USMCA Talks Could Shape Next Phase of US Trade Policy

President Donald Trump is about to get another chance to massively shape the U.S.’s trade policies.

It’s been six months since Trump upended years of U.S. trade policy with his “Liberation Day” tariffs. Now, the U.S., Mexico and Canada are about to review a major trade agreement Trump secured in his first term. This time, the negotiations over the U.S.-Mexico-Canada Agreement (USMCA) could focus on more than tariffs, as trade barriers, migration, drug trafficking and continental defense will all be part of the talks. 

“How the three nations navigate this moment will shape the region’s economic future for decades,” wrote Center for Strategic & International Studies (CSIS) analysts Diego Marroquín Bitar, Christopher Hernandez-Roy, and Earl Anthony Wayne.

Negotiations Could Be the Next Front on Tariffs

Mexico is the U.S.’s largest trading partner, followed closely by Canada, Census Bureau data showed. The two countries provide almost 30% of total U.S. trade, with third-place China accounting for less than 8%. 

While the U.S. has applied additional tariffs on some goods from Canada and Mexico, a broad swath of products that meet USMCA guidelines were exempt from the new import taxes. But that could change if the negotiations alter those guidelines, said Georgetown University government and business professor Marc Busch.

“Then we’re talking a whole lot of tariffs,” Busch said.

High Stakes Review Process Begins

The process for renewing the USMCA is already getting underway, including the recent move by the U.S. Trade Representative to get public feedback on its impact on American businesses.

The agreement states that all three nations must review the pact by July 2026. If the parties don’t come to terms, it could lead to an end to a trade deal that was supposed to last 16 years, and have far-reaching impacts.

“The stakes are high,” CSIS wrote. “The USMCA remains the foundation of North America’s economic strength and a key counterweight to China’s global influence.”

While the trade agreement could change tariff levels, it’s also likely to address some of the many trade barriers that Trump’s administration has identified. 

For instance, the U.S. said Canada’s supply-management system for agricultural products limited the ability of American farmers to sell there. It said that Mexico has widely flouted intellectual property protections by allowing counterfeit goods and media to proliferate, while also favoring the country’s state-owned energy companies.

“Since returning to office, the president has expressed concern that Canada and Mexico have taken unfair advantage of the USMCA and U.S. free market access and suggested that the agreement needed to be renegotiated,” legal firm Brownstein wrote in a note to clients.

USMCA Auto Rules Could Impact Car Prices 

One area where negotiations could lead to higher tariff costs is automobiles, where American negotiators will likely push for stricter “rules of origin” requirements, which means more parts of the car would have to be made either in the U.S. or North America.

“The supply chain complexity is astounding when it comes to auto parts. You’re going to look at pieces of the car that are crossing both borders upward of seven to eight times before final assembly,” Busch said. “Of course, it’ll translate to higher prices for consumers.”

The Trump administration is also expected to make drug trade enforcement and migration a key part of the talks with Mexico, while it’s likely to press Canada to take a larger share of defense spending for continental security. Leaders of both countries have stated they would work to address U.S. concerns.

Conflict with Canada Could Cost Both Countries

In a review on the potential negotiations with Canada, BMO Economics laid out a range of outcomes that could result from the negotiations. While a best-case scenario could see tariffs remain at current levels, a breakdown in negotiations could lead to a significant divide between the U.S. and its northern neighbor.

As a result of their most likely worst-case scenario, tariffs on Canadian imports could increase to 35%, while Canada would be likely to retaliate with 15% tariffs on U.S. goods. That could lead to a 1% drop in U.S. economic activity, while Canada’s economy could eventually contract by 5%. Meanwhile, inflation in both countries would rise under this scenario.

“Such an outcome would provoke deep structural change across the North American economy, much of which would only be felt over the long term,” said the report from BMO Senior Economist Aaron Goertzen. “Both sides would find it more difficult to compete against overseas regional value chains. On both sides, real incomes would be relatively lower and consumer choice relatively narrower.”