The July 1 deadline for reviewing the six-year United States-Mexico-Canada Agreement (USMCA) is looming, and almost no one in trade circles believes it will be met cleanly. An event hosted by Scotiabank in Mexico City this week with CSIS fellow Diego Marroquín Bitar explained why, and the takeaway is clear and straightforward: expect a long and painful process extending into 2027, with plenty of uncertainty along the way.
This is a bearish scenario for both the Canadian dollar and the Mexican peso and helps explain why the Canadian dollar is trading cautiously despite the spike in oil prices.
The base case — which Marroquin and Center for Strategic and International Studies co-author Bill Reinsch described as a “painful extension” — means that Mexico and Canada will eventually make enough concessions on energy, steel bases, Chinese investment, and other sore points to get Washington to sign. But they believe this agreement will not come easily, and the fact that serious bilateral talks have begun late makes reaching an arranged solution this year almost impossible.
What’s interesting is how different Ottawa and Mexico City play. Mexico is leaning toward deeper integration with the United States, trying to make itself indispensable to American supply chains, and cooperating in fentanyl enforcement more than many expected under President Sheinbaum. Canada is hedging and diversifying its trading partners to reduce its exposure to influence from Washington. Both strategies carry risks. Mexico’s settlement still faces internal political constraints on energy sovereignty and judicial reform. Canada’s diversification policy is limited by geography – you can only pivot so far when 75% of your exports go south.
The China angle is one that has real bipartisan appreciation in Washington. Both sides want Chinese investment out of Mexico’s strategic sectors — electric vehicles, energy, infrastructure — and view Mexico as a potential back door for Chinese inputs entering North American supply chains. This raises a problem, but Mexico has indicated its agreement here, and the United States wants to write it into the agreement strongly.
Rules of origin in automobiles are another point of tension to monitor. The current 75% regional content threshold could be pushed to 85%, which manufacturers with Mexican operations say is not possible on a short timeline. Tighter rules without transition periods would disrupt the integrated production model that makes the North American auto industry competitive in the first place. The irony of bypassing protectionist measures making the continent less competitive is not lost on anyone at the negotiating table, but that does not mean it won’t happen.
There is a wild card worth reporting. The Supreme Court’s ruling against the IEEPA tariffs has taken away the easiest unilateral tool available to Washington, meaning that reviewing the USMCA itself becomes the primary American point of leverage. This concentrates pressures but also increases risk – if management cannot extract concessions through the review process, there will be no Plan B in the back pocket.
The geopolitical backdrop may actually help. The United States has limited bandwidth because the Iranian situation remains unresolved, and opening too many fronts at once incurs huge costs leading up to the midterm elections. Ironically, this could push Washington toward getting something done on the United States-Mexico-Canada Agreement rather than letting it languish.
Near-Term Milestones: Preparations for the US-Mexico-Canada Agreement should accelerate through April. The USTR Section 301 investigation covering both Mexico and Canada has an April 15 deadline for written submissions, with hearings beginning April 28. Then the true lines of US demands will begin to take shape.
Advisers in the report believe that the United States-Mexico-Canada Agreement may still survive in some form, as economic integration is too deep for anyone to withdraw from it. But the version that emerges on the other side could look dramatically different, with tougher rules, more restrictions, and a power dynamic that leans more toward Washington. For anyone working in Canadian or Mexican stocks, the auto sector, or the cross-border supply chain, this is a slow-moving story that deserves more attention than it gets.
Ultimately, I think it will be a big boost for the Mexican peso and the Canadian dollar once the issue is resolved, but they do raise good points about continuing negotiations.
