President-elect Donald Trump reiterated his commitment to renegotiate the US-Mexico-Canada Agreement (USMCA) shortly before the November election, an action which overshadowed his calls for imposing new tariffs on various foreign goods. The USMCA, established during Trump’s first administration, served as a modern substitute for the North American Free Trade Agreement (NAFTA) that had been in effect for 25 years prior to its implementation in 2020.
According to the original terms of the USMCA, a comprehensive review of the agreement is scheduled for 2026, independent of Trump’s statements. This pre-existing framework offers Trump an avenue to initiate substantial alterations to the agreement, which affects Canada and Mexico, the United States’ two most significant trading partners. Such renegotiation efforts could intersect with Trump’s wider policy agenda encompassing national security, immigration, and crime—issues that, while not directly addressed within the trade pact, could nonetheless be leveraged through it.
Francisco Sanchez, a former undersecretary of commerce for international trade under President Barack Obama and now a partner at Holland & Knight law firm, noted the utility of the existing mechanisms within the agreement for Trump to achieve his goals. Sanchez indicated that the governmental structure set up for reviewing the agreement is advantageous for Trump’s ambitions.
Following his electoral victory, Trump declared his intention to impose tariffs on all goods from Canada and Mexico commencing on his first day in office unless those countries take measures to curb illegal immigration and drug trafficking across their borders. This bold stance prompted immediate responses, including a call from Mexican President Claudia Sheinbaum and a visit from Canadian Prime Minister Justin Trudeau to Trump’s Mar-a-Lago estate.
Understanding the role of the USMCA necessitates an exploration of what the agreement stipulates and how it diverges from NAFTA. NAFTA, initiated in 1994, successfully created a North American free-trade zone that eliminated tariffs on the majority of goods exchanged between the signatory nations, particularly benefiting US exports to Mexico that previously faced high tariffs. The USMCA extended the free-trade environment established by NAFTA, providing fundamental economic cooperation that is estimated to support around 17 million jobs throughout North America.
While the USMCA preserved many core provisions from NAFTA, it also introduced a chapter focused on digital trade, reinforced labor rule enforcement in Mexico, and expanded access to the Canadian dairy market for American farmers. A significant aspect of the USMCA pertains to the automotive sector: it mandates that 75% of a vehicle’s components be manufactured within the three signatory countries—up from the prior 62.5%—to qualify for tariff exemptions while moving between those countries. Additionally, it requires a greater proportion of these parts to be produced by workers earning at least $16 per hour.
Analyses of the impact of previous trade agreements like NAFTA reveal complexities; while free trade is typically associated with long-term economic growth, it creates clear winners and losers within the economy. Critics often cite NAFTA as a culprit in job losses and wage stagnation, a sentiment that has received bipartisan reinforcement. Carla Hills, a former US trade representative instrumental in the establishment of NAFTA, emphasized that the job losses should not be attributed to free trade per se, but rather to inadequate retraining of affected individuals.
The USMCA has so far exhibited minimal changes to the dynamics of trade among the three nations since its enactment in July 2020. Trade volumes among Canada, Mexico, and the US have continued to thrive, yet the anticipated influence of the agreement’s vehicle component requirements won’t materialize until fully updated by 2027. Early reports indicated a decrease in imports of vehicle parts, leading to heightened revenue, employment, and wage levels in the American auto industry. However, this increase in production costs has prompted some consumers to shift toward more affordable foreign-made vehicles.
Trump has made various claims regarding reinforcing the US auto industry, even suggesting a drastic 100% tariff on foreign cars during his campaign. The rules in the USMCA regarding the proportion of vehicle parts sourced from the signatory countries could serve as a mechanism for further incentivizing domestic manufacturing. Additionally, measures that raise wages in Mexico may indirectly bolster US manufacturing by reducing the cost advantage that Mexican production currently holds.
The negotiations may also include elements aimed at countering China’s influence, particularly concerning how products can bypass US tariffs via Mexico. Observers speculate that a significant focus could be on managing the importation of Chinese parts and components, which may have substantial implications beyond the visible political discourse. Furthermore, Trump is likely to pursue strategies to decrease the US trade deficit, which he perceives as evidence that other countries exploit the American market. However, the trade deficit is influenced by various factors, including consumer behavior and the strength of the dollar, and data indicates that the USMCA has not substantially reduced it since its implementation. In fact, statistics show that the trade deficit with Mexico surged by over 78% after the USMCA was
