USMCA at a Crossroads: Securing North America’s Future

In an era of rapid political change, the North American region faces significant international risk, demanding strong leadership and sound governance. Mexico has elected Claudia Sheinbaum as its first female president (explore Mexico’s internal risks in Episode 178), Donald Trump has returned to power in the United States (learn more about the U.S. election results in Episode 182 and Episode 183), and Canada is navigating uncertainty after Prime Minister Justin Trudeau’s resignation. These political shifts bring opportunities and challenges, particularly in regional trade and economic cooperation, which hinge on the success of the United States-Mexico-Canada Agreement (USMCA).

Over the past months, President Trump has repeatedly emphasized his intention to impose tariffs on Canada and Mexico. However, despite this week’s wave of policy announcements, these tariffs have yet to materialize, as Trump appears cautious with his universal tariff plans. Targeted tariffs on Canada, Mexico, and China could potentially take effect starting February 1st, though their scope remains uncertain.

Trump may use tariffs as leverage to secure concessions on border policy and trade agreements. Ideally, this approach could lead to negotiations that prevent the need for tariffs altogether. Alternatively, the president could decide to withdraw tariffs if they are deemed detrimental to the U.S. economy. Businesses and trade stakeholders should closely monitor the impact of these measures; if the tariffs are perceived as beneficial, Trump may feel emboldened to impose additional ones. Conversely, if they harm economic stability, a rollback could become more likely.

These unfolding developments set the stage for a critical moment in North American relations, where strong leadership, strategic negotiation, and a commitment to regional cooperation will determine whether challenges can be transformed into opportunities for lasting stability and prosperity.

What is the USMCA and Why does it matter?

The USMCA, which replaced the North American Free Trade Agreement (NAFTA), is a mutually beneficial framework designed to support North American workers, farmers, ranchers, and businesses. By fostering more balanced and reciprocal trade, the agreement aims to sustain high-paying jobs and drive economic growth across the region. Its significance is underscored by the economic interdependence of the three member nations: Canada sends 78% of its exports to North America, the U.S. relies on Canada and Mexico for 30% of its exports, and Mexico directs 85% of its exports to its North American partners.

By eliminating tariffs and incorporating provisions on labor, digital trade, environmental protection, and intellectual property, the USMCA has strengthened regional trade and reduced reliance on external markets, particularly China. These measures promote better governance and minimize trade-related risks for businesses. The upcoming 2026 review will determine whether the agreement is extended for another 16 years or terminated in 2036, a decision with profound implications for regional stability.

A united front will be required during the review to address emerging issues such as supply chain disruptions, digitalization, and evolving trade policies. A failure to renew the agreement would create significant uncertainty, increase business costs, and heighten international risk.

The Threat of Tariffs: Risks to Cooperation and Trade

President Trump has announced plans to impose a 25% tariff on all imports from Mexico and Canada, aiming to pressure both nations to curb illegal immigration and the flow of fentanyl into the U.S. Additionally, a 10% tariff on Chinese imports is being proposed as part of his broader trade strategy. While these measures aim to address U.S. national security priorities, they pose significant economic and political risks, especially if Canada and Mexico retaliate. Read our analysis on the geopolitical risks posed by Trump’s presidency here.

The imposition of such tariffs could severely disrupt North American supply chains, where goods, such as cars, medical devices, and agricultural products frequently cross borders multiple times during production. A 25% tariff at each stage of this process would dramatically increase costs, making production economically unsustainable. This not only threatens the viability of regional industries but also undermines the principles of the USMCA.

Trump’s tariff threats could be a strategic move to pressure Canada and Mexico into making policy concessions, particularly regarding border policy. In his inauguration speech, President Trump declared a national emergency at the southern border, targeting illegal immigration. This policy is expected to place additional economic strain on Mexico as the country braces to receive thousands of individuals impacted by mass deportations from the U.S.

Imposing tariffs in violation of the USMCA risks eroding U.S. credibility and could hinder long-term cooperation on pressing global issues, including the challenge of China’s economic influence. Instead of fostering unity, these threats might encourage governments to prioritize short-term, isolated deals, weakening collective efforts to address shared economic and security challenges.

The China Factor

The U.S. remains focused on disrupting Chinese trade through tariffs and bans, but neither Mexico nor Canada has followed suit with similar restrictions. President Trump’s proposed 10% tariff on Chinese goods and efforts to close loopholes would likely raise prices for American consumers while cutting into Chinese exporters’ profits. However, such measures could also strain U.S. supply chains and complicate trade dynamics in North America. For more insights on China, tune in to Episode 185, where we explore China’s involvement in the Middle East and its wider geopolitical implications. Don’t miss it!

Chinese exporters are already adapting by finding alternative routes into the U.S. market. For instance, they could use Mexico as a base to export electric vehicles (EVs), bypassing high U.S. tariffs on direct Chinese imports and even qualifying for incentives under the Inflation Reduction Act. These strategies reveal the challenges of enforcing trade restrictions in a deeply interconnected global economy.

Despite reducing imports of low-value goods like furniture, the U.S. still relies heavily on China for high-value products such as smartphones, computers, and lithium-ion batteries, which accounted for 27% of U.S. imports from China in 2023. Diversifying supply chains to countries like Vietnam often perpetuates indirect reliance on Chinese intermediates, as many factories depend on Chinese parts. This indirect dependence complicates efforts to weaken ties with China.

To effectively reduce reliance on China, the U.S. must align with Mexico and Canada under a coordinated USMCA strategy. This includes leveraging existing supply chains, expanding critical mineral production, and boosting regional manufacturing capabilities. Without deeper North American cooperation, isolated U.S. trade measures risk undermining regional integration and weakening economic competitiveness.

As North America navigates a period of significant political change, the USMCA serves as a vital framework for regional stability, economic growth, and collaboration. The upcoming 2026 review is an opportunity for the U.S., Mexico, and Canada to reaffirm their commitment to shared prosperity while addressing emerging challenges such as supply chain resilience, trade with China, and global economic shifts. A united approach is essential to maintaining the region’s competitiveness and fostering long-term economic security. Failure to cooperate risks undermining the USMCA’s potential, leaving the region vulnerable to fragmentation and diminished global influence.

Agreements like the USMCA shape regional governance and reduce risks through collaboration. With the 2026 USMCA review approaching, strong leadership from all three countries is essential to ensuring the agreement remains a cornerstone of North America’s economic stability.

Listen here as we dive deeper into these issues and more in this weekend’s special podcast featuring Joshua Meltzer!