Mexico - August 2026

On 1 July the US government opted not to renew the US-Mexico-Canada Agreement (USMCA) for another 16 years. This cleared the way for rolling annual reviews ahead of the trade deal’s expiration in 2036 and has dealt a major blow to the Mexican and Canadian governments, which were both pushing for the pact to be extended until 2042. 

The uncertainty that has overshadowed the deal in the run up to its review in July – and the diplomatic tensions that came with it – is now set to be sustained after US President Donald Trump nixed the agreement that he has repeatedly criticised, despite having played an important role in its implementation in replacement of the North American Free Trade Agreement (Nafta) in 2020. Mexican officials have made an effort to stay positive, highlighting that the US could have pulled out of the agreement altogether, and that the existing deal governing some US$2tn in annual trade between the three countries and covering a free trade area encompassing about 515m people remains in place. 

But it remains necessary to tackle major sticking points troubling the USMCA signatories – in particular those that prompted the Trump administration to shun the deal, including tariffs, rules of origin, the loss of manufacturing jobs in the US, and the trade deficits the US has with Mexico and Canada. The US goods trade deficit is of special concern: last year only China was a greater contributor to it than Mexico, according to data from the US Bureau of Economic Analysis, a US federal government agency, with the annual deficit with Mexico growing by almost 75% since the USMCA took effect in 2020. Meanwhile, the US’s (far smaller) deficit with Canada has tripled.

It remains possible that the deal could be extended by 16 years in future annual reviews – something which is also strongly supported by Mexico’s private sector – as outstanding problems are gradually addressed in order to continue promoting the USMCA’s stated aims: notably, shared prosperity, competitiveness, and the economic integration of North America through trade and investment. “We’re not in a rush but neither do we want uncertainty, so we want to try and reach an agreement on lots of issues that we have been working on for many months,” said Marcelo Ebrard, Mexico’s economy minister, citing sectors such as automobiles, steel and aluminium, agriculture, labour, electronic payment services, and economic security. 

But the US government maintains a tough stance. Uncertainty over the USMCA’s future is only being fuelled by Trump’s erratic comments to the media, declaring to US TV channel Fox News on 28 July that he would prefer the US to leave the USMCA than renegotiate it. When asked if he was still looking to update the agreement, he responded: “I don’t care. I mean, I don’t really want to. I’d rather be independent…Here’s the thing: Mexico and Canada need us. We don’t need them. The deal is important for them. It’s not important for us.”

Tariffs

Days earlier, the US administration went as far as to implement a new round of tariffs affecting both Mexico and Canada. The tariffs were announced on 23 July shortly after the most recent round of USMCA talks ended, with a fresh 10%-12.5% tariff package targeting 60 global economies accused of failing to ban imports produced with forced labour. At the same time, US Trade Representative (USTR) Jamieson Greer met Mexico’s President Claudia Sheinbaum to review the status of trade discussions and thanked her for her commitment to strengthening the US-Mexico economic relationship. 

Ebrard said the new tariffs would not affect any Mexican products exported under USMCA rules, with some 85% of Mexico’s exports to the US continuing to enter the country tariff free. In addition, while Mexico would pay the lower 10% tariff on the remaining 15% of products falling outside USMCA protections, he underlined that this would simply replace the existing 10% global baseline tariff paid by Mexico, which was struck down by the US supreme court in February and expired on 24 July. The lower 10% rate is reserved for countries the USTR considers to be committed to enforcing domestic forced labour import bans but have yet to fully implement measures to do so. This group includes Mexico and Canada. Meanwhile, the higher 12.5% penalty applies to countries that fail to meet these standards. Nevertheless, analysts warned that the US could still impose additional tariffs targeting excess industrial capacity as part of a wider attempt to limit Chinese access to the US market via Mexico.

Ebrard’s nonchalance was not shared by the region’s other economic powerhouse, Brazil, which accused the Trump administration of using forced labour as an excuse to pursue its protectionist trade policy. The 12.5% rate will apply to Brazil, affecting around 3,000 Brazilian products and amounting to around US$12.5bn of annual exports to the US, according to the American Chamber of Commerce for Brazil (Amcham Brazil). For 85.3% of these products, the new tariff would add to the 25% tariff recently levied on Brazil following a USTR investigation into alleged unfair trade practices, effectively lifting it to 37.5%, said Amcham Brazil.

Next steps

The next round of negotiations over the USMCA will take place in Washington, DC in early September, which the Mexican government will attempt to use to strengthen its trade position. Ahead of the latest round in July, Greer described the discussions as “fairly non-dramatic”, while a subsequent joint statement referred to “continued constructive engagement”, with Mexico reporting progress on more than 30 technical issues. The US remains especially concerned about its growing trade deficit with Mexico, with Greer suggesting earlier this year that one way of addressing this is by changing rules “in a way that enhances US content” in US-Mexico goods trade. Mexican officials in turn are striving to keep tariff-free access for most exports while providing enough certainty for businesses to keep investing in regional supply chains. At the very least, US talks with Mexico are far more advanced than those with Canada, with whom the US has significantly tenser relations [EB-26-06]. The US government hopes to secure interim trade arrangements with both countries by the end of this year, according to Greer. 

“This suggests the review is evolving into a rolling negotiation process, allowing incremental progress on less contentious issues while leaving the agreement's more challenging issues until 2027. While continued negotiating momentum is encouraging, uncertainty over the eventual shape of the agreement will persist, particularly as Greer has alluded to piecemeal interim arrangements with Mexico and Canada,” Nicholas Watson, an analyst at London-based consultancy Teneo, wrote in a note to clients, highlighting the US trade deficit with Mexico, automotive rules of origin, and steel and aluminium tariffs as among the more complex issues that are likely to extend into 2027. 

With regard to the US trade deficit, Mexican negotiators are expected to argue that – far from being a negative for the US economy – their country’s trade surplus is merely evidence of the deep integration of North American supply chains and strong regional competitiveness, as well as noting that tariffs have led to a decrease in Asian imports. In addition, Mexico is open to tightening automotive rules of origin: Sheinbaum has said Mexico could support raising the regional value content threshold – potentially up to as high as 90% – as long as all inputs are treated equally, regardless of the country, and that specifically US-made content is not favoured. 

As for steel and aluminium tariffs, the US is understood to have requested that Mexico align its trade policies even more closely with the US’s more punitive regime, in order to limit the entry of Chinese metals into the region while preserving preferential treatment for locally produced steel. Although Mexico has already raised tariffs on imports of about 1,500 products from countries without free trade agreements, mostly affecting Chinese imports [EB-26-01] – in a move approved by Mexico’s congress that was seen as an attempt to placate the Trump administration – the government may be willing to comply if it helps to secure a broader agreement over the USMCA, according to sources interviewed by Bloomberg. At present, the US charges tariffs of 50% on core steel and aluminium – with some exceptions – as well as 25% on derivative products, while Mexico applies product-specific metal import tariffs, with steel duties reaching up to 25% in some categories, excluding additional anti-dumping measures.

But publicly, Mexico is lobbying for the US to lower steel tariffs from 50%, with the 10% rate the US applies to the UK potentially serving as a benchmark. Mexican officials say the country’s trade surplus with the US makes the duty unnecessary, since Mexico buys more US steel than any other country, which benefits the US rather than threatening it – a point that Mexican negotiators are likely to push in the next round of USMCA talks in September. Ebrard has underlined that Mexican industry has consistently invested in domestic smelting and processing capacity since 2018. 

Impact

For now, the failure to secure long-term continuity over the future of the USMCA has not only seen a renewed wave of unilateral US tariffs, but tangible consequences in the automotive sector among others, as demonstrated by Toyota’s partial withdrawal of manufacturing capacity from Mexico to Texas. The Japanese automaker announced in early July that it will shift most of the production of its Tacoma pickup truck – the best-selling midsize pickup truck in the US – to its San Antonio plant in Texas as part of a US$3.6bn expansion there, suggesting that uncertainty over the USMCA and increased tariff-related costs were partly behind the decision to pull out of its factory in Tijuana, Baja California state. While Toyota insisted that it remained “committed” to its operations throughout North America, and encouraged a “quick resolution” to the USMCA to ensure that the region remains globally competitive, Trump seized on the move as proof that his trade policies were effective. “Toyota is moving from Mexico to the United States (Texas!). A really big deal. Tariffs at work!” he posted on Truth Social. 

Since Trump imposed 25% tariffs on imported automobiles and automotive parts last year, several manufacturers have shifted production to the US, or expanded it. They include South Korean carmaker Hyundai, which announced in April last year that it would move production of its Tucson SUV from Mexico to Alabama as part of a wider US$26bn investment in the US from 2025-2028, and Japan’s Honda, which last year decided to build its next-generation Civic Hybrid in Indiana instead of at its plant in Mexico’s Guanajuato state. 

Doubts over the USMCA are also already impacting the real economy more broadly, according to the Centro de Estudios Económicos del Sector Privado (CEESP), the private-sector research arm of Mexico’s Consejo Coordinador Empresarial (CCE) business lobby. In an economic analysis published on 27 July, CEESP cites lingering uncertainty surrounding the pact’s review as one of the key reasons behind slowing quality job creation and constrained GDP growth. “Weak investment, rising labour costs, and international uncertainty surrounding the USMCA are limiting the expansion of capital stock, inhibiting the creation of quality jobs, and slowing the pace of growth,” said the CEESP. Ebrard and other officials will be seeking to reduce this uncertainty as much as possible in upcoming talks. However, with a long-term extension likely remaining elusive and many issues pending, trade delegations face a tough task ahead.