Former President Donald Trump has signaled intentions to revisit the United States-Mexico-Canada Agreement (USMCA), a significant trade pact he initially championed during his administration. This announcement has raised questions about the potential implications for North American trade, particularly within the automotive sector.
The USMCA, which came into effect in July 2020, was designed to replace the North American Free Trade Agreement (NAFTA) and sought to modernize trade relations between the three nations. Key provisions include the requirement that 75% of a vehicle's parts be manufactured in one of the three countries to qualify for tariff-free status. This rule is intended to bolster domestic manufacturing and increase wages for workers across the region, particularly in Mexico, where the agreement mandates that a larger share of auto parts come from workers earning at least $16 per hour.
Gary Hufbauer, a nonresident senior fellow at the Peterson Institute for International Economics, remarked on the negative perception surrounding NAFTA. He noted, “NAFTA became a hate phrase,” emphasizing the importance of the name change to USMCA in reshaping public sentiment. This shift is part of a broader strategy to enhance trade relations and support domestic jobs, as the agreement is estimated to sustain approximately 17 million jobs across North America.
Under the USMCA, trade among the three countries has seen a marked increase since its implementation. However, challenges persist. For instance, while the goods trade deficit with Mexico surged more than 78% from 2020 to 2023, the deficit with Canada rose by about 27% in the same period. These figures underscore ongoing complexities in trade dynamics that could influence future negotiations.
The USMCA maintains many core elements of NAFTA but introduces significant updates, including a new chapter on digital trade and stricter enforcement of labor regulations in Mexico. These enhancements reflect an effort to adapt to modern economic realities and provide better protections for workers.
The impact of the automobile content requirement will not be fully understood until 2027, when it is expected to be completely phased in. During this transitional period, industry experts suggest that manufacturers may be incentivized to produce more parts domestically. Sanchez, an industry analyst, commented, “I think it certainly preserves our ability to maintain a relatively robust car industry.”
As Trump considers revisions to the USMCA, attention is likely to turn towards addressing concerns about foreign competition, particularly from China. Gregory Husisian, a partner at Foley & Lardner who chairs the law firm’s International Trade and National Security Practice, noted, “It’s highly likely that the negotiators will be looking at how to deal with Chinese parts and components.” He added that “a lot of these wonky, behind-the-scenes things will have as big or bigger impact than the stuff you see in the news,” highlighting the complexities involved in trade negotiations.
Despite Trump's pledge to review and potentially alter aspects of the USMCA, it is essential to note that a formal review of the agreement is already scheduled for 2026. This process is a built-in requirement of the trade pact and will examine its overall effectiveness and impact on trade relations among the three countries.
