As the United States, Canada, and Mexico begin the formal review of the United States-Mexico-Canada Agreement (USMCA), negotiations are expected to be highly contentious. Despite growing policy differences among the three trading partners, a long-term reversal of North American economic integration remains unlikely due to deeply established industrial and supply chain dependencies across the region.
Key figures
- 51% of vehicles imported into the United States come from Canada and Mexico
- 60% of US crude oil imports originate from Canada
- Exports to the United States represent 30% of Mexico’s GDP and 17% of Canada’s GDP
A USMCA Review Facing Intense Pressure
July 1 marks the launch of the first official review of the USMCA, which entered into force in 2020 as the successor to the North American Free Trade Agreement (NAFTA)1. While the review was originally intended to serve as a routine update, it is taking place amid mounting trade tensions across North America.
The Trump administration is seeking significant revisions to several provisions of the agreement, particularly those related to automotive rules of origin, trade relations with China, access to Canada's dairy market, and certain Mexican energy policies. Canada and Mexico, however, have strong incentives to defend their current positions, increasing the likelihood of lengthy and complex negotiations.
Economic Integration Has Become Difficult to Reverse
SSince the USMCA came into effect, total trade between the United States and each of its North American neighbors has increased from approximately USD 615 billion in 2019 to nearly USD 800 billion in 2022. As a result, Canada and Mexico have collectively surpassed China as the United States’ most important trading partners.
This economic interdependence is particularly evident in strategic industries. Canada and Mexico account for 51% of vehicles imported into the United States and 58% of all automotive parts sourced from abroad. In some cases, a single automotive component crosses the U.S.-Mexico border five to seven times before being integrated into a finished vehicle. Similar dependencies exist in the energy sector, where Canada is responsible for 60% of U.S. crude oil imports.
In practical terms, North American supply chains and value chains have become so interconnected that any attempt to reverse integration would carry significant economic costs for all three countries.
The Trade War Is Increasing the Strategic Value of the USMCA
Against the backdrop of ongoing trade disputes, the strategic importance of the USMCA has grown considerably. Compliance with USMCA regulations has become the primary avenue for Canadian and Mexican businesses to secure exemptions from U.S. tariffs. Products that meet USMCA requirements have been largely spared from many of the trade duties introduced by the White House.
This framework provides Canada and Mexico with a meaningful competitive advantage over other U.S. trading partners, particularly China. As global supply chains continue to shift and evolve, preferential access to the U.S. market has become a critical economic and strategic asset for both countries.
However, this advantage has also intensified debate surrounding the agreement. As the gap widens between the preferential treatment offered to North American partners and the restrictions imposed on China, Washington has become increasingly concerned about potential circumvention of its trade policies and the continued influence of Chinese firms within regional supply chains.
For this reason, the United States is pushing to strengthen several provisions of the agreement, particularly automotive rules of origin and regulations governing trade relationships between North American partners and China.
A Quick Resolution Appears Unlikely, but Compromise Remains Possible
Negotiations could continue through 2027. Current positions remain difficult to reconcile, and preliminary discussions have done little to narrow the gap between the three parties.
Nevertheless, a complete U.S. withdrawal from the agreement without a replacement framework remains an unlikely scenario. Such an outcome would create substantial disruption across North American supply chains and negatively affect key industries throughout the United States, Canada, and Mexico.
As a result, a pragmatic compromise remains the most realistic outcome. This could involve targeted concessions that enable each country to protect its strategic interests while preserving a preferential trading framework for the region.
The negotiations now beginning are set to be long and contentious. But the industrial integration built up over three decades has become too deep-rooted to be called into question overnight.
Even in the event of a deadlock over the USMCA, Canada and Mexico are likely to retain some form of preferential access to the US market, as the economic cost of a breakdown would be considerable for all three countries.
Marcos Carias, North America economist at Coface
1- North Atlantic Free Trade Agreement
