North American Trade: USMCA Review and Key Issues
USMCA Overview and Key Issues at Stake
The 2026 joint review of the United States–Mexico–Canada Agreement (USMCA) has shifted from a routine assessment into a high‑stakes negotiation driven by U.S. protectionist measures under the Trump administration, which has used tariffs and security demands to press Mexico and Canada for concessions. The review’s outcome — renewal, painful concessions, withdrawal, bilateral fallback deals, serial annual reviews, or eventual expiration — will shape North America’s competitiveness, supply‑chain resilience, energy cooperation, labor standards, and ability to counter China. The three countries should use the review to modernize and reinforce the USMCA (through targeted updates and side letters, supply‑chain mapping, harmonized border management, coordinated critical‑minerals and energy policy, and improved enforcement) rather than permit fragmentation that would weaken the region.
Stakes and Context
USMCA covers a 500‑million‑person market (~30% global GDP) and after five years helped grow intra‑regional trade and FDI, but Trump‑era tariffs and security demands have raised the risk that the 2026 review becomes a broader renegotiation.
A breakdown or rollback of USMCA would harm integrated industries (automotive, agriculture, energy), raise costs, and give openings to rivals like China.
Principal Flashpoints
Labor enforcement and expansion of the Rapid‑Response Mechanism (RRM).
Rules of origin, especially automotive content and U.S. content thresholds.
Energy policy and treatment of state‑owned enterprises (Mexico).
Digital trade and AI governance—USMCA provisions are dated.
Agriculture (corn, supply management, biotech).
Critical minerals and investment screening to reduce Chinese supply‑chain leverage.
Additional Section 232 investigations threaten major Mexican and Canadian exports.
Political Responses
Mexico favored quiet diplomacy, enforcement actions on migration and fentanyl seizures, and targeted engagement to avoid major retaliation.
Canada pursued a strategic reset linking trade and a “new security bargain,” boosting defense spending and security measures while negotiating tariff relief.
Bottom line: The 2026 review is a make‑or‑break moment for North American integration. The three countries should prioritize cooperative, targeted modernization and stronger enforcement to preserve competitiveness and resilience, rather than allow short‑term leverage tactics to fragment the regional economic bloc.
Geopolitics and Considerations for Mexico
Mexico should avoid rushing into a weak deal. Mexico’s best strategy is to seek protections against US tariffs (Sections 232 and 301), push for deeper North American supply-chain integration—especially in semiconductors and critical minerals—and secure preferential access to US incentives. If those goals aren’t attainable, Mexico is better off maintaining the status quo than accepting a damaging agreement that would harm manufacturing and long-term growth. Key points:
Trump’s tariff threats are likely a negotiating tactic; outright termination of USMCA is possible but unlikely because it would harm key US and Mexican industries.
Mexico’s priorities in the USMCA review: secure tariff protections for USMCA-compliant goods, protections from Section 232/301 measures, and stronger integration in semiconductors and critical minerals.
Concrete asks include preferential access to US semiconductor and critical-minerals incentives, joint workforce and supply-chain funding, and rules to boost high value-added manufacturing in Mexico.
If ambitious concessions aren’t possible, maintaining the current USMCA (waiting) is an acceptable fallback rather than accepting harmful terms.
The China Risk for Mexico
Chinese firms are increasingly investing in and shifting manufacturing to Mexico, driven by U.S. tariff exposure, geopolitical risk, and supply‑chain disruptions since COVID‑19. Some Chinese suppliers set up local operations to meet USMCA rules of origin and continue serving U.S. buyers, a trend that is legally complex and reshaping North American supply chains ahead of the 2026 USMCA review. Key points
Chinese FDI into Mexico has grown sharply since 2017, accelerated by the U.S.–China trade war and USMCA implementation; official net FDI was ~$2.3B (2017–2024), though real totals are likely higher.
Many Chinese companies relocate production to Mexico (including large projects like a $5B Lingong factory) to reduce tariff exposure and qualify for preferential treatment under USMCA.
Critics call this a “backdoor” into the U.S.; experts say the label is both accurate and oversimplified—most moves are legally complex and often compliant with rules of origin.
The trend is especially notable in automotive and EV supply chains and is changing cross‑border freight patterns and trade‑compliance challenges ahead of the 2026 USMCA review.
In 2025, Mexico’s President Claudia Sheinbaum proposed raising tariffs on about 1,463 products from countries with no free-trade agreements (notably China and several Asian states) to protect strategic industries, preserve jobs and boost domestic production. This was presented as economic protectionism within WTO rules but is widely read as a geopolitical maneuver to balance relations with the United States and China ahead of the 2026 USMCA review.
The proposal aims to reduce reliance on imports (especially Chinese goods), strengthen nearshoring, and signal alignment with U.S. concerns over China — while risking Chinese retaliation and complicating Mexico’s delicate position between the two superpowers.
Proposal details: Amend import tax law to raise tariff ceilings up to 50% on 1,463 goods across ~20 sectors (autos, textiles, footwear, toys, furniture); would apply to countries such as China, India, Indonesia, Thailand, Türkiye, South Korea and Russia; if approved it would take effect 30 days after promulgation and run until Dec 31, 2026.
Geopolitical context: Seen as a calibrated move to placate U.S. concerns and avert possible Trump-era tariffs (and influence USMCA negotiations), while curbing China’s growing economic footprint in Mexico; Sheinbaum denies the measure is aimed at pleasing the U.S.
Risks and reactions: China condemned the proposal and warned of countermeasures; measures could strain Chinese investment ties, provoke U.S. scrutiny, and risk economic fallout (exports, employment, inflation) if relations with either superpower sour.
Strategic dilemma: Mexico must balance deep economic ties to the U.S. with a desire to diversify and attract foreign investment (including from China) while avoiding becoming a geopolitical flashpoint between Washington and Beijing.
Geopolitics and Considerations for Canada
Short Overview: we expect negotiations between Canada and the US over the trade deal to be difficult. Part of the problem lies in high internal trade barriers between the providences of Canada. Under the current version of the USMCA, Canada has some special interest carve-outs such as the dairy industry, broadcasting etc. It will be difficult for Prime Minister Carney to sell changes domestically. However, the recent elections in Canada gave his party a bigger majority and this will help.
After winning a majority recently, Canadian Prime Minister Mark Carney must now shift from global diplomacy to deliver tangible results at home—most urgently renegotiating trade with the United States to protect exports and resolve tariffs—while addressing domestic economic pressures such as rising cost of living, high food inflation and unemployment. His majority gives him political room to make potentially unpopular concessions needed to reach a deal with Washington, but critics say he must move faster and focus on immediate domestic priorities.
A potential problem might be protecting the dairy industry in Canada. The opposition party criticized slow progress on U.S. talks; the government has previously said it won’t negotiate away Canada’s dairy supply-management system.
Canada’s chief U.S. trade negotiator, Janice Charette, said Canada’s mandate is to preserve the core elements of the USMCA and that Ottawa does not intend a major rewrite of the pact. She does not expect a negotiated agreement by the July 1 start of the U.S.-led review and is also seeking relief from hefty U.S. tariffs on steel, autos and aluminium. Charette warned talks with the U.S. could take time and urged Canada to hold its nerve after having already made concessions.
Canada will protect the fundamentals of the USMCA and avoid reopening its core terms. A formal U.S.-led review of USMCA begins July 1; Charette does not expect a quick agreement.
Canada seeks relief from U.S. tariffs (about 50%) on steel, autos and aluminum—sectors where Canada is a major supplier.
Ottawa has already conceded on issues such as dropping a digital-services tax and retaliatory tariffs. Analysts see growing U.S.-Canada trade tensions and worry Canada may be out of sync with U.S.-Mexico talks.
Background: Canada’s Attemp to Reduce Reliance on US
Canadian political and economic figures signaled a move to reduce Canada’s deep economic reliance on the United States. Former PM Stephen Harper urged adaptation to new geopolitical realities and less dependence on the U.S. Bank of Canada Governor Tiff Macklem called U.S. protectionism a structural force and urged diversification and strengthening Canada’s internal market.
Prime Minister Mark Carney announced measures to protect Canada’s auto sector—counter-tariffs, reskilling and financial support for workers—and a push to diversify and become a global EV leader, including allowing 49,000 Chinese EVs into Canada at a low tariff to attract investment in EV supply chains. Washington reacted angrily (threats of tariffs, accusations of “virtue-signaling”), citing cybersecurity and broader trade concerns. These moves highlight rising trade friction under the USMCA and Canada’s efforts to hedge against U.S. economic shifts. Key points:
Canadian leaders (Harper, Macklem, Carney) signaled a strategy to reduce dependence on the U.S. and diversify trade and industry.
Canada is protecting its auto sector with counter-tariffs and worker supports while pursuing EV-focused industrial policy and inbound Chinese EVs to spur investment.
U.S. officials responded with threats and criticism; cybersecurity and trade-security concerns are cited.
The developments increase tension around the USMCA and suggest Canada is preparing for a more fragmented North American trade future.
