VANCOUVER, Canada – As the U.S.-Mexico-Canada trade deal faces its first joint enforcement review on July 1, experts say the chances of it being renewed are decreasing given U.S. President Donald Trump’s fickle behavior.
During his first term, Trump promoted a new agreement to replace the North American Free Trade Agreement (NAFTA).
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The result was the USMCA Agreement, which went into effect on July 1, 2020 and is scheduled to expire in 16 years.
Now, on the sixth anniversary of the USMCA’s founding, the three countries involved will decide whether to continue the trade agreement for another 16 years.
However, the outcome of the review process is unclear, and commentators warn that the uncertainty it creates could create complications for companies.
If all three countries do not agree to an extension, an annual review process will begin and the USMCA will be discussed annually until 2036.
“An annual review may be required, but it also means pervasive uncertainty, which is bad for business decision-making,” said Tony Stilo, director of Canadian economics at advisory firm Oxford Economics. “It’s certainly a clear damper.”
However, this is the situation that analysts currently expect to emerge from the July review.
“The most likely scenario is that it will go into an annual renewal process,” said Bina Najibullah, vice-president and director of research at the Asia-Pacific Foundation of Canada, a non-profit think tank.
However, he added that the outcome of the July negotiations remains uncertain. She pointed to the lingering question: “Is nothing agreed until everything is agreed, or is incremental change acceptable?”
In the worst case scenario, either party could give six months’ notice and abandon the trade agreement altogether.
Najibullah said President Trump may be leaning in that direction. “He said he wished (USMCA) never existed,” she said.
Trump himself told reporters this month that he felt the U.S. didn’t need a trade deal.
“I don’t know if I will renew the contract,” he said on June 10, indicating he was open to negotiations with other parties to the agreement. “We’re talking to them. Let’s see if we can take some action.”
A week later, President Trump expressed further ambiguity about the US position. “I don’t want to get an agreement, but I might sign it,” he said during a visit to Paris.
Protection from customs duties?
Unlike President Trump, the leaders of Canada and Mexico have said they want the trade deal to continue.
USMCA has become especially beneficial for both countries in the wake of the tariffs that President Trump imposed last year after taking office for his second term. Goods traded under this agreement are largely exempt from additional taxes.
But Trump is using another legal tool to tax USMCA-compliant products as well. For example, his administration turned to Section 232 of the Trade Expansion Act, which authorizes economic penalties for products that “could undermine” U.S. national security.
It invoked the act to impose a 50% tariff on Canadian steel, aluminum, and copper, as well as a 25% tariff on non-U.S. products of USMCA-compliant vehicles. A 10% tax is added to some wood products.
However, particularly high tariffs were imposed on products not covered by USMCA.
The Trump administration previously used the International Emergency Economic Powers Act (IEEPA) to impose widespread tariffs around the world, but the U.S. Supreme Court ruled in February that the taxes were unconstitutional.
But the White House responded to the Supreme Court’s ruling by imposing 10% tariffs worldwide, using Section 122 of the Trade Act, which allows the United States to address a “large and severe” balance of payments deficit.
These tariffs currently face legal challenges, although the Trump administration has threatened to raise that rate to 15% in the coming months.
It also proposes additional tariffs on both Canada and Mexico, citing their failure to take steps to prevent forced labor.
Mexico and Canada are the United States’ largest trading partners. Until recently, for example, Canada sent nearly 80% of its exports to the United States.
USMCA allows much of that trade to be protected from President Trump’s changing tariff policies.
But analysts like Canada’s Stilo warn that subjecting the USMCA to an annual review process could weaken the bloc’s economy.
“The annual review will be a ‘huge headwind’,” he told Al Jazeera.
Stilo said Canada is likely to pursue tariff relief as part of its review of the USMCA, an important issue for the country’s economic outlook.
“Our view that the economy will improve in the second half of this year and into next year is based on lower tariffs,” he said.
Risks to U.S. exports
But USMCA is also a boon for U.S. companies that export products such as auto parts, aircraft, oil and computers to Canada and Mexico.
According to data analysis by the Peterson Institute for International Economics, the majority of exports from some U.S. states go to Canada and Mexico, where they are shipped under the USMCA.
For example, North Dakota exported 89.9 percent of its goods to Canada and Mexico last year. Michigan’s rate was 64.9%, Iowa’s rate was 50%, and Arizona’s rate was 39%. All four states voted for Trump in the 2024 election.
Overall, the United States also relies heavily on exports to Canada and Mexico for certain product categories. Exports such as auto parts, aircraft and petroleum products generated more than $10 billion in sales to Canada and Mexico last year, underscoring the importance of these trading partners.
For example, 75.6 percent of U.S. exports of parts and accessories for tractors, public transportation vehicles, automobiles, and similar motor vehicle equipment went to two neighboring countries.
Analysis authors Gary Hufbauer and Ye Zhang wrote that the outcome of the USMCA review could have significant implications for U.S. industries and states.
For example, if President Trump abandons a trade agreement, the United States could impose additional tariffs on products from Canada and Mexico. As a result, these countries could retaliate with their own tariffs or seek domestic or third-party substitutes for U.S. products.
Hufbauer told Al Jazeera: “The termination of USMCA poses a risk to U.S. exports.”
His analysis suggests that while the overall U.S. economy may be able to weather the uncertainty, certain businesses and states may be hurt.
But Hufbauer warned that the fallout may not end there. A failure in the USMCA review could cause long-term damage to cross-border relations.
“The bigger impact for the United States is the destruction of alliances and friendships around the world. This is much more political than economic,” Hufbauer said.
Mr. Stilo sees the review of the USMCA as coming amid a broader global realignment that will test traditional alliances.
“We are in a much more fragmented world. We are not completely deglobalized, but we are definitely seeing the disintegration of regional blocs,” Stilo said.
For Canada in particular, economic uncertainty may force leaders to seek a broader range of trading partners.
“We’re always going to trade with the United States,” Stilo said. “But now there is more diversity.”
