United States-Mexico-Canada Agreement (USMCA) to decode current & future economic uncertainty
The United States, Canada, and Mexico are bound by USMCA (United States-Mexico-Canada Agreement), which replaced NAFTA (North American Free Trade Agreement) on July 1, 2020 ) which encompasses a comprehensive range of products eligible for preferential tariff treatment among the three countries. While the agreement aims to facilitate trade by reducing or eliminating tariffs on numerous goods, the specific products and applicable tariff rates are detailed in the respective tariff schedules of each country.
Tariff rates under the USMCA agreement across different product categories for the US, Canada, and Mexico. The chart highlights variations in tariff rates for key sectors such as dairy, meat, seafood, and automobiles.
USMCA’s Impact on Industries & Trade Relations
USMCA Economic Impact, showing the effects on GDP growth, foreign direct investment (FDI), and trade growth across the United States, Canada, and Mexico.
The USMCA has had varying impacts across industries and trade relations, with each country experiencing distinct benefits and challenges. In the automobile industry, the requirement for 75% North American content and a $16/hour minimum wage for 40-45% of auto workers has shifted production dynamics. The U.S. and Mexico benefit from increased regional production, though Mexico’s wage requirements may raise costs. Canada’s auto exports remain stable, but investment growth is limited. The agriculture sector sees Canada as the biggest winner, as it gains better access to the U.S. dairy market, while U.S. farmers benefit from higher sales. Mexico maintains its strong trade relationships in corn, soybeans, and meat, but retaliatory tariffs could disrupt the sector. In technology and digital trade, the U.S. is the dominant player, benefiting from stronger intellectual property protections and a ban on digital tariffs, securing advantages for companies like Amazon and Google. Meanwhile, Canada and Mexico gain access to improved digital services, but they remain net consumers rather than producers. Mexico emerges as the primary winner in manufacturing, as its lower-cost labor continues to attract foreign direct investment (FDI) despite new wage rules. However, automation could offset job growth in the long term. The energy industry favors Canada and the U.S., with Canada maintaining its position as the top oil supplier to the U.S. and Mexico allowing more private investment while retaining control over Pemex.
USMCA affects multiple industries differently across the U.S., Canada, and Mexico.
Trade relations under USMCA are evolving, with U.S.-Canada ties remaining stable yet strained by tariffs on softwood lumber and steel. U.S.-Mexico trade is the most dynamic, as Mexico benefits from increased investment, yet faces pressure from labor reforms and U.S. tariff threats. Canada-Mexico trade grows steadily, with minimal conflicts compared to U.S.-Mexico relations. Future risks include new tariff policies, supply chain disruptions, and rising tensions over energy and labor laws. If tariff wars escalate, North America could face reduced trade flows, lower FDI, and potential economic slowdowns. While the U.S. benefits from trade protections and a strong digital economy, Mexico holds the greatest long-term advantage in manufacturing and investment, and Canada maintains stable but modest growth through energy and agricultural exports. The agreement’s future hinges on policy stability, enforcement of labor and environmental standards, and the avoidance of retaliatory trade measures.
Trade Disputes Under the United States-Mexico-Canada Agreement (USMCA)
Trade disputes under the United States-Mexico-Canada Agreement (USMCA) have escalated due to recent tariff policies, supply chain disruptions, and alleged violations of the agreement. The U.S. imposed 25% tariffs on Canadian and Mexican imports, citing concerns over illegal immigration and fentanyl trafficking. While Canada retaliated with 25% tariffs on $30 billion worth of U.S. goods, including liquor, vegetables, and manufactured products, Mexico is preparing a set of retaliatory tariffs, with President Claudia Sheinbaum expected to announce specific countermeasures on March 9, 2025. These trade conflicts have significantly impacted key industries, particularly automobiles, manufacturing, agriculture, and energy. The automobile sector faces major disruptions, as tariffs affect more than $300 billion in annual trade, leading to higher vehicle prices, reduced exports, and potential job losses across all three countries. Mexico’s electronics and manufacturing industries, which contribute nearly half of its exports, face a possible decline of one million units in auto production, creating instability in labor markets and investments. The energy sector is also strained, as Canada remains the largest supplier of oil and steel to the U.S., yet new tariffs on energy products could weaken the long-standing trade relationship.
Scenario Analysis of the 25% Tariffs, showing the projected impact on GDP growth, trade growth, and foreign direct investment (FDI) across the U.S., Canada, and Mexico under different tariff scenarios.
Legally, Canada and Mexico argue that the U.S. tariffs violate USMCA by undermining the agreement’s core principles of free trade, non-discriminatory treatment, and dispute resolution mechanisms. The USMCA was designed to eliminate barriers to trade between the three countries, and the imposition of 25% tariffs on Canadian and Mexican imports contradicts these commitments. Canada and Mexico claim that these tariffs constitute an unfair trade practice and could set a precedent for unilateral actions outside the established framework.
Under USMCA Chapter 20, which governs state-to-state dispute settlement, Canada and Mexico may formally challenge the tariffs through an independent arbitration panel. This chapter ensures that trade disputes are resolved through neutral adjudication rather than unilateral economic retaliation. Additionally, Chapter 19 of USMCA, which covers anti-dumping and countervailing duty disputes, may also apply if Canada and Mexico argue that the U.S. is improperly imposing tariffs without justified cause.
Canada and Mexico have also pointed out that USMCA includes specific provisions protecting industries from sudden, unjustified trade barriers, particularly in auto manufacturing, energy, and agriculture, sectors that have been directly impacted by the new tariffs. If the dispute is escalated, the affected countries can seek remedies through retaliatory tariffs, compensation, or a formal ruling requiring the U.S. to remove the tariffs. In extreme cases, a prolonged trade war could weaken USMCA’s effectiveness, leading to discussions on renegotiation or alternative trade arrangements.
Given the legal complexity, the dispute is likely to be resolved either through diplomatic negotiations, arbitration under USMCA provisions, or intervention by the World Trade Organization (WTO). However, with ongoing political and economic tensions, the outcome remains uncertain, and prolonged tariffs could reshape North American trade dynamics, forcing Canada and Mexico to seek alternative markets and trade alliances outside the U.S to mitigate potential long-term damage from the tariff conflict.