Three questions ahead of USMCA's first formal review

By LATAM & GFG Investment Strategy

• Trilateral framework survives, bilateral threat is leverage only. North American supply chains are too integrated and Washington's own fragmentation costs — MFN gaps, CPTPP arbitrage, loss of the China veto — are too high for a bilateral pivot to be viable. The agreement continues, with a full extension most likely around 2027.
• Value-added enforcement is the central commercial fight. With ~45% of Mexican auto exports still sourced outside North America and Mexico now the top U.S. ATP supplier, expect higher content thresholds, plant-level audits, and tighter rules of origin targeting Chinese backdoor flows — with ATPs likely the next battleground after autos.
• Legal certainty in Mexico is the overlooked risk. Mexico's 2024 judicial reform handed the ruling coalition effective court control, gutting the domestic legal backstop that USMCA investor protections rely on. For companies committing capital to industrial corridors, dispute resolution reform — not tariffs — is the crux.
• USMCA will keep being used as a non-trade lever. From immigration to cartels, Washington has consistently used the agreement to extract policy concessions beyond trade. That pattern persists regardless of who is in office, meaning companies face a structural uncertainty premium on North American investment for years to come.

While we see small to no probability of a full withdrawal of any form of trade agreement between the three countries, the problem is that while negotiations stall, companies delay investment plans and uncertainty – business and economic – compounds for all three partners.

Ahead of the July 1 checkpoint, three questions are driving client conversations: (1) whether the three-country framework will survive intact or give way to bilateral arrangements; (2) which pressure points are most likely to define the negotiation's outcome and how far the parties will push; and (3) whether the review remains a trade negotiation at all or serves once again as leverage on broader security and political issues.

1. Is a trilateral agreement still necessary?

The backdrop to this review has shifted substantially since 2020. Mexico surpassed China as the U.S.'s largest goods trade partner overall, both by total volume and as the primary source of the goods deficit, as nearshoring moved from theme to policy priority and companies diversified supply chains away from China. That has made North America more central to Washington's economic security agenda, but it has also sharpened scrutiny over whether the agreement is actually encouraging production within the region or simply routing trade flows through a North American label. U.S. Trade Representative Jamieson Greer has made the stakes explicit: as long as the U.S. runs a large trade deficit with Mexico, tariffs remain part of the policy toolkit.

That pressure has fed bilateral appetite in both Washington and Ottawa, with each signaling openness to a direct U.S.-Canada arrangement over the trilateral framework.

But North American supply chains are deeply integrated, and aluminum is the clearest example: Canada generates roughly 3 million metric tons per year from Quebec's hydroelectric smelters, a structural cost advantage the U.S. cannot replicate, and the U.S. now sources roughly half of its aluminum imports from Canada. That metal passes through U.S. rolling mills, where it is processed into body panels, structural parts, and engine castings, before flowing through auto component clusters in Monterrey, Saltillo, and Guanajuato to the final assembly plants of GM, Ford, Volkswagen, Toyota, and others across Mexico. In practical terms, a piece of Canadian aluminum can cross the U.S.-Canada border twice and the U.S.-Mexico border twice before reaching a U.S. car buyer: once as raw metal heading south, and again as a finished vehicle heading north. The Canadian smelter, the U.S. rolling mill, and the Mexican assembly plant are not independent links in a chain. They are a single integrated production system, and USMCA's content rules were designed precisely to sustain it.

The economic case against fragmentation is compounded by a procedural one: any party may exit USMCA with six months' notice, but building a replacement from bilateral arrangements would require new Congressional legislation in the U.S., Senate approval in Mexico, and Parliamentary action in Canada, a process measured in years rather than months. In any such gap, trade among all three parties would revert to most-favored-nation (MFN) tariff treatment, since USMCA replaced NAFTA outright and there is no prior framework to fall back on for any of them. Washington's exposure runs deeper still: both Canada and Mexico are members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), whose 45% auto content threshold sits well below USMCA's 75%, giving both countries a ready path back to the looser export rules that USMCA was designed to replace. Washington would also lose the agreement's "poison pill" clause, which gives it a veto over Mexico's trade deals with non-market economies like China. Taken together, the MFN gap, the CPTPP asymmetry, and the loss of the China veto mean that in a full fragmentation scenario, Washington would have more at stake than is commonly assumed.

Our view is that the bilateral appetite is genuine but the case against acting on it is structural: with an estimated 14 million U.S. jobs tied to intra-regional trade, North American supply chains are too deeply integrated to partition, the procedural path to replacement runs through years of legislation in all three capitals, and Washington's losses from fragmentation, namely MFN tariffs, CPTPP arbitrage, and the loss of the China veto, would be the largest of the three parties. The bilateral threat converts into negotiating leverage rather than a credible exit path.

2. Assuming the agreement to continue, what are the key pressure points in the negotiation?

The real contest in the review is not whether USMCA continues, which it almost certainly will, but what its rules look like afterward. Four pressure points will define where the parties push hardest.

a. The backdoor problem: value-added and Mexican exports

Even predecessors of the current U.S. administration have brought into question the degree of influence and dependence the U.S. economy has of China. As to what pertains to North America and the USMCA, there is a genuine concern that exports to the US – especially those coming from Mexico – reflect mostly foreign inputs assembled under a USMCA label vs. genuine North American value creation. Two sectors sit at the center of that debate: autos, where USMCA's content rules are most developed, but enforcement gaps remain, and advanced technology products (ATP), where Mexico's rapid rise as an exporter has outpaced the agreement's regulatory framework.

The renegotiation that led NAFTA into USMCA introduced a much more stringent standard for Rules of Origin, increasing the minimum North America regional content in auto exports from 62.5% to 75% to determine which exports would qualify for duty-free access. Additionally, the new agreement set forth a new wage floor, requiring 40–45% of vehicle content produced by workers earning at least $16 per hour. While initially disruptive to the existing supply chains, auto manufacturers found ways to adapt by increasing regional content, and thus value add.

Nonetheless, roughly 45% of the value in auto exports from Mexico to the US still originates outside North America. Mexico reinforced its commitment to the region ahead of the review by tightening tariffs on Chinese and Asian-sourced components across more than 1,400 product categories, intended to demonstrate the power of domestic value add and not a purely China transshipment story. In our view, the review will push further: higher content thresholds (approaching 100%), plant-level audits, and tighter chain factorization requirements that force meaningful value-added processing at each supply chain stage rather than simple final assembly.

And while autos are the most emblematic export, Advanced technology products (ATPs) are quickly gaining ground. In 2025, Mexico overtook China as the leading ATP exporter to the United States: Mexican ATP exports reached $149.4 billion, up from $120.4 billion the prior year, while Chinese ATP exports fell from $112.3 billion to $61.7 billion. While ATPs represent 55% of total auto & machinery exports from Mexico to the US, they are poised to become the latest export bridging story. ATPs’ Mexican value add is 55% while the average for autos and machinery is 50%. Establishing a minimum requirement for regional content now for ATPs could force greater investments into installed capacity in the region, catalyzing a much higher value-add industry in the age of AI.

b. Labor: how far does the Rapid Response Mechanism reach?

Labor is one of the most closely watched pressure points in the 2026 review, reflecting Washington's view that trade integration should come with stronger labor standards across North America. The revamped agreement already addresses this through two mechanisms: the Facility-Specific Rapid Response Labor Mechanism (RRM), which allows the U.S. and Canada to challenge workers' rights violations at individual Mexican manufacturing facilities in the auto, textile, and mining sectors, and the Labor Value Content requirement, which embeds wage floors directly into auto rules of origin as described above. More than 60 RRM cases have already established a credible enforcement record, and the question at the review is not whether these provisions stay but how far they expand: pressure will build to extend the RRM beyond organizing rights to wages and safety standards, with deeper reach into the smaller component suppliers lower in the chain where compliance is hardest to verify. For Washington, the labor agenda is strategic as well as social: stronger enforcement removes the incentive to use Mexico as a low-wage production platform, making labor the clearest example of how USMCA has evolved into a mechanism that conditions market access on domestic policy outcomes.

c. Energy: CFE priority and stalled investor disputes

Mexico's governing coalition has made state control of the energy sector a central political commitment, and that commitment sits in direct tension with USMCA's investor protection framework. Under President López Obrador, the 2021 electricity reform restructured Mexico's power market to give the state utility Comisión Federal de Electricidad (CFE) dispatch priority over private and foreign generators, effectively reversing a 2013 liberalization that had opened the sector to competition. This prompted claims from U.S. and Canadian energy companies who argue the policy violates USMCA's national treatment obligations. With the ruling party now controlling Mexico's courts after the country’s 2024 Judicial Reform, those claims have no domestic recourse and proceed through USMCA arbitration panels, making the review's central question how far the U.S. and Canada can push for binding limits on CFE's priority and whether Mexico will accept them. The CFE outcome will set USMCA's most significant precedent on how SOE preferences interact with investor protections, a question that extends to pharmaceutical data and agricultural market access and will outlast the current review.

d. Dispute resolution: what Mexico's judicial reform put at risk

Dispute resolution underlies all the other pressure points: USMCA's rules on content, labor, and investment are only as strong as the mechanisms that enforce them, and Mexico's domestic judicial changes have put those mechanisms in question. Mexico's 2024 judicial reform sharpened the problem considerably: replacing appointed federal judges with elected ones, followed by the ruling party's sweep of the June 2025 judicial elections, has given the governing coalition effective control over Mexico's courts, weakening the domestic legal backstop that USMCA's investment protections rely on, as the active GMO corn dispute already illustrates. The question at the review is not whether dispute panels remain in place but whether they can operate independently of Mexico's domestic court composition: the push will be for stronger independent arbitration mechanisms embedded within USMCA itself, a change Mexico is unlikely to accept given the sovereignty constraints it implies. For investors committing capital to Mexico's industrial corridors, this is the crux: legal certainty does not come from treaty text alone but from the domestic institutions that give it effect.

Our view is that these four areas — value-added enforcement, labor scope, energy, and dispute resolution — will define the negotiating agenda at the July review and in the cycles that follow.

3. Will USMCA continue to be used as a leverage tool?

Since 2020, USMCA has become Washington's primary lever for pressing Mexico on issues beyond trade. What initially triggered the NAFTA renegotiation was immigration. This time, it was drug trafficking. We don’t know what will follow, but we know this is not where it ends. In 2019, the U.S. threatened tariffs on Mexican goods if Mexico didn't strongly address the flow of migrants, mostly from Central and South America, transiting through its territory toward the U.S. border. Mexico deployed roughly 27,000 National Guard troops to its southern border within weeks. The migrants, denied entry into the U.S. and unable to return easily to their countries of origin, remained stranded in Mexico — meaning Mexico absorbed not just the political cost of complying with Washington's demand but the economic and social costs of the migrants themselves.

The pattern has since shifted from immigration to security. The Trump administration's designation of Mexican cartels as foreign terrorist organizations, the fentanyl crisis, and cartel activity in industrial corridors have all created new pressure points, and for businesses and investors the overlay matters at two levels: cartel presence creates direct friction in supply chains, and physical insecurity affects where companies are willing to commit capital. Washington's framing of North America as an economic security zone means the review is also a test of whether Mexico is a reliable strategic partner; security demands are unlikely to appear in USMCA's text, but they will shape what Mexico is willing to concede at the table and will likely persist as a lever with real trade and investment consequences long after the current administration leaves office.

With the view that the trade agreement will remain a negotiating tool for non-trade related issues going forward, the scenario is not particularly encouraging for companies. They will continue to bear the cost of uncertainty, in various degrees, for years to come. However, the power of North America integration should more than make up the higher IRR that companies need to use now when evaluating future investments in the region.

Conclusion

Unfortunately, all we can do now in regard to the upcoming July 1^st checkpoint or even longer-term, the future of USMCA, is operate under probabilities and scenarios. Thus, our base case scenario continues to be that the FTA will remain in place in its trilateral front. Our colleagues in the IB or Center of Geopolitics have called for 2027, which seems reasonable. In any case, it won’t be without key changes. The bilateral threat is credible as leverage but not as an exit: North American supply chains are too integrated and Washington's own fragmentation costs too high for a bilateral pivot to beviable. On regional content, value-added enforcement in autos and advanced technology products is the central commercial battleground, where higher content thresholds, plant-level audits, and tighter rules will aim at limiting Chinese backdoor exports and truly foster value creation in the region. However, uncertainty will remain beyond even a full agreement, as Washington is reframing North America as a strategic economic and security zone. Labor standards, dispute resolution, and energy will all be shaped by that framing. Because at the end, as we’ve said before, Latin America has what the world – and the US wants – and Mexico is no exception.