The USMCA trade agreement, now in its fifth year of existence and up for renegotiation in 2026, is already looking frail.
Yesterday (Nov 25), US President-Elect Donald Trump announced that on his first day back in office he would use executive powers to impose a 25% tariff on all products entering the US from Mexico and Canada, its USMCA partners, as well as an additional 10% tariff on Chinese imports. Those tariffs, he said, will remain in place until the flow of fentanyl and illegal immigrants into the US is halted.
Predictable as this announcement may have been, it still raises lots of (largely unanswerable) questions.
Will the Trump administration apply the tariffs across the board, as Trump’s message strongly suggests, or will it be more judicious in their application? In 2018, the Trump administration prioritised tariffs on intermediate goods to avoid hurting consumers. What will the broader economic effects be this time round? How severe will their impact be on inflation, economic activity and product shortages in the US, given this new round of tariffs will be levied not just on China but also the US’ other two biggest trade partners (Mexico and Canada)?
Is the US even ready or capable of reindustrialising in the targeted sectors? Six years after Trump began his trade war on China, the US may have diversified its imports away from China for low value-added goods (e.g. bedding, mattresses, and furniture), but diversification for higher value-added goods (e.g. smart phones, portable computers, lithium-ion batteries) is proving far harder, data from the Atlantic Council (of all places) suggests.
There are also serious questions about the legality of Trump’s proposed tariffs. Will Canada and Mexico retaliate with their own tit-for-tat tariffs? If so, just how badly could the resulting trade war spiral? Will it push the three countries into recession? How badly will it hit the Mexican peso, which has already faced significant depreciation so far this year? What will the legal consequences be? Lastly, how will the tariffs on Mexican and Canadian goods help the US tackle its opioid and fentanyl epidemic if precious little is done on the demand side of the equation?
“What tariffs should we put on their merchandise until they stop consuming drugs and illegally exporting weapons to our homeland?” asked the president of Mexico’s Senate, Gerardo Fernández Noroña.
One thing that is clear is that trilateral relations between the erstwhile “Three Amigos” of North America are about to become a lot more strained — for a while at least.
That said, the long-term impact may not be as severe as some are fearing. When Trump began his first presidential term, it was generally assumed that it would be disastrous for Mexico’s economy. Yet more or less the opposite occurred: the Trump administration’s trade war on China and resulting nearshoring strategy helped turn Mexico into the US’ largest trade partner.
Also, this is not the first time Trump has threatened to impose tariffs on Mexico. In 2019, he said he would impose a 5% tariff on all goods entering from Mexico unless it stemmed the flow of illegal immigration to the United States. Nine days later, Trump ditched the plan after Republican senators had threatened to try to block the tariffs if he moved ahead with them.
Canada Turns On Mexico
This time round, however, it’s not just Trump that’s talking tough on North American trade. A couple of weeks ago, Doug Ford, the premier of Ontario, Canada’s richest province, called for Mexico’s removal from the USMCA trade agreement due to its growing trade and diplomatic ties with China (a topic we covered just a couple of months ago).
“Since signing on to the United States-Mexico-Canada Agreement, Mexico has allowed itself to become a backdoor for Chinese cars, auto parts and other products into Canadian and American markets, putting Canadian and American workers’ livelihoods at risk while undermining our communities.”
Ford’s position is far from an isolated one. Danielle Smith, the premier of Alberta, Canada’s third richest province, expressed a similar view just days later, noting that “Mexico has taken a different direction” and that Americans and Canadians want to have “a fair trade relationship.” Chrystia Freeland, Deputy Prime Minister of Canada, said she shares the concerns of the United States regarding Mexico’s relationship with China.
The same apparently goes for Canadian Prime Minister Justin Trudeau. Last Thursday, just three days after meeting with Mexican President Claudia Sheinbaum on the side lines of the G20 meeting in Rio, he told a press conference that the USMCA would ideally continue as a trilateral trade deal, but hinted that if Mexico did not tighten its policy against China, other alternatives would have to be sought.
“We have an absolutely exceptional trade agreement at the moment,” Trudeau said. “We will guarantee Canada’s jobs and growth in the long term. Ideally, we would do it as a united North American market, but, pending the decisions and choices that Mexico has made, we may have to consider other options.”
Politicians in the United States and Canada have expressed growing concerns that under the USMCA, Chinese companies could assemble cars in Mexico and ship them north, which would spare them tariffs. In recent years, China has poured huge sums of money into Mexico to build factories and automotive plants. And trade is booming between the two countries…
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Nick Corbishley 