US-Mexico-Canada Agreement (USMCA)
Under the terms of the renegotiated NAFTA, the updated trilateral agreement provides for a mandated review by July 1, 2026. That process was formally kicked off by the U.S. in September, with USTR seeking public comment. The third and final day of public hearings was held on Friday, December 5.
Since then, the Trump Administration now appears to prefer separate bilateral agreements rather than renewing the trade alliance as a trilateral deal. This will both simplify and complicate the negotiations.
On the simplification side, all three countries bring different issues to the table. Mexican President Claudia Sheinbaum has been objectively more successful in facilitating a favorable working relationship with President Trump than her Canadian counterpart. Mexico’s Congress is poised to vote this week on Sheinbaum’s proposed tariffs on China, a move seen as further alignment with U.S. trade policy. This could help accelerate relief for Mexico from U.S. steel and aluminum duties. But Mexico is not immune from confronting serious differences with the Administration, most recently around Water Treaty commitments.
These singular and country-specific issues will be the crux of any renegotiation (e.g., Canadian dairy), while more existential issues for President Trump-like U.S. auto manufacturing-will be a definitive theme for all three.
Assuming material changes are made to USMCA, Congress will again be required to approve the agreement(s). If, however, the parties do not reach final agreements by July 1, USMCA will renew-unchanged-for up to a period of 10 additional years before sunsetting by statute on July 1, 2036.
There are two important considerations when evaluating the USMCA negotiations and its ultimate outlook:
- Withdrawal. It’s quite possible, if not likely, that President Turmp will threaten to withdraw from USMCA as July 1 approaches in order to extract additional concessions from each country. USTR Ambassador Jamieson Greer said as much last week. President Trump often threatens dramatic action in order to gain leverage. The governor to this will be both those lawmakers (see letter) and interest groups with a vested interest in the existing agreement and the state of the economy. Triggering withdrawal (which requires 60 days’ notice) would have potentially disruptive economic consequences, a political liability for Republicans heading into the congressional midterms.
- Vote Counting. Finding the votes in Congress to pass a renegotiated USMCA will be exceedingly difficult. Should control of the House flip in the 2026 midterms, divided government will create challenges for President Trump’s trade agenda. Assuming alterations to USMCA are material, approval would be required by Congress. To do that, it would be wise for Trade Promotion Authority to be renewed by Congress (it lapsed in 2021). That is a very difficult political vote, and there is almost no chance of it happening in a mid-term election year. Thus, an altered USMCA (along with reauthorized TPA) is more likely to be addressed in a future Congress and a non-election year. If Democrats control either chamber, President Trump will have to negotiate with them.
In a recent wide-ranging interview with Politico, USTR Ambassador Jamieson Greer opined on the Administration’s approach to USMCA-renewal. This portion of the interview is especially noteworthy:
When you think about the U.S., Canada, Mexico agreement, there are a few things we trade among us in a massive way. One of them is automobiles, another’s agriculture, another is energy. With respect to the auto trade, the goal is to make more autos in the United States of America… And so the president, earlier in his second term, imposed tariffs on autos globally, including on Mexico…
…Now all of that being said, we can look at the underlying rules of USMCA. If something comes in and gets special duty treatment or a lower tariff, there’s usually a rule of origin associated with it that says a certain amount of this widget has to come from the region. Otherwise you have to pay a higher tariff. We can change some of those rules to make them tighter, to have a higher percentage have to come from the United States… There’s also a bunch of stuff in Mexico and Canada where maybe they discriminate against our companies. It could be telecom companies or it could be our corn exports…
…Listen, our relationship with the Canadian economy is totally different than our relationship with the Mexican economy. The labor situation’s different, the stuff that’s being made is different, the export and import profile is different. It actually doesn’t make a ton of economic sense why we would marry those three together. The actual trade between Canada and Mexico is much smaller than the trade between the U.S. and Canada and U.S. and Mexico. Sometimes you’ll hear people say, “Oh, well, you know, USMCA, it’s a $31 trillion agreement.” It’s like, well, yeah, but like $29 trillion is us. So I think it makes sense to talk to them separately about that agreement.
Ultimately, the U.S. strategy for USMCA should be viewed as two-fold: additional concessions from both Canada and Mexico to the benefit of U.S. producers and manufacturers (particularly ag and autos) and a self-sufficient North America that can compete but is not beholden to a foreign power. The latter strategy has been coined “Fortress North America.”
Reciprocal Tariffs
The Administration remains active in pursuing trade agreements with a number of outstanding countries, most notably Brazil and India, as well as formally beginning the statutorily required review of USMCA as noted above. These continued negotiations are overlayed with the formalization of term sheets achieved post- “Liberation Day,” the one-year de-escalatory agreement reached between President Trump and President Xi in late October, and ongoing peace talks between the U.S., Russia, Ukraine, and the EU.
While the media continues to be largely negative towards the Administration’s use of tariffs, duties are no doubt here to stay and have had more success than detractors assumed. In his interview with Politico mentioned above, Ambassador Greer also summed up the Administration’s overall theory of the case:
If you look at the tariff setup in the world that’s come out of the president’s program, the highest tariffs are on China. Again, not because we bear China any ill will, but because we have a giant trade deficit with them and they have a lot of unfair trading practices. The next set of highest tariffs is Southeast Asia, India, these other areas that use a lot of Chinese content, Southeast Asia in particular, and we have giant trade deficits with them, Vietnam, for example. And then the next highest tariff rates, and these are usually about 15 percent, folks who are allies but with whom we have big trade issues: Korea, Japan, Europe, etc. And then the lowest tariff rates are really in the Western Hemisphere, where we want our supply chains to be, where it’s very secure. So you can really see almost like concentric rings going out from China, what the tariff rates are like. We have a couple outliers right now. India has a higher tariff for some geopolitical reasons. They buy Russian oil. Brazil has some higher tariffs.
International Emergency Economic Powers Act (IEEPA)
Perhaps the biggest variable in the trade landscape is the impending decision by the Supreme Court over the President’s use of IEEPA to unilaterally impose tariffs. The uncertainty around the Court’s decision is already leading some countries to hedge in finalizing their term sheets with the Administration.
While the outcome of the case is unknown at this time, the justices (but for Alito and Thomas) appeared skeptical of the President’s interpretation of IEEPA during oral arguments in early November. Given that the Court’s skepticism revolves around defining tariffs as a tax, Treasury Secretary Scott Bessent’s recent touting of rebates has been interpreted as a way to rhetorically reclassify the tariffs as something other than revenue to the government.
Further, there has been conjecture that SCOTUS’ decision to uphold Texas’ redistricted congressional district map was done with an eye towards softening the potential impending blow they may deliver later this month or early next year in striking down the Administration’s use of IEEPA.
Should the Court rule against the President, the two immediate questions will be how refunds will be processed and what authorities the President will use as an alternative to IEEPA. Importers that have paid IEEPA duties are not necessarily guaranteed refunds, leading many (Costco most notably) to seek their own judicial relief.
We expect the Administration to act quickly on the latter question. In fact, the Administration has a number of existing authorities via statute that it could utilize to supplement IEEPA, including:
- Section 301 of the Trade Act of 1974. The statute provides the President with authority to implement tariffs for up to four years at an unlimited size against countries engaging in “unjustifiable,” “unreasonable,” or “discriminatory” trade practices. But the law if inefficient from an implementation standpoint and requires time-consuming investigations, the prospect of which is daunting given the number of countries reciprocal IEEPA tariffs have been applied to post-Liberation Day.
- Section 232 of the Trade Expansion Act of 1962. This statute has already been used widely by President Trump during both of his administrations to address imports deemed a threat to national security (e.g., aluminum, autos, copper, lumber, steel). The advantage to the law is that courts generally provide the Executive with wide latitude over national security. Like Section 301, however, this authority requires an advance investigation (by Commerce) making it more cumbersome.
- Section 338 of the Tariff Act of 1930. Also known as “Smoot/Hawley,” the Depression-era authority authorizes tariffs of up to 50 percent on imports from countries that have been found by the Executive to have discriminated against U.S. firms. The upside to the law is that no investigation is required and there’s no limit to the duration of the tariffs. The statute has yet to be used to impose tariffs, though it has been specifically referenced by Secretary Bessent as an alternative to IEEPA.
- Section 122 of the Trade Act of 1974. Authorizes the President to levy 15 percent tariffs for up to 150 days in response to unbalanced trade. The law has not yet been used to apply tariffs and is both limited in severity and temporary by definition.
A noteworthy consideration is that the Supreme Court’s decision could be more nuanced than just simply striking down the Administration’s use of IEEPA. In fact, the plaintiffs’ lawyers argued during oral arguments that IEEPA could be used for quotas, embargoes, and licensing fees.
The Administration could potentially re-brand its use of IEEPA in order to shuffle the structure of existing tariffs to fit into one of these definitional tools. As noted above, the Administration has already raised the prospect of tariff rebates in order to recast the purpose of IEEPA revenue, perhaps as a public argument strategy with SCOTUS.
In the wake of the Court’s decision, attention will inevitably turn towards two avenues/logistical questions:
- Refunds. While U.S. importers are lining up to file suit in anticipation of the Court’s decision, it remains unclear whether such a move will be required. Thus, companies like Costco are potentially bringing on unneeded risk by being public. Moreover, should importers recoup previously paid tariffs, it follows that the Administration may demand that they lower prices to allow consumers to share in those refunds.
- Congress. It is important to note that Congress has little ability to authorize and/or codify existing tariffs on its own as a majority does not exist in either chamber for such a legislative strategy. The prospect of using tariffs as an offset for other policies, whether debt reduction or as a pay-for, may seem enticing but few trade-offs (outside perhaps an elusive Reconciliation 2.0 package) are likely to gain bipartisan appeal (e.g., ACA subsidy extension).
Thus, the Administration is on its own to find alternatives to IEEPA, which they no doubt are in the process of preparing for. President Trump told reporters last week that “we always find ways, you know, we find ways.”
Regardless of the Court’s decision, we believe tariffs will continue in some form for the near- to medium-term. Even if a Democratic presidential candidate should win in 2028, a fulsome rollback of President Trump’s liberal use of tariffs for the purposes of trade negotiations, global reordering, and leverage is unlikely. In short, tariffs are the new normal.
U.S./China Relationship
The summit between President Trump and President Xi on the sidelines of APEC at the end of October served as the first in-person meeting between the two since the first Trump Administration. Already, both sides have committed to reciprocal state visits next year, with President Trump scheduled to visit Beijing in April followed by a President Xi state visit to Washington later in the year. Treasury Secretary Bessent has said the two may meet as many as four times next year.
This represents a signification de-escalation between the two superpowers after a nearly 10-month series of provocations. The question is how durable the status reached in late October will be for both the life of the roughly one-year agreement, as well as into the more distant future.
For now, all signs point to a fairly stable-if not improved-relationship, with President Trump posting on Truth Social Monday afternoon that he has approved NVIDIA sales of its H200 chips to Chinese firms. In light of the GAIN AI Act falling out of the annual National Defense Authorization Act (NDAA), the President’s move represents an endorsement of Silicon Valley’s world view as is often echoed by White House AI Czar, David Sacks.
Putting the recent chips announcement aside, Ambassador Greer said the goal at present is “stability in this relationship.” To that end, both parties have met immediate deliverables coming out of Korea:
- U.S. Deliverables. On the U.S. side, IEEPA fentanyl tariffs have been lowered from 20 percent to 10 percent, effective November 10. Section 301 exclusions that were set to expire in November have been extended to November 10, 2026. And finally, both Commerce’s expansion of the Entity List (50 percent rule) and the implementation of Section 301 shipbuilding fees have been postponed until November 10, 2026.
- Chinese Deliverables. On the Chinese side, export control restrictions on rare earths have been suspended and licenses are again being issued to foreign firms. All retaliatory tariffs and fees announced earlier this year, as well as non-tariff barriers, have been removed. 13 fentanyl precursor chemicals are no longer being shipped to North America and Chinese firms are again purchasing soybeans, sorghum, and wheat. Though no official news has surfaced confirming implementation, the Chinese are also on the hook to terminate antitrust investigations against U.S. chip companies.
In addition to the scheduled visits between the two presidents next year, the leaders have been more closely in touch, with President Xi initiating a phone call with President Trump the week before last, a rarity for the CCP. The two spoke about progress related to the above, but also reportedly discussed Taiwan, the contents of which are not known.
So what does this all point to? In the near term, we expect stability between the two countries to last at least through the midterm elections. For President Trump, this helps assure markets and reduces tariff-related inflationary pressure while also unlocking the CCP’s stranglehold on the rare earth supply chain. But the core existential differences remain. Each side is attempting to shore up its preferred world order:
- U.S. Advantages. The U.S. has made considerable progress in reaching dozens of reciprocal tariff agreements with its trading allies, while opening new markets. As a sign of the impact these agreements are having, the Chinese have expressed their displeasure with numerous southeast Asian countries (e.g., Cambodia, Malaysia). Meanwhile, the U.S. tech stack and overall software advantage continues to keep Chinese progress reliant on the West. What remains to be seen is whether the U.S. can catch up to the Chinese on critical supply chains. This will be determined in large part by how fast the U.S. can execute on major investments in the shipbuilding industry, domestic mining and processing of rare earths, increasing energy production and building related infrastructure to feed a hungry AI-driven expanse in power consumption, and onshoring of critical manufacturing (e.g., pharmaceuticals). As noted above, a successful USMCA renegotiation would accelerate U.S. industrial onshoring and near-shoring and bring North America closer to self-sufficiency.
- Chinese Advantages. Supply chains and market size remain China’s biggest leverage points. On the latter, agricultural purchases are existential for U.S. growers and given the ability for Brazil to supplant many U.S. crops, this will continue to be a U.S. vulnerability. The Administration’s long-awaited $11 billion farm payment announcement brings immediate but temporary relief for U.S. growers. Downward commodity prices combined with an unreliable market in China, competition from Brazil, and upward input costs (e.g., farm equipment) all create a significant vulnerability for the U.S. agricultural sector. The Chinese, meanwhile, continue to lag in chipmaking and software, though they have closed the gap in data center efficiency considerably. Whether they can catch up on the former could very well be tied to the fate of Taiwan. TSMC remains Taiwan’s greatest defense. Without a full scale intellectual and skilled labor transfer to the U.S., Taiwan will continue to benefit from U.S. soft power protection in the region. Taiwanese Premier Cho Jun-tai recently stated that trade talks with the U.S. are now largely completed, and the two sides are exchanging final documents. The Chinese are playing the long game, however, and direct control of Taiwan remains an imperative.
Outstanding questions that will color both the U.S./China relationship as well as their race for superpower supremacy include the ongoing trade negotiations with Brazil and India, as well as the fate of the Russia/Ukraine peace talks (and the pressure of secondary sanctions). The effort to align with the formidable economies of India and Brazil continues apace. Whether the outcome of talks is binary remains to be seen.
- India. The U.S. appears poised to finally reach an agreement with India, with that country’s Commerce Secretary telling industry that an initial agreement is likely “before the end of the year.” USTR staff is scheduled to travel to India this week, ironically (or purposefully) on the heels of President Putin’s charm visit last week, re: Russian arms and oil.
- Brazil. Meanwhile, the cadence of talks has increased between the U.S. and Brazil. In addition to exempting certain products from Brazil’s 40 percent IEEPA tariff (effective November 13), the leaders have spoken frequently in the last month. Brazil’s agricultural sector continues to serve as leverage in talks as do specific consumer product affordability issues, as mentioned above (e.g., cocoa, coffee, bananas).
That said, the CCP retains a considerable advantage with respect to Brazil, as is evidenced by the Administration reorienting its geopolitical national security strategy to refocus on Central and South America. The recently released National Security Strategy, also termed the “Donroe Doctrine” as an update to the Monroe Doctrine, establishes a direct U.S. national security link to all points south. This should not come as a surprise given the debate (and private sector actions) earlier this year related to control of the Panama Canal, as well as the Administration’s opening of new markets in the region, particularly with respect to Argentina, while reaffirming political allies (e.g., Honduras) and attempting to eliminate foes (e.g., Maduro).
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