have to create a good personal relationship, and I think Carney is trying to do that.”

On monetary policy, Beaudry said inflation has broadly returned to the Bank of Canada’s two per cent target, but underlying pressures remain. He flagged the risk that U.S. policy could complicate Canada’s path if the U.S. Federal Reserve becomes more tolerant of higher inflation.

“If they went to something that looks like three per cent inflation,” he said, that would create “an extra challenge” for Canada’s inflation target.

Beaudry does not expect interest rate hikes in 2026, predicting rates will likely hold steady or fall if economic conditions weaken or CUSMA negotiations falter.

“I don’t see very much of a possibility of a rate hike during the year,” he said.

Beaudry also cautioned about growing financial market risks linked to the rapid expansion of artificial intelligence investment. He said AI will remain transformative, but questioned whether current

Big Tech valuations are sustainable. “It’s not clear that the companies that have invested hugely in it … are the ones that are going to reap all the benefits,” he said, noting parallels to the years leading up to the 2008 financial crisis.

Beaudry also said Canada must do more to adopt and commercialize new technologies to remain competitive while helping workers transition across sectors.

“Technological adoption is really, really important,” he said, calling for greater risk-taking to ensure innovation and productivity growth.

Achieving all these goals will cost money and Beaudry said Canada continues to struggle to attract investment amid all the tariff and trade uncertainty. Ottawa is trying to make the country more appealing to investors.

Included in this year’s budget is a $1.7‑billion, 13‑year strategy to recruit top international talent, including senior scientists, along with a new “productivity super‑deduction” for accelerated capital spending write-offs and expanded research and development tax credits.

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Beaudry is optimistic about potential improvements in 2026, but said meaningful change will take time.