The potential disruption and wider economic impacts are severe. (Justin Hamel/Bloomberg)
key takeaways:
- The US declined to renew the USMCA on July 1, opting for an annual review instead, extending the trade agreement for 16 years.
- The decision creates uncertainty for North American supply chains, with intra-regional trade set to exceed $1.6 trillion in 2024.
- Countries can continue negotiations over the next 10 years, but if no solution is reached, the USMCA will expire in 2036.
US Trade Representative Jamieson Greer said the US has decided not to renew its trade agreement with Canada and Mexico, instead opting to conduct an annual review of the agreement, which threatens to increase uncertainty for companies producing goods across North America.
The US-Mexico-Canada Agreement, or USMCA, will remain in place for the next decade unless either country decides to withdraw from it. Annual reviews rather than long-term renewals open the door to years of contentious negotiations over rules governing continent-wide supply chains and low tariffs critical to automakers, farmers, retailers and energy companies.
Speaking before the official announcement, Greer said the Trump administration is “not ready to seal the deal.”
“We think there are substantial issues,” Greer said in an interview with Bloomberg News on July 1. He said a number of changes are needed to address the imbalance.
Although the US decision was not a major surprise, it was a shocking reversal for President Donald Trump, who had torn up the original USMCA in 2020 and once called it “the best and most important trade deal ever made.” Trump soured on the agreement in his second term in part because it protected large portions of trade from the tariffs he imposed and did nothing to address trade deficits with Mexico and Canada.
The potential disruption and wider economic impacts are severe. The USMCA promoted economic activity between the three countries, which combined represent approximately one-third of the world’s GDP. Intra-regional trade is expected to exceed $1.6 trillion in 2024, up from $1 trillion when the agreement entered into force in 2020.
https://www.youtube.com/watch?v=egor8gTOJ6s
(Bloomberg Television via YouTube)
On July 1, the sixth anniversary of the USMCA’s founding, countries could extend for 16 years the agreement that Trump negotiated during his first term. That scenario was unlikely, however, as Trump has made clear he wants changes or may opt to go it alone — part of a broader effort by his administration to recapture manufacturing jobs and squeeze concessions from trading partners.
The USMCA has provided a measure of stability in an otherwise turbulent period that included Trump’s tariff conflicts with China and other major trading partners. His moves to impose the new levy came with broader exemptions for USMCA-eligible products, softening the blow on Mexico and Canada.
Still, other U.S. tariffs on products such as autos and metals remain a problem in negotiations with Mexico and Canada and will cloud future negotiations.
Trump tried to increase pressure ahead of the July 1 milestone, claiming the US would be better off without a deal. That path will be difficult given bipartisan support for the USMCA in Congress, even if some lawmakers and labor unions want to see it reformed.
Under the annual review, countries can try to reach an agreement during the next 10 years. If no solution is reached during that period, the treaty will expire in 2036.
“We have these negotiations ongoing and we don’t know when they will end, and there is no short- or medium-term obligation to conclude those negotiations,” said Patrick Childress, co-head of Holland & Knight’s USMCA team. “So this, certainly, creates some uncertainty for companies.”
Washington has held formal talks with Mexico in recent months, but has largely ignored Canada at the negotiating table. Trump has clashed with Prime Minister Mark Carney, who has sought to reduce Canada’s trade dependence on the U.S.
Complicating any negotiation is China’s new assertive business posture. As Chinese automakers gain market share outside the US, key USMCA issues include minimum threshold requirements for US auto parts and pressure by Washington to tighten rules of origin on autos, driven by concerns over transshipment of Chinese inputs.
Another potential flash point is Mexico’s and Canada’s tolerance of Chinese investment and the degree of alignment with United States national-security concerns about it.
“Canada is interesting because one day they’ll say, ‘We want to help make America great again. We want to help make America great again,'” Greer told Bloomberg News. “Then the next day they’ll be talking about bringing in Chinese investment. “So we get mixed messages from Canada.”
Given the geopolitical backdrop and Trump’s maximum-leverage style, an extended negotiation process could prompt companies to hold off on potential investments. Lobbying groups, including the US Chamber of Commerce and the Business Roundtable, have pressured governments to strengthen and maintain the agreement.
“Supply chains are built with 30-year visibility, not five, and uncertainty can deter investment and growth,” Madeline Shalecki, assistant director of the Atlantic Council’s Geoeconomics Center, wrote in an online post this week.
In May, unions representing most of the North American auto market wrote to Greer urging the administration to strengthen and expand the deal.
In June, the US Chamber of Commerce brought more than 70 business partners to Capitol Hill and pressed lawmakers to “support maintaining the framework, press for full compliance from all three governments, and encourage a quick and orderly review that provides certainty for businesses.”
The Retail Industry Leaders Association, whose members include Home Depot Inc. and Target Corp., urged the parties to preserve the deal’s duty-free benefits and reduce uncertainty around the review period as much as possible.
“The USMCA provides retailers with the certainty they need to plan supply chains, invest in North America, and efficiently move merchandise to consumers,” Ellen Jackson, RILA’s director of government affairs, said in a statement.
The International Association of Machinists and Aerospace Workers urged member countries to use the review period to tighten labor standards, strengthen enforcement and improve rules of origin. The agreement should be improved “to discourage corporations from moving jobs out of the United States and Canada in search of cheaper labor,” the union said in a statement July 1.
