Trump 2.0 and the future of the North American trade bloc

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. As tariffs are now on the table, the US and Mexico have reached an agreement that the 25% imposition will be reviewed again in a month, hence early March will be on the radar. Nonetheless, the situation is fluid as Canada has decided to retaliate, so details will be coming through if the two countries reach a similar agreement as with Mexico to delay tariffs. 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. 

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.

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.

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.