Deal offers $2tn clue to America’s global trade strategy

The eyes of much of the world are currently on the FIFA World Cup soccer tournament in North America. However, beneath the global radar screen, another important process is underway as the US, Mexico, and Canada seek to renew their huge USMCA trade deal, which underpins around $2 trillion of economic activity across the continent.

The USMCA is, in effect, a North American Free Trade Agreement 2.0, which was first signed in 1994. Since USMCA came into force in July 2020, during US President Donald Trump’s first administration, it has served as a political cornerstone of economic relations between the US, Mexico, and Canada.

At that time, Trump called the deal a “wonderful” and “historical transaction.” However, the US leader has recently declared that he thinks the deal is not working and should be scrapped.

Amid all the political bluster from Trump, a July 1 deadline earlier this month, which could have brought renewal of the agreement on largely unchanged terms, passed without any deal. Yet, that does not mean the agreement will now inevitably collapse.

Instead, it shows how challenging the negotiations are between the three countries. The eventual outcome, which could be weeks or even months away, will be another signal of the likely posture of Trump on international economic diplomacy, including tariffs, in the remaining years of his second presidency.

It is clear that the Trump team is more dissatisfied with USMCA than are Canada and Mexico, which both favor renewal under largely existing terms for 16 more years. US Trade Representative Jamieson Greer says he also wants structural changes to the agreement to apply to all three countries, including moves to mitigate the risk from China. Changes include more alignment on external tariffs; stronger screening of inbound investment and export controls; sustained, stronger security cooperation; and tighter rules of origin, or defining how much of a product must be made in North America in order to trade duty-free.

For example, the Trump team has alleged high use of third-country content, including from China, in Mexican manufactured goods. So despite Mexican tariffs on China, some Trump officials see Mexico as a “backdoor” for China to enter US markets at lower tariffs.

Greer has said that the final deal could result in separate arrangements with Canada and Mexico to try to maximize US leverage, building on the existing trilateral agreement. Trump has not sought Trade Promotion Authority from Congress, so its ability to alter the text of the USMCA itself is limited. He may, therefore, use side letters to the agreement, backed by US executive actions, to try to achieve his goals.

Amid high uncertainty, there are multiple potential pathways forward after July 1. Many market participants are still pricing in a challenging extension process, which could last weeks or months longer, which brings more difficult discussions and significant USMCA changes.

There is genuine uncertainty over the fate of the negotiations.

Andrew Hammond

This outcome would probably result in Mexico and Canada making significant concessions to the US to try to reduce tariff exposure and extend the USMCA.

However, other scenarios offer significant possibilities, too. One that is growing in likelihood is annual USMCA reviews which, by dialing up political uncertainty, may discourage longer-term investment in North America.

As Greer’s rhetoric implies, there is also a possibility of moving from a trilateral USMCA more toward bilateral deals between the US and Canada, and US and Mexico. This scenario would retain some market access but hamper development of supply chains across the whole of the North American continent.

Trump’s rhetoric, which may largely be a negotiation tactic, also points to the possibility of the US or one or more USMCA partners seeking “early withdrawal” from the deal. It is unlikely that Mexico or Canada would be the first movers of such an agenda, despite the fact that the US leader’s attacks on both NAFTA and the USMCA over the past decade have damaged much goodwill with Ottawa and Mexico City.

Part of the reason there is still genuine uncertainty over the fate of the negotiations is that the USMCA negotiations risk getting further intertwined with Trump’s wider international economic diplomacy agenda, including tariffs. On July 23, the global 10 percent tariff the US leader imposed earlier this year under Section 122 tariffs is scheduled to expire, after 150 days, unless Congress decides to unexpectedly renew.

At the same time, the Trump team is moving to conclude its Section 301 trade practice probes into manufacturing via alleged “persistent trade surpluses, or underutilized or unused capacity.” These could lead to new US tariffs on not only Mexico and Canada but also a much wider group of nations around the world.

This probe into alleged industrial overcapacity follows the one which reported recently that US imports of goods had been produced with forced labor. All the countries, including Mexico and Canada, have been found to have crossed US red lines on this agenda, and Greer has recommended new tariffs be imposed in coming weeks.

Taken together, the coming weeks will illuminate the direction of Trump’s global economic diplomacy. Most are predicting that he will escalate his tariff agenda, which will make finding a sustainable solution to the USMCA renewal process more challenging.

• Andrew Hammond is an associate at LSE IDEAS at the London School of Economics.