Price on Trade: USMCA hearing highlights shortcomings of trade pact

On December 3-5, 2025, the Office of the US Trade Representative (USTR) held a three-day public hearing on the operation of the United States-Mexico-Canada Agreement (USMCA). The trade pact begins its first formal joint review on July 1, 2026. The US government heard testimony from American steel producers as well as many downstream steel product manufacturers. Several Canadian and Mexican steel producers and industry groups also testified.

In many respects, the testimony given was not surprising. Domestic steel manufacturers urged USTR to strengthen USMCA and to stop allowing Canada and Mexico to use the agreement to surge low-priced steel into the United States. Conversely, our Canadian and Mexican counterparts asked the US government for continued access to the US market while claiming to be interested in taking steps to counteract China and other bad trade actors.

In our opinion, it is striking that for all the bold talk about establishing a “common external tariff” — or “Fortress North America” — the solutions being proposed fail to live up to their promises. As we have commented recently, USMCA certainly needs a rethink. But we have serious concerns about Canadian and Mexican proposals that suggest common trade policies that are, as we see it, more illusory than effective.

Take Mexico for example. On Dec. 10, 2025, the Mexican Congress passed legislation to increase tariffs on steel imports up to 50% for China and several other Asian countries. Despite the headline, these tariffs will not stand as a bulwark against unfairly traded steel entering Mexico as a means of accessing the US market. That is, for this tariff program, the exceptions certainly override the rule.

First, as with many other Mexican steel tariffs, countries that have a free trade agreement with Mexico are not subject to the tariff increases. Mexico has free trade agreements with approximately 50 countries — including major steel producers countries or trade blocs in Japan, Vietnam, and the European Union. (Mexico also has similar arrangements with Brazil.) So, this amounts to a significant carve-out that exempts many of the steel imports entering Mexico.

Second, even for countries that do not have a free trade agreement with Mexico, like China, the increased tariffs do not modify the existing maquiladora (IMMEX), Rule 8 (PROSEC), and other duty-exemption or duty-drawback programs. Chinese producers in particular frequently take advantage of these programs, which exempt many imported steel and steel-containing products from duties when they are subsequently re-exported to the United States.

Mexico is not alone either. While Canada has touted recent measures to tighten its steel tariff rate quotas (TRQs), to apply new tariffs on derivative products, and to ramp up enforcement on circumvention and evasion of existing trade orders, many of these policies appear similarly insufficient to keep imported steel from using the Canadian market as an entry point to the United States. For example, despite strengthening parts of its TRQ program, Canada continues to apply much looser quota volumes to imports from free-trade-agreement partner countries. Akin to Mexico, Canada has free trade agreements with roughly 50 countries, including large steel producers like Japan, South Korea, Vietnam, and the European Union.

In effect, it may sound attractive to call for a common tariff among USMCA countries. But if those tariffs are replete with loopholes and exceptions, they will be insufficient to stop low-priced steel imports from using Canada or Mexico as a backdoor to the US market. Further, such proposals do not address the need for tariffs on imports from Canada and Mexico to support domestic manufacturing.

Such measures, which include Section 232 duties, are necessary for a healthy American steel industry. For example, when Section 232 duties were reimposed in 2025 on Canadian and Mexican steel imports entering the United States, the substantial year-over-year decrease in imports (more than 1.4 million tons during the first nine months of 2025) matches nearly one-to-one the increase in American raw steel production during the same time frame. Put simply, the reintroduction of Section 232 tariffs on Canadian and Mexican imports has greatly increased US production.

As we have noted several times before, the build-up of Canadian and Mexican production and capacity targeting the US market is driven in large part by government subsidies. Indeed, Steel Market Update reported last week that the Canadian federal government is planning to assist Algoma Steel in building new plate and structural beam mills. This follows the $500 million in financing that Algoma recently received from the governments of Canada and Ontario. And that amount came on top of many other subsidies previously provided to the company.

As we see it, the capacity of these new mills is not demanded by the Canadian market. If it was, then why has Algoma needed multiple rounds of subsidies to build and maintain it? Rather, Canada continues to be an export platform with its eyes largely set on the US market. Since 2015, roughly half of Canada’s steel production has been exported. And, in 2025, approximately 95% of those exports have been to the United States.

Fabricated beams are a prime example of a product that Canada exports to the United States in significant quantities at the direct expense of the US industry. While Algoma’s steel may be used in some Canadian infrastructure projects, we think a large portion of their production is exported to the US market. As such, this recent round of Canadian handouts to Algoma amount to, in our opinion, just the latest efforts to promote exports and target the United States.

This is exactly why a stronger (not weaker) USMCA is required. As USTR heard from many American steelmakers at the USMCA hearing, new provisions are needed to encourage the use of US content in steel and downstream products like autos, auto parts, and fabricated structural steel. New rules are also necessary to account for the disparities in the labor and environmental costs of making steel in the United States versus other countries like Mexico.
For too long, Canada and Mexico have taken advantage of massive government subsidies, cheap Chinese capital and metal inputs, and disproportionately low costs to grab market share from US producers in the United States. As the Trump administration has recognized, the USMCA joint review is a prime opportunity to address those concerns and to rebalance the North American steel trade relationship.

Additionally, it is not just the steel provisions of USMCA that need to be renegotiated. Other rules on downstream, steel-containing products (such as autos and auto parts) need to be revised as well. For instance, there is a loophole in the current Section 232 programs on steel and aluminum, auto parts, and truck parts that allows USMCA-compliant imports of steel-intensive auto and truck parts to enter the United States without paying any Section 232 duties.

Namely, following President Trump’s Oct. 17, 2025, executive order on trucks and truck parts, certain USMCA-compliant auto and truck parts are not subject to Section 232 duties until the US Department of Commerce establishes a process to apply tariffs exclusively to the non-US content in those parts. This should be relatively straightforward to implement. However, because Commerce has not yet done that, more than 30 US Harmonized Tariff Schedule categories that were covered by the Section 232 steel program as derivative products are now exempted from paying duties because they are also covered by the Section 232 autos or trucks programs.

Due to this loophole, coupled with the overly generous duty offsets afforded many auto producers, which appear to be exceeding their USMCA part import levels, increasing volumes of American steel, aluminum, and parts production is being lost to Canada and Mexico. While the auto and truck producers may be grinning like the Cheshire Cat, this policy is counterproductive to bringing manufacturing back to the United States.

In short, as we have said before, USMCA should be redesigned to encourage domestic steel, aluminum, and downstream production. Despite Canadian and Mexican claims of seeking market access to support US manufacturing, history tells us that their industries have used their favorable trade preferences to displace US production, not grow manufacturing in the United States. In the end, USTR’s hearing did more to illustrate the gulf between the various parties than to resolve serious concerns.