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Now is the official end of the beginning for one of the most successful free-trade accords the world has ever known: the United States-Mexico-Canada Agreement, formerly known as Nafta. It is not, however, the end of North American free trade - in fact, far from it.
Today 1 is the first deadline for renewing the agreement, and it'll probably be missed. That prospect, as well as President Donald Trump's recent claim he'd "rather not have the USMCA," has led to some warnings that the deal - and the supply chain it's supported for 30-plus years - is at serious risk.
Granted, Trump loves drama, which will surround USMCA negotiations as long as he is president. And the next steps won't be costless. But the agreement is simply too important to blow up, and Trump knows it.
For starters, the deadline is relatively meaningless. Under Article 34.7 of the USMCA, trade ministers from all three countries must convene at the deal's six-year mark (that's July 1) to assess its performance and decide whether to issue a 16-year extension, to 2042. If anyone declines to extend the deal, the three parties will meet annually until either everyone agrees to renew the agreement or it expires in 2036.
Canadian and Mexican officials have said they want to renew the USMCA tomorrow, but there are silver linings if, as expected, the US abstains. Today, a long extension is politically treacherous, and inaction won't scuttle the agreement. Ten years is a long time, and Canada and Mexico might benefit from waiting Trump out instead of handing him major concessions because of a soft deadline.
Yes, Trump could withdraw from the deal. But it's a safe bet he's bluffing.
First, there are the economics. While the Nafta/USMCA's macro effects are relatively modest, the agreement has facilitated an enormous amount of trade and investment since it took effect in the 1990s. In 2024 alone, trilateral trade in goods and services totaled $1.99 trillion, and regional foreign direct investment reached almost $380 billion - an increase of 37% and 16%, respectively, since the USMCA took effect in 2020. Mexico and Canada are now the top two US trading partners, well ahead of third-place China.
Just as important is the depth of this engagement. At $2 trillion in annual trade, the USMCA bloc might seem small compared to the EU's single market ($6.4 trillion) or the China-led Regional Comprehensive Economic Partnership ($3.3 trillion). But the USMCA involves just three countries, while the EU and RCEP involve 27 and 15, respectively. That means per country trade volumes - and regional supply chain integration - are far higher in the USMCA than in those other blocs.
This integration took decades to develop and is particularly important for US manufacturers. The National Association of Manufacturers calculates that roughly 71% of US imports from Canada and 64% from Mexico are industrial inputs - components, materials and intermediates flowing into American factories producing "Made in the USA" stuff. Further deepening comes from cross-border transactions occurring within the same multinational enterprise. Recent research from the Census Bureau finds that more than half of foreign affiliates worldwide export to or import from their US parent, but this figure jumps to more than 75% in North America, with intrafirm trade particularly deep in the transportation sector.
These are finely calibrated production systems built on predictable rules and minimal frictions, with inputs repeatedly crossing US borders before going into USMCA-made finished goods. Thus, the Census study's authors warn that "raising trade barriers can be extremely detrimental for US multinationals, particularly when they are applied on imports from Canada and Mexico" - a conclusion supported by other research showing how complex supply chains amplified the costs of US tariffs in 2018-19.
The USMCA's benefits - and the harms of termination - extend beyond manufacturing. The North American energy market is tightly interconnected, with Canada and Mexico serving as major buyers of US oil & gas products and major sources of US energy imports. Since Nafta took effect, moreover, US fresh produce imports have almost doubled - growth led by Mexico and Canada - as American agriculture also flows the other direction, with both countries serving as top destinations. Services and digital trade have also blossomed under the Nafta/USMCA's streamlined rules for the business travel, cross-border sales, data flows, and physical outposts of North American service providers.
Unwinding USMCA would thus inflict real damage across the US economy - damage that Trump clearly understands. Days after he slapped fentanyl-related "emergency tariffs" on all imports from China, Canada and Mexico, he backtracked with a blanket exemption for goods that qualify under USMCA - a carveout that now covers more than 87% of goods imported from those countries. After applying "national security" tariffs on imported automotive goods, he immediately offered exemptions for USMCA-compliant parts and finished vehicles (followed by an "import adjustment offset" for US-based automakers to recoup tariff costs). And facing voter pushback on "affordability" last fall, the president exempted from his global tariffs foods and fertilizers that disproportionately originate in Canada and Mexico.
The political and legal obstacles are similarly daunting. The USMCA is Trump's deal, which he negotiated, signed and declared to be the "best agreement we've ever made." Termination would mean torching a signature accomplishment. There's also the legal issue of whether Trump has the authority to exit the USMCA, since it was ratified by Congress and is codified into US law. As the Republican-led Senate Finance Committee concluded in a 2020 report, "The United States cannot withdraw from a congressionally approved trade agreement without the consent of Congress." Litigation would surely ensue.
So, expect technical renegotiations, not seismic changes, in the years ahead. Here, again, the law looms large. Significantly altering the USMCA would require amending its implementing legislation and thus need congressional approval. A vote to reopen the most important (and controversial) trade agreement in US history is not a fight Congress is eager to pick - nor is it one, as US Trade Representative Jameson Greer just signaled, that the administration wants to encourage.
Instead, the parties will probably conclude a series of side letters targeting a few sources of continued tensions. The US is sure to demand stricter scrutiny of Chinese-origin content flowing through Mexico and Canada - a predictable response to US tariffs on Chinese imports and partly fueling Mexico's increased exports, but one that can be targeted by new "rules of origin" for USMCA-compliant goods. The US might also seek increased access in both countries for American farm exports and tighter enforcement of digital trade, intellectual property, labor and environmental rules. Canada and Mexico, meanwhile, will press for breaks on US "national security" tariffs on metals and automotive goods.
Nobody will get everything they want, and talks will be a slog at times. But there's common ground on several core issues - and, of course, a new US administration just 30 months away.
None of this is to say that the coming negotiations will be costless. A 10-year expiration window may be a lifetime in politics, but it introduces new and significant uncertainty for global businesses that make large-scale expansion plans on multi-decade timelines. So, on the margins, missing the July 1 deadline will likely reduce North American investment.
New rules of origin or labor and environmental conditions will also impose new costs on North American businesses, especially multinationals. The Federal Reserve has found that compliance costs under USMCA's existing automotive rules of origin - just the documentation, classification and reporting burdens - amount to an invisible 2% tariff on cross-border trade, translating into billions of additional dollars paid by US manufacturers. Changing and expanding these rules will add to firms' tab, as will the costs of monitoring, lobbying and adjusting to the political theater that accompanies each annual USMCA review.
These all count as taxes on seamless trade and productive activity. They're hardly catastrophic - but they're not exactly inconsequential, either. In the current environment, that's probably the best North American businesses can hope for.
Scott Lincicome is an economist with the Cato Institute. He specializes in domestic policy and international trade.
Previously:
• Defenders of the Jones Act have lost
• And now for the battle over tariff refunds
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