Price: Cliff or crossroads, what lies ahead for USMCA?

The United States-Mexico-Canada Agreement (USMCA) joint review process is looming large, pre-negotiations are underway with little reported progress, and, as SMU previously noted, President Trump has publicly stated that he is “not looking to renew it.”

Last week, the president opined that “we do better as a country if we don’t have an agreement,” as reported by Reuters. So is USMCA teetering on the edge of a cliff? The answer is: no, not really, though it does stand at a significant crossroads, and zombification is a real possibility.

Background

USMCA entered into force on July 1, 2020, for a term of 16 years, meaning the agreement will not terminate until July 1, 2036. But unlike its predecessor, the North American Free Trade Agreement (NAFTA)—and for the very first time for any US free trade agreement—the USMCA contains a “joint review” process whereby the three countries can assess the agreement’s performance and decide whether to extend it for another 16-year term.

The first of these reviews starts next month on the sixth anniversary of the agreement.

If all parties agree on renewal of the status quo, the agreement is renewed for another 16 years until 2042, and the next review occurs six years later. If consensus is not reached, USMCA remains in force but enters a period of annual reviews for the next 10 years, with a potential termination date of July 1, 2036, if no extension is ultimately agreed upon.

This 10-year review process was carefully negotiated by all parties to provide breathing space, especially as trade and geopolitical dynamics evolve. And while USMCA does allow any party to terminate the agreement with six months’ notice, exercising this maximalist option does not appear immediately likely.

In effect, this built-in review mechanism means that USMCA is not a static arrangement. Unlike older trade agreements that persist indefinitely, USMCA forces policymakers to actively confront whether the pact is delivering on its promises and to make adjustments if it is not. From a US government perspective, the status quo is not sufficient.

How we got here

The US trade deficit was nearly $50 billion with Canada and nearly $200 billion with Mexico in 2025—figures which have roughly doubled under USMCA. And despite representing roughly 85% of North American GDP, the United States has seen a disproportionate migration of steel-intensive manufacturing—autos, appliances, and other manufactured products—to its USMCA trading partners. Over time, this shift has been reinforced by differences in labor costs, regulatory frameworks, and, critically, the extensive use of industrial subsidies abroad.

The result is not a fully integrated North American manufacturing ecosystem, but rather an uneven playing field in which US demand increasingly drives foreign capacity buildout. USMCA is not a common market with a shared currency, environmental regulations, labor and wage requirements, or legal and political system. When changes are needed, they must be negotiated among the parties, which is why USMCA contains a forcing mechanism for those negotiations.

Section 232 effect

For example, this dynamic is clear in the steel sector. As we previously noted, when Canada and Mexico were exempt from Section 232 tariffs and exported steel duty-free to the United States under USMCA, their share of US steel imports rose sharply, capturing market share even as imports from other countries declined. Conversely, the reimposition of Section 232 tariffs in 2025 produced a near one-to-one relationship between reduced imports and increased domestic production—evidence that US capacity exists but is highly sensitive to trade policy signals. In other words, USMCA could not and did not protect the domestic steel manufacturing. An external force, i.e., Section 232, was necessary.

The implications extend well beyond steel. As supply chains for autos, construction materials, and capital goods have shifted, so too have the jobs and investment that sustain American industrial communities. Billions of dollars have been committed to modernizing American steel and aluminum capacity, yet these investments risk underutilization if trade rules continue to incentivize production outside the United States.

But is it enough?

Though Section 232 measures helped plug some holes, USMCA’s current framework still contains significant loopholes that undermine its stated objectives. For example, exemptions and offsets within Section 232 programs for autos and auto parts have effectively neutralized tariffs on many downstream products, allowing finished goods incorporating foreign steel to enter the US market duty-free under USMCA. Similarly, tariff regimes in Canada and Mexico often include broad carve-outs for free trade partners, creating “backdoor” pathways for third-country steel to reach US consumers. These gaps weaken enforcement and blur the distinction between regional integration and global arbitrage.

Based on the trade deficits alone, it would not have been hard to guess the Trump administration’s position on USMCA, and the president’s recent comments leave little room for doubt. One need not guess Canada’s position either, since the country called for renewal of USMCA as is, before negotiations had even begun in earnest. There is clearly little alignment here among the countries, and while the US is already engaging in negotiations with Mexico, negotiations with Canada have failed to formally launch. Canada’s fixation and hard line on US trade strikes us as short-sighted. In many respects, Canadian manufacturers face similar adverse effects from Mexico, as manufacturers often prefer operating in Mexico over Canada if they choose not to locate in the United States. The rapid rise of auto assembly in Mexico, while similar operations decline in the United States and Canada, illustrates this point well.

So, what’s on the horizon?

As USMCA approaches its first joint review, it’s not standing on the edge of a cliff, since the agreement has at least a decade left on the books. That said, the agreement, which provides the framework for over $1.5 trillion in North American trade, does stand at a significant crossroads, albeit perhaps just the first of a decade of annual intersections.

On the one hand, USMCA may become a zombified agreement for the next ten years, stuck in annual cycles of negotiation while, practically speaking, trade diplomacy shifts to bilateral agreements with Mexico and Canada separately and on different terms without any forcing event.

On the other hand, the tri-part agreement may evolve into something more sustainable, whereby the three countries receive the intended benefits of cooperation and predictability while protecting each country’s economic and national security interests as originally intended.

One thing is clear: President Trump appears to have little interest in perpetuating business as usual and is clearly approaching the review process as an opportunity to rebalance incentives across the continent.

Within that context, it is neither logical nor probable that the United States will take the Canadian suggestion of simply negotiating the tariff irritants that adversely affect Canada without addressing the bigger picture issues driving the rapid expansion of trade deficits.

Our contention

As the United States engages in the negotiations and potential annual reviews, US policymakers should protect the Section 232 tariffs, which were demonstrably necessary for protecting the US steel industry. Additionally, as we have explained previously, we should push for stronger rules of origin, including “melted and poured” requirements for all USMCA steel-containing goods to qualify for duty breaks, to ensure that preferential access reflects genuine regional production and not mere assembly of third-country parts.

We should also close loopholes in tariff regimes that allow foreign inputs to bypass duties through complex supply chains. And we should align trade policy with the substantial domestic investments already underway. This is the best opportunity to make these changes.

Critics will argue that such measures risk fragmenting North American integration. But a system that systematically shifts production away from the region’s largest market is unsustainable. A more balanced framework that protects and rebuilds production within the United States while maintaining fair trade with Canada and Mexico would ultimately strengthen, not weaken, the trilateral partnership.

It appears that the administration is concluding that not renewing USMCA can provide the negotiating impetus for changes as envisioned by the agreement.