The Next Phase of USMCA

The events of July 1 regarding renewing the United States-Mexico-Canada Trade Agreement (USMCA) turned out to be a bit of a nothingburger. By the time the day arrived, everyone knew the United States would not agree to simply renewing the agreement as is, which means that the 10-year annual review mechanism would be triggered, and that is exactly what happened. Some media reaction was more apocalyptic than expected, but most took it in stride, as did the financial markets and Congress. Republicans and a good number of Democrats agreed with the decision to continue negotiating, although for very different reasons. Republicans noted important unresolved issues including Canadian dairy and lumber and Mexican energy and investment. Democrats complained about labor and environment.

All parties, including Democrats who opposed the decision, emphasized the need to continue negotiating, which appears to be precisely what the administration intends to do. The most popular word from all sides was uncertainty. Business craves certainty because it allows them to plan and move forward with their investment and production goals. Trump, in contrast, favors a negotiating approach that creates uncertainty because he thinks it gives him more leverage. There is also suspicion that in the case of USMCA, uncertainty is intentional because it will drive companies to invest in the United States rather than Canada or Mexico, but I believe the more likely outcome is that most companies will simply put their plans on hold and wait for the situation to clarify. Investments in new facilities or equipment are made for the long term but are influenced by short-term conditions. If companies don’t know what tariffs or other regulatory requirements they will face in six months or a year, they will usually wait until they have greater confidence about the future. Even companies already located in the United States that have substantial exports to Mexico or Canada will hold off on new U.S. investment if they don’t know what their future tariff liabilities will be.

So, what happens now? First, the drama I have been predicting for months is likely to occur. Trump has been distracted by the war with Iran but recently has again begun to attack the USMCA and suggest the United States does not need it and does not need to buy anything that Canada or Mexico make. We can expect those attacks to continue. Fortunately, the actual negotiations are once again in the hands of a professional. U.S. Trade Representative (USTR) Jamieson Greer is following in the footsteps of Trump’s previous USTR, Robert Lighthizer. Both have a firm grasp of the law, have been careful to meet procedural requirements, and have articulated clear policy goals. One can disagree with Greer’s announced goal, which is to reduce U.S. trade deficits with Canada and Mexico—I certainly do—but at least he has one. The smartest thing Trump can do is what he did last time—go away and leave the negotiating to the pros, returning only to take credit for what he will certainly call a great victory.

Second, we are beginning to see what is on the table in the talks. The biggest issue is security, which appears to mean protecting the U.S. market from Chinese imports coming in through the “back doors” of Mexico and Canada. This is an area where all three countries have similar concerns, since they all face the threat to their industrial bases of Chinese overcapacity. An easy first step would be Mexico fulfilling its promise to implement an inbound investment review process, but the United States will certainly want more. There has been talk of a “Fortress North America,” in which all three countries would maintain common restrictions against Chinese market access. Customs unions with a common external tariff are not new, but one that specifically focuses only on China would violate fundamental World Trade Organization rules, although we seem to be past the point where anybody cares about that (besides me).

Related to security will be debates over rules of origin (ROO), primarily for autos but also for other items. If an agreement contains measures to keep unwelcome items out, then it must have rules to determine what is unwelcome. In a world of complex supply chains, ROO fill that role by defining what constitutes a North American product. Automobile rules in the initial USMCA did precisely that, but it now appears that Trump wants to both tighten those rules and add a new U.S. content requirement. It is likely no company, foreign or domestic, could meet such a standard right now, so the real negotiation will be over the length of a phase-in period. Automakers have also pointed out the inconsistency of current rules which make some of them subject to tariffs that are actually greater than those faced by importers, due to tariffs on steel and aluminum pursuant to Section 232 plus tariffs on the non-USMCA compliant portion of their autos. This is another example of the unexpected counterproductive things that happen when governments intervene in the market without sufficient analysis.

Finally, sectoral interests are beginning to assert themselves. Canadian lumber and dairy products and Mexican energy policy and specialty crops are just some of the long-standing trade disputes that USMCA did not resolve. If the USMCA train appears to be leaving the station, you can be sure these interests and others will try to climb aboard.

As for timing, the agreement provides ten years to negotiate a revised agreement. Ever the optimist, I hold out hope that this can be finished in time for Trump to declare victory before the U.S. midterm elections, but realistically, it is likely to take longer than that. Trump may slow-roll it, thinking he can demand more after the election, and the other two countries may be quite comfortable with letting the talks continue until his term is over. Of course, the longer it takes, the more uncertainty there is, with the concurrent negative effects on growth and investment.

Author’s note: I retired from CSIS on March 29, 2026. I plan to continue writing this column and participating in The Trade Guys podcast, so please continue to read and listen. However, my CSIS email address will no longer be working, so if readers or podcast listeners want to contact me directly, they should do so at [email protected].

William A. Reinsch is a senior adviser (non-resident) and Scholl Chair emeritus with the Economics Program and Scholl Chair at the Center for Strategic and International Studies in Washington, D.C.