Economy & Markets
Trump 2.0 and the Future of the North American Trade Bloc
On his first day as the 47th President of the United States, Donald Trump signed a series of executive orders which, however, did not impact the markets since they lacked concrete announcements regarding tariffs. However, Mexico and Canada were not left unscathed after President Trump's inaugural speech, where he unofficially mentioned plans to impose a 25% tariff on exports from both countries starting February 1st. Can he do it? The short answer is yes. By declaring a "national emergency" at the US-Mexico border and designating Mexican drug cartels as foreign terrorist groups, tariffs on Mexican exports could be justified. The justification for tariffs on Canadian exports is less clear. While securing the country's borders seems to be President Trump's priority, given the high US deficits, tariffs appear to be an attractive revenue stream.
Among the first-day executive orders, President Trump instructed the United States Trade Representative to begin an internal review of the benefits of US participation in the USMCA, ahead of the formal review process scheduled for July 2026. The results of these analyses are due by April 1st. However, a day after taking office, President Trump expressed his intention to move the current review date forward to sometime this year, suggesting that the February 1st tariffs might be a tactic to bring Canadian and Mexican officials to the negotiating table sooner.
The United States maintains a wide trade deficit
US trade deficits, by country, $mm
Source: Census Bureau, Haver Analytics. Data as of December 31, 2023.
Late last year, Canadian provincial and territorial premiers urged the federal government to negotiate a bilateral trade agreement with the US, reflecting concerns that China was using Mexico as a backdoor to the North American market. Given the integration across supply chains in the three countries, a complete withdrawal from the USMCA is unlikely. However, trade between Canada and Mexico is less significant compared to their trade with the US (70% and 80% of exports, respectively) and hence, it is possible that USMCA becomes a set of bilateral agreements of each country and the US instead.
The USMCA's predecessor, NAFTA, was signed by Canada, Mexico, and the United States in 1994. It was seen as a groundbreaking agreement that significantly increased trade and investment among the three countries, creating one of the largest free trade zones in the world. After 25 years without significant changes, it was due for a review. While the revamped agreement didn't differ much from its original form, with only 10 out of 34 chapters modified, President Trump called it "the best FTA in history." The updated agreement includes provisions for digital trade and information flow, greater market access to key industries (agriculture), fair competition and investment protection in the energy sector, increased labor rights and environmental standards, improved dispute settlement mechanisms and provisions to increase North American content in automobile manufacturing. It also introduced a "Review Clause," establishing a 16-year term for the agreement unless renewed, with interim 6-year reviews for the first two rounds (2026 and 2032). This clause replaced the US's original proposal of a "Sunset Clause," which would have terminated the agreement five years after its entry into force unless all parties agreed to maintain it.
Uncertainty around potential changes to the USMCA will continue, and the review date is likely to be a topic of debate. The first key date to watch is February 1st, to see if the U.S. moves forward with proposed tariffs on Canada and Mexico. The second key date is April 1st, when the USTR will deliver its report and recommendations to President Trump, including findings from public consultations on the USMCA and the impact on US industries.
What to watch for
US trade with USMCA partners Mexico and Canada accounts for nearly 30% of the country's total imports, making the relationship a target for President Trump's nationalistic agenda. He has consistently criticized countries with which the US has a large trade deficit, arguing that the country is at a disadvantage that needs correction through tariffs. However, the elasticity of substitution for many top US imports from Mexico and Canada is below average, meaning potential tariffs would likely lead to higher domestic prices.
Tariffs will likely flow through to the consumer
Estimates of Elasticity of Substitution for key industries
Source: Ahmad, Saad and David Riker, A method for estimating the elasticity of substitution and import sensitivity by industry, U.S. International Trade Commission, Office of Economics, WP 2019-05-B, May 2019.
Canadian and Mexican exports to the US are largely concentrated in transportation hardware, automobile manufacturing, energy, and agricultural products. These industries tend to be highly vertically integrated, so global supply chains may be pressured if tariffs become effective. Vertical integration has been a focus for much of the last decade, with companies seeking to minimize supply chain risk. As an example, General Motors operates large manufacturing facilities in the region to fabricate many of its electric vehicle (EV) products, seeking to expand this in an effort to reduce reliance on far-away trading partners. In 2021, they partnered with POSCO in Canada to manufacture key battery inputs, some of which are currently sourced mainly from China. Through projects like this, GM has intertwined its capabilities in Canada and Mexico with those in the United States to build its complex products with a large North American footprint. Such moves to build out a more secure infrastructure and supply chain will likely persist, and hence tariffs levied between North American countries are a risk for all three economies.
Canada and Mexico are significant players in several top goods for the U.S.
Top 10 US Imports by good, $bn
Source: Census Bureau, Haver Analytics. Data as of December 31, 2023.
However, while trade deficits are central to President Trump's criticism of Canada and Mexico, there are other issues in each bilateral relationship which will be key to watch in case the trade agreement is used as leverage for addressing non-commercial concerns. President Trump has criticized Canada's reliance on US military support, advocating for cost-sharing. In his previous administration, President Trump also criticized Canada's dairy supply management system, arguing that it imposed unfairly high tariffs on US dairy products and created barriers for American farmers. In the US-Mexico relationship, the main issues are trade, immigration, and security. In 2019, President Trump threatened escalating tariffs on Mexican exports if Mexico didn't control Central and South American immigration through the country into the US, leading to the USMCA in 2020. Similarly, it is likely the agreement will be used once again as leverage to negotiate stricter immigration policies with Mexico and a greater focus on border security by Mexican authorities. What's different this time is the "national emergency" declaration at the US-Mexico border.
Beyond the possibility of leveraging the trade agreement for non-trade purposes (e.g., immigration and security), we believe the 25% tariff announcement will serve to bring Canada and Mexico to the negotiating table before the July 2026 USMCA scheduled review. While discussions could span several sectors, we believe topics will include:
1) Strict measures to curb "back door" Chinese exports to North America. Mexico has already announced higher tariffs on textile imports from China, aligning with prevailing US and Canadian trade policy trends. This move is complemented by the "Plan Mexico," aiming to substitute 15% of imported yarns with domestic supplies. However, Chinese investment in Mexico has soared in recent years. While it's hard to confirm if these investments are related to "export bridging," anecdotal evidence suggests several Chinese manufacturers have moved production to Mexico to leverage its commercial and logistical infrastructure. How this will be limited or accounted for in the reviewed USMCA remains to be seen, but it will likely be a priority topic, particularly related to the source of origin or national content.
Mexico: A recent influx of capital from China
Mexico Foreign Direct Investment from China, $mm
Source: Secretaria de Economia, Haver Analytics. Data as of September 30, 2024.
2) Labor and national content for key industries. One major change from NAFTA to USMCA was the mandate to maintain a minimum 75% North American content for auto exports to qualify under the agreement. We believe this number could increase, even up to 100%. While daunting, this presents an opportunity for Canada and Mexico to attract and develop domestic investments to strengthen local industries, similar to post-USMCA developments. Furthermore, as the US seeks to diversify away from advanced technology imports from Asia, there is room for these industries to develop further in Canada and Mexico, leveraging existing synergies with other sectors.
Investment has rebounded after the USMCA
Source: Census Bureau, Haver Analytics. Data as of September 30, 2024
Canada and Mexico have ramped up exports of ATP
US Imports of Advanced Tech Products, indexed to 100 in June 2006
Source: Census Bureau, Haver Analytics. Data as of September 30, 2024.
Labor was a major topic during the 2020 USMCA renegotiation. Chapter 4 specifically addresses wage and labor conditions in the auto industry, mandating that 40-45% of a vehicle's content be made by workers earning at least $16/hr in all three countries. By including provisions designed to raise labor standards and establishing new enforcement and dispute resolution mechanisms, USMCA has sought to level the playing field across the partners. We believe the success in the auto industry could expand to other key sectors, such as the emerging advanced technology product industry.
USMCA managed to level the playing field in labor
Real average hourly wage in manufacturing sector by country, indexed to 100 in 2018
Source: Statistics Canada, Bureau of Labor Statistics, Instituto Nacional de Estadística Geografía e Informática, Haver Analytics. Data as of December 31, 2024.
3) Potential for promoting investments in critical mineral extraction, including better access to other Latin American markets. The US imports over 70% of its critical mineral needs from China. Yet, as demand increases from greater global power demand, Latin America and Canada have increased exploration budgets (29% for Latin America and 62% for Canada). Increased investment in surveying new sources of these minerals could boost North American economies with abundant reserves. For example, Mexico is already the largest silver supplier, with 23% of global production, but could gain significant share from China for US copper and zinc imports. Argentina is well-positioned to increase lithium exports. Chile and Peru supply 27% and 10% of global copper and are investing to support higher demand. Latin America’s potential is immense, as we explore in our JPM 2024 Mid-Year Outlook. Yet, opening more channels to other Latin American countries and developing connectivity across the region is crucial. Despite Mexico's strong logistics to move goods north, there is little integration south and across Latin America. As discussed in Nearshoring: A new era of connection for Latin America, logistics infrastructure is a major challenge. The IADB estimates Latin American transportation costs average 6.6% of total traded value, compared to 3.4% in the US.
The U.S. is still critically reliant on China
Sources of U.S. imports of rare earth compounds and metals, 2019-2022
Source: GAO analysis of U.S. Geological Survey 2024 Annual Commodity Summary Estimates. Data as of December 31, 2022.
Latin America controls a large share of key minerals
Latin America’s share in the production and reserves of selected minerals, %
Source: International Energy Agency. Data as of December 31, 2021.
4) Energy: ensure a level playing field and leverage growing power demand. In 2024, as a continuation of Mexico’s former President López Obrador's reform agenda, newly-elected President Sheinbaum signed off on the dissolution of independent regulators for key industries like telecom and energy. Mexican officials stated these changes won't undermine USMCA commitments for independent oversight. This is crucial for the energy sector, as the Mexican government is bringing Pemex and CFE back to State-Owned Entities to strengthen national energy sovereignty, challenging the "level playing field" in USMCA's Chapter 22.
On the other hand, Canada is the largest oil supplier to the US, more than all other countries combined. Mineral fuels and related products are Canada's main exports (+25% of total exports in 2024), with continued investment in pipeline projects supporting its stance as a global oil supplier. Given recent political upheaval and upcoming federal elections, energy policy and infrastructure development will be key issues for USMCA review discussions and domestically, especially considering President Trump's agenda of increasing drilling on federal lands and expanding oil pipeline projects.
While mineral oils are Canada's key export, 80% of its domestic power generation comes from non-emitting sources. Both Canada and Mexico ratified their commitment to the Paris Climate Accord in 2016. More recently, Mexican President Claudia Sheinbaum signaled a significant shift in the country’s energy policy – departing from her predecessor’s fossil-fuel-centric approach - and emphasizing a strong commitment to energy transition and renewable infrastructure expansion. This contrasts with President Trump's EO to withdraw the US from the Paris Accord.
Beyond oil and mineral fuels, energy should play a major role in USMCA conversations given the US's growing power needs. We expect US power demand to increase 5x to 7x over the next 3-5 years due to greater investments in US manufacturing, increased electrification in clean energy solutions, and surging data center demand. US data centers have been growing 25% per year and are unlikely to slow down as new technology adoption increases, especially AI. Canada can leverage its potential for cheap hydroelectric power to provide stable energy, fostering data farm development and positioning itself as the key energy provider in the trade bloc.
Canada dominates U.S. oil imports
US 2023 oil imports, by source and importing region, million barrels/day
Source: Energy Information Administration, Bloomberg Finance L.P. Data as of December 31, 2023.
U.S. electricity demand is at an inflection point
U.S. electricity demand growth, CAGR
Source: Bernsein Societe Generale Group. Data as of December 31, 2022.
5) Expand regulation around digital services and technologies, specifically AI. While USMCA includes chapters ensuring fair competition, protection, and regulation of digital technologies, it doesn't specifically address artificial intelligence. We believe language will adapt to acknowledge new technologies and provide a stable environment for continued digital innovation.
While uncertainties abound regarding the USMCA and tariffs, we trust the integration of supply chains across the three countries and the benefits of the commercial partnership will prevail. Whether the USMCA review occurs in 2025 or 2026, as originally planned, or if the trilateral agreement becomes bilateral deals, businesses and investors must remain vigilant and proactive in identifying risks and opportunities. Potential changes driven by President Trump's administration could significantly impact trade dynamics, supply chains, and investment opportunities across North America. For businesses, understanding these shifts is essential to mitigate risks and capitalize on emerging opportunities in key sectors like digital technologies, critical minerals, and energy. For investors, it is important to recognize that volatility will continue, highlighting the importance of building resilient portfolios and investing in growth stories with long-term potential, as outlined in our 2025 Year Ahead Outlook: Building on Strength.
President Donald Trump hints at imposing a 25% tariff on Mexican and Canadian exports, citing a potential "national emergency" at the US-Mexico border. This could be a tactic to expedite USMCA negotiations with Canada and Mexico.
Nur Cristiani
Head of LATAM Investment Strategy
Published Jan 31, 2025
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