Price on Trade: Geopolitical sparks in Davos foretell intense upcoming USMCA talks

The World Economic Forum held its annual meeting this past week in Davos, Switzerland. As world leaders ascended into the Swiss Alps, they did so against the backdrop of trade and geopolitical tensions.

Notably, the weekend prior, President Donald Trump threatened tariffs on several European countries for their opposition to his plans for the United States to purchase Greenland. Those tariffs appear to be off the table. And we hesitate to speculate on the president’s future course of action. But it is clear that the United States continues to be aggressive in its geopolitical posturing and that tariffs remain a key policy tool.

Notably, during the summit, US Secretary of Commerce Howard Lutnick criticized recent actions by the Canadian government, led by Canadian Prime Minister Mark Carney, to work more closely with China on trade and economic issues. In an interview with Bloomberg TV last Thursday, Secretary Lutnick pointed out that, as a member of the US-Mexico-Canada Agreement (USMCA), Canada has the second-best trade deal with the United States in the world (second only to Mexico).

He further noted that it would be unrealistic for Canada to believe it would get a better deal or greater market access from China than from the United States. Prime Minister Carney’s comments, which sparked Lutnick’s reaction, were notable. It’s not just because they pointed to the fading of the post-World War II multilateral rules-based system. It’s also because they asked for the so-called “middle powers” to resist coercion from large powers and work together on economic and national security issues.

In effect, Canada announced itself as a free agent on trade and security negotiations. This departure from prior US-Canada cooperation appears to have resulted in the not-so-subtle reaction from Secretary Lutnick, which emphasized the importance of the North American relationship for Canada.
While Secretary Lutnick ultimately acknowledged that the recent machinations of Prime Minister Carney and the Canadian government may just be “political noise,” he lamented Canada taking its strong economic ties and favored neighbor status with the United States for granted.

In fact, President Trump has gone as far in response as to withdraw his invitation for Canada to join his new “Board of Peace” initiative. Secretary Lutnick further remarked that Canada choosing to work with China over the United States is simply not in its own long-term economic interests and would likely not be looked on favorably by the Trump administration as USMCA is renegotiated.

Recall that in July 2026, the USMCA will formally begin its joint review and renegotiation process. Secretary Lutnick’s comments in Davos are one of several indicators that USMCA negotiations may be particularly contentious in the coming year. As those negotiations intensify, the steel and aluminum industries are likely to be front and center. There are many steel-related aspects of the agreement that need to be strengthened, including those related to rules of origin, product valuation, and autos. At the same time, the Canadian and Mexican industries are likely to continue pushing for a removal of Section 232 tariffs on their imports, which the United States should reject outright and treat as a non-starter in any negotiation.

Especially in light of this week’s past events, recent whispers around Washington, DC, indicate that negotiations with Canada and Mexico will be increasingly bilateral, posing greater challenges and less favorable outcomes for the Canadian government. The Canadians may assume that they cannot win a negotiation with the American government, and they may hope to rely on US commercial interests to bail them out. However, if forced to choose between Canada and Mexico, many manufacturers are likely to prioritize Mexico as the more important manufacturing hub.