The future of the USMCA
What’s next for US trade relations with Canada and Mexico?
Since 2020, the last year of President Donald Trump’s first term in office, trade and investment disputes among the three major countries of North America have been governed by the complex terms of the United States-Mexico-Canada trade agreement (USMCA). The pact has been upended, however, by Trump’s actions in his second term, including threats and the imposition of tariffs on Canada and Mexico, leaving the future of relations with two of the most important US trading partners uncertain.
This guide explains why the USMCA nevertheless remains at the core of the three countries’ relationship, what’s at stake in many different aspects of their interdependence, and possible paths forward for negotiators to try to resolve. This page will be updated as the trade deal is subjected to a new round of conflicts and possible adjustments in the months ahead.
Editor's note: For the most up-to-date PIIE analysis on USCMA, visit this page. Links to relevant recent research are also included below.
Where do events stand at the Start of the Trump Administration?
When President Trump capped his first term in the White House by replacing the much-criticized NAFTA (North American Free Trade Agreement) with the USMCA in 2020, he hailed the new deal as “a truly fair and reciprocal trade deal that will keep jobs, wealth and growth right here in America.” In the first weeks in office of his second term, he took a different turn, threatening or imposing tariffs at a rate of 25 percent on many US imports from Canada and Mexico, as he accuses them of failing to stop the flow of illicit fentanyl and unauthorized migrants across their respective borders with the US. Canada and Mexico have insisted that they want to cooperate with the Trump administration on immigration and drugs to try to avert a trade crisis. The disputes remain ongoing (see this timeline for the latest updates).
In the background of this discord, the USMCA governs many different aspects of the three countries’ relationship—from agriculture and digital services trade to rules protecting investments. The pact’s provisions could be revised by all three North American partners because it calls for a review of its performance by July 2026. As often happens with economic agreements, old and new issues have accumulated that will have to be addressed, including drugs and migrants. New tariffs imposed by the US before the renegotiation of the USMCA violate its letter and spirit.
It is certainly possible that the three countries’ leaders will find solutions to fentanyl and illegal immigration and then, in the time leading to the review, turn their attention to less explosive aspects of trilateral relations.
Possible Scenarios in Trump’s approach to Mexico and Canada
The following scenarios illustrate generally what kind of outcomes could be expected under certain actions and do not account for recent events, with varying adverse effects on Canada and Mexico and the future prospects for renewing the USMCA.
First, the US could withdraw from USMCA and impose the threatened 25 percent tariff on Mexico and Canada, should talks over drugs and immigration fail. These tariffs could come on top of any new tariffs imposed on all other trading partners with which the US has negotiated free trade agreements to lower tariffs (some 20 countries in total) and the rest of the world.
Should such an approach be adopted, it might shift part of the bilateral US-Mexico merchandise trade deficit (exceeding $150 billion annually in recent years) to other trading partners and similarly shift the US-Canada merchandise trade deficit (around $60 billion) to other countries, with little effect on the aggregate US trade deficit. However, US imports from Mexico could conceivably grow if Trump carries out a threat he made in his presidential campaign to impose 60 percent new tariffs against China.
Second, if Trump abandons his proposal to impose a 10 to 20 percent global tariff on all trading partners, he might instead insist on some sort of bilateral trade balance provision in the USMCA review. For example, if Mexico’s bilateral surplus exceeds $120 billion over a rolling four-quarter period, Mexico might be obligated to find ways of stimulating imports from the US, preferably via measures to liberalize imports in protected sectors (e.g., energy and agriculture) or targeted fiscal expansion (e.g., a reduction in value added taxes on imports). Similar provisions might be applied to Canada.
Third, as a less intrusive version of the second scenario, Trump might insist on raising the US “most favored nation” or MFN tariff on autos that obligates the US to grant to any World Trade Organization (WTO) member the same tariff it imposes on others. That rate is currently 2.5 percent. If the MFN tariff is significantly raised, that might encourage auto firms with plants in Mexico and Canada to observe the USMCA rules of origin, rather than simply pay the current low MFN tariff on exports to the US market.
In a January 2024 submission to the United States Trade Representative (USTR) the United Auto Workers (UAW) called for just this measure. For example, the US MFN tariff on most autos and parts might be raised to 10 percent (subject to duty drawback on round-trip trade in autos and parts), buttressed by a 100 percent tariff on EV imports. This approach would, of course, create trade friction with the European Union and Japan—major auto exporters that do not have FTAs with the US. But for that reason, neither Mexico nor Canada (nor South Korea) would much object, assuming they continued to enjoy tariff-free entry to the US market (apart from EVs) under their FTAs.
Fourth, Trump might pursue dollar devaluation, as urged by former USTR Robert Lighthizer in his book No Trade Is Free, as a means of curbing the global US merchandise trade deficit, now running around $1 trillion annually (over 3 percent of US GDP). In this drastic scenario, the bilateral deficits with Mexico and Canada would become a footnote and might be ignored during Trump’s second term.
However, Trump’s Treasury secretary, Scott Bessent, a Wall Street financier and hedge fund manager, seems disinclined to advocate dollar devaluation. Moreover, the same macroeconomic logic that argues against broad tariffs as an effective remedy for the aggregate trade deficit also suggests that devaluation would not be as effective as Lighthizer hopes.
What happens if Trump goes ahead with 25 percent tariffs on Canada and Mexico?
US merchandise imports from Canada and Mexico largely enter the US market duty free or at average ad valorem tariff rates less than 1 percent. Tariffs of 25 percent would thus come as a shock, both to industrial buyers of intermediate goods and to households shopping at stores like Albertsons or Walmart.
Industrial imports in the range of $100 billion or more annually are concentrated in machinery, electronics, electrical machinery, vehicles and parts, wood products, transportation equipment, and fuel (petroleum and natural gas). Consumer purchases are concentrated in prepared foodstuffs (like beer and chips), fruits and vegetables (e.g., mangoes, avocados, tomatoes), meat, toys, clothing, and footwear (see figure 1). US prices of all these products would increase, driven by the direct impact of 25 percent tariffs on imported goods and also by follow-on price increases by US firms making competitive goods.
Since US imports from Canada and Mexico amounted to 3.3 percent of US GDP in 2023, the direct impact on the US price level would be 0.8 percent (3.3 percent times 25 percent), and the indirect impact might be half of that amount as competing US firms raised their prices, bringing the total impact to possibly 1.2 percent. The political problem for President Trump would not be so much the small increase in the average US price level as price spikes in recognizable goods, like gasoline at the pump in some locations, certain auto brands, avocados, and tomatoes.
The US is most reliant on imports from Canada for fuel and wood products, and from Mexico for, transportation equipment and vegetable products. For products that are more easily substitutable, tariffs would likely lead US consumers and producers to import more from the rest of the world—for example, from Latin America for fruits and vegetables and the Middle East and Venezuela for oil. As well, China could also become relatively more competitive for certain industrial products, such as machinery, electronics and minerals, as well as consumer goods such as toys and sports equipment.
For Canada and Mexico, the pain of 25 percent US tariffs would be much greater. Analysis done by Warwick McKibbin and Marcus Noland, summarized in figure 2, shows GDP losses and increases in inflation in each country as a consequence of a 25 percent US tariff.
However, as McKibbin and Noland explain, the figures in this chart “likely underestimate the real damage to the three economies.” That is because they are highly integrated, but Mexico and Canada are “much more dependent on trade with the US” than the US is on them. Their paper notes that intermediate goods, especially in motor vehicles, cross the borders multiple times, so imposing tariffs at each stage “would be disastrous.” Mexican exports, 80 percent of which go to the US, account for 40 percent of Mexico’s GDP.
“In essence,” the authors say, “Mexico ships one-sixth of its annual economic output to the US in the form of exports.” And since many of these exports originate in maquiladoras within 30 miles of the border, wiping out the livelihoods of those working at these factories could compel some of them to migrate to the United States, undercutting US efforts to stop border crossings. For Canada and Mexico the trade and GDP losses are so great, and the concentration in affected export industries so dramatic, that their political leaders would be forced to retaliate.
But the cost of such retaliation would be steep. And unfortunately for Canada and Mexico, mirror-image retaliation—meaning 25 percent tariffs on all imports from the US—would be just as costly for those countries as the 25 percent US tariffs. To be sure, the costs would fall on different sectors, but the overall shock to the Canadian and Mexican economies would be enormous. For that reason alone, Prime Minister Trudeau and President Sheinbaum are laying plans for targeted retaliation.
There is a precedent for a more targeted approach available to Trump.
In his first term, Trump imposed tariffs of 25 percent on steel and 10 percent on aluminum, covering imports from all countries, including Canada and Mexico, under the national security authorities of Section 232 of the Trade Expansion Act of 1962. In retaliation, Canada imposed tariffs on iconic US products like bourbon, pizza, and ketchup. The upshot was a negotiation that led to a conversion of US tariffs into informal quotas and surveillance of steel and aluminum imports from its USMCA partners and other friendly countries.
Bearing that history in mind, Trudeau and his ministers are drawing up lists of sensitive goods and services that could be subject to import or export taxes. Critical minerals, electricity, petroleum and natural gas are potential export targets. American tourism to resort locations in Canada might be another. On the import side, Canada could ban dairy, cattle, fresh meat, and fruit—largely from politically sensitive red states. Added to the list, Canada could discourage its citizens from snowbird tourism in Florida and Arizona and curtail Hollywood entertainment delivered over the internet. Finally, if tensions become truly acute, Canada could open a debate over cooperation with US missile and naval defenses in the Arctic region.
Sheinbaum and her ministers can be equally creative in drawing up targeted retaliation lists. In addition to banning sensitive US exports, like corn and soybeans, Mexico might curtail Hollywood entertainment and financial services. It could withhold cooperation on cartel interdiction and drug seizures. As a draconian measure, Mexico might temporarily forbid US subsidiaries operating in Mexico from paying dividends and interest to their parent firms.
All these factors illustrate why a North American trade war will be truly costly to all partners. Once launched, the economic, political, and diplomatic fallout will be enormous, and a return to the status quo ante in commercial relations and mutual trust will take years, not months. The Departments of the Treasury, State, and Defense and the CIA will surely brief the president on these realities. If Trump listens to them, his tariff threats could well evolve into difficult but productive negotiations.
US trade deficits with Mexico and Canada
Trump has long criticized trade deficits with US trading partners. His argument, which is both simplistic and misleading, is that if the value of US imports exceeds that of exports, incurring a deficit, as is the case with Mexico and Canada, the US is a loser. US automotive trade deficits with Mexico rank high among his grievances. As figure 2 shows, almost since NAFTA’s launch in 1994, which preceded the USMCA, the US has run a merchandise trade deficit with Mexico. Much of that deficit is centered in bilateral automotive trade. During the election campaign, Trump promised 200 percent tariffs on all vehicle imports from Mexico. US bilateral merchandise deficits with Canada are historically smaller than deficits with Mexico.
The US runs a trade surplus with both North American partners on intangible services, such as consulting and banking, however. That surplus is much larger with Canada than Mexico. The US services trade surplus with Canada increased nearly fivefold over the past 25 years, rising from an annual average of $5.5 billion during 1999-2003 to $26 billion during 2019-23. The US services trade surplus with Mexico remained relatively small during the post-NAFTA period. But Trump is more concerned with merchandise trade deficits than with any offset resulting from surpluses in services trade.
The US-Canada bilateral merchandise trade deficit rose from $25.8 billion in 2019 to $60.8 billion in 20241 (with a peak of $78.2 billion in 2022, possibly reflecting COVID-19). However, US-Canada auto trade shows a small but consistent surplus for the United States, while US-Canada services trade shows a consistent US surplus in the $20 billion-$35 billion range.
The US-Mexico bilateral merchandise trade deficit grew consistently, rising from $99.4 billion in 2019 to $170.2 billion in 2024. Autos and parts account for a large but modestly decreasing share of the bilateral deficit, almost 80 percent in 2019 and 64 percent in 2024.2 The services trade balance is an approximate wash.
The historical experience with tariffs demonstrates that even very high tariff barriers cannot reduce the aggregate US trade deficit with all its partners. The reason is that tariffs that discriminate against selected partners (such as Mexico, Canada, and China) can shift imports from these countries to imports from other countries, leaving the aggregate US trade deficit unaffected. Still, Trump continues to insist that making tariffs the center of US economic policy will reduce the aggregate trade deficit.
A separate concern in Trump’s negotiations over the USMCA was that China and other countries would take advantage of its provisions by shipping goods to Mexico or Canada in order to qualify for entry into the US. Accordingly, the USMCA imposed tighter rules of origin on autos, requiring 75 percent (up from 62.5 percent) by value of autos and parts to be made in North America for cross-border trade to qualify for zero tariffs.
Despite their intentions, a strong US economy and high tariffs on US imports from China helped to sharply increase the bilateral US-Mexico and US-Canada merchandise trade deficits following the inception of the USMCA, as shown in figure 2. The US merchandise trade deficit with Canada more than doubled from an annual average of $19.6 billion during 2014-18 to $45.9 billion during 2019-23. The bilateral US-Mexico merchandise trade deficit almost doubled from an annual average of $64.9 billion during 2014-18 to $119.2 billion during 2019-23.
If President Trump carries out his threat to impose a 60 percent tariff on all imports from China, the gradual relocation of manufacturing plants to Mexico could accelerate, further enlarging the bilateral US merchandise deficit with Mexico.
For the sensitive autos and parts trade balance, the situation differs between US-Mexico and US-Canada. Since the USMCA, the US-Canada trade balance for autos and parts has turned from a deficit to a small surplus. For US-Mexico trade, the annual average trade deficit in autos and parts rose from $57.1 billion in 2014-18 to $82 billion in 2019-23. Growth in the autos and parts trade deficit was smaller than growth in the overall merchandise trade deficit, possibly due to the tighter rules of origin on autos. While autos and parts remain a large component of the US-Mexico merchandise trade deficit, the share dropped from 88 percent (2014-18) to 69 percent (2019-23).
How US-China Trade Conflicts Have Led to Tensions with Canada and Mexico
US tensions with Mexico and Canada have resulted in part from changes in US trade with China. Since 2018, Canada and Mexico have replaced China as the largest US trading partners.
In 2018, two-way commerce between China and the US was $659 billion in current dollars. Canada was second, with two-way commerce of $618 billion, and Mexico was third with $610 billion. Fast-forward to 2024, based on annualized current dollar data, Mexico was first with $848 billion in two-way commerce, Canada was second with $764 billion, and China was third with $578 billion. This shift was observed by 2023, driven by the increase in imports from and exports to Mexico with the simultaneous drop in purchases from China (figure 4).
Clearly the reversal of fortune between China and Mexico reflects fallout from the US-China trade war.
US-China trade
After Trump launched the trade war in 2018, and China reciprocated with its own tariffs, in 2019 the value of US exports to China fell by $14 billion while the value of US imports from China fell by $89 billion (figure 5).3 In real terms, measured in 2019 prices, the declines were about the same. Consequently, between 2018 and 2019, the US bilateral trade deficit narrowed by $75 billion, from $418 billion to $343 billion.
However, in 2020, 2021, and 2022, the value of US export and import trade with China generally rose. Part of the rise in import trade can be ascribed to US tariffs, since in real terms US import gains were smaller. US bilateral imports took another plunge in 2023 and remained at the new lower level in 2024. The US import plunge probably reflects the delayed efforts of Chinese firms to relocate production to other countries, such as Vietnam and Mexico. In terms of value, the US bilateral deficit with China narrowed to $279 billion in 2023 and remained about the same in 2024. In real terms, the trade contraction was similar, and the bilateral deficit also narrowed in 2023 and 2024.
US-Canada trade
Canada has maintained its position as the second largest US trade partner. The value of US exports to Canada rose by 17 percent between 2018 and 2024 (figure 6), but the gain essentially reflected higher US export prices. In real terms, US exports to Canada were flat over the six-year period. US imports from Canada rose 30 percent in value terms and 17 percent in real terms.
Consequently, the bilateral US-Canada trade deficit widened in current dollars from $19 billion in 2018 to $61 billion in 2024, with intermediate ups and downs. In real terms, measured in 2019 prices, the deficit widened to $69 billion. While the bilateral deficit is larger now than during Trump’s first term, it remains far short of the $200 billion figure denounced by Trump before his inauguration.
US-Mexico trade
Owing at least in part to the US-China trade war, Mexico has become the largest US trading partner, with a high level of US components in Mexican exports. But the bilateral deficit increase from $78 billion in 2018 to $170 billion in 2024 is a source of concern, not only by President Trump but many in Congress (figure 7). US imports from Mexico grew steadily between 2018 and 2024, in both current dollars and real terms, with only a small setback in 2020. However, while US exports in current dollars also grew, the growth in real terms was modest, only 9 percent between 2018 and 2024.
Apart from the size and growth of the bilateral deficit, President Trump and his followers also worry that Mexico is becoming a channel for Chinese intrusion in the US market, both as an exporter of intermediate components and through Chinese investment in Mexico.
Mexico-China trade
China has maintained its position as the second largest source of Mexican imports, after the US. The value of imports from China increased from $84 billion in 2018 to $130 billion in 2024 (figure 8), partly due to changes in import prices. In real terms, imports increased by 24 percent to $103 billion, while exports remained flat.
The US and Canada share a concern that Mexico could become a backdoor for Chinese products as Chinese factories expand. Mexico’s Secretariat of Economy reported a rise in foreign direct investment from China since 2021, peaking at $570 million in 2022 and $477 million in the first three quarters of 2024. China’s National Bureau of Statistics reported similar upward trends and a peak of $1 billion flow in outbound direct investment to Mexico in 2023, while Rhodium Group recorded $3.77 billion in Chinese investment transactions in 2023 and $1.43 billion in the first half of 2024.
Can a North American Trade War be Avoided?
President Trump has given Canada and Mexico limited time to propose solutions that would stop illicit fentanyl and unauthorized migrants from entering the US. How realistic are his demands?
Stopping flow of illicit fentanyl
It’s no easy matter for either Mexico or Canada to halt the flow of fentanyl into US territory, but much harder for Mexico than Canada. For starters, the volume in metric tons of a year’s worth of American fentanyl consumption is in the single digits and can be transported in a single truck container. Annually, more than 7 million trucks enter the US from Mexico, along with 75 million cars. So finding fentanyl shipments is akin to the proverbial needle in a haystack. Moreover, for lack of a Congressional appropriation (though money was authorized), even the US Customs and Border Protection agency (CBP) does not have sophisticated sensor equipment for detecting fentanyl.
Within Mexico, the best ways to stop fentanyl production are to seize precursor chemicals arriving from China and shut down fentanyl factories. (Precursor chemicals are substances used in the illicit manufacture of narcotics and other controlled substances.) But production is centered in cartel-controlled states, namely Sinaloa, Baja California, Durango, Sonora, and Chihuahua. In his inaugural address, President Trump labeled such cartels as terrorist organizations, but it is unclear how labeling them will bring them under the heel.
For decades the Mexican government has not been able to uproot the cartels and reclaim these states. Eight coastal cities serve as dominant points of entry for precursor chemicals, and the Mexican navy may enjoy greater success interrupting precursors. Yet even if President Sheinbaum totally commits to stopping fentanyl by relying on the navy (relatively free of corruption), the project will take years, not weeks.
Canada’s challenge in stopping fentanyl may be hard but much easier than Mexico’s. Far less fentanyl is produced in Canada than Mexico. In 2023, CBP seized 2,800 pounds of fentanyl at the US-Mexico border, and less than 5 pounds at the US-Canada border. As with Mexico, the annual volume of arriving cross-border traffic from Canada—nearly 6 million trucks and 21 million cars—makes a border-detection strategy difficult. Moreover, a crackdown on fentanyl arrivals from Mexico may likely shift production and distribution to Canada.
On the bright side, the federal Royal Canadian Mounted Police (RCMP, with 3,400 officers) and other federal police forces (about 1,000 officers) are relatively free of corruption and do not face a cartel problem. Conceivably, a Canadian promise to boost its federal police force and border agency by 1,000 officers to detect and destroy fentanyl production might satisfy Trump. In fact, a few days before Trump’s inauguration on January 20, 2025, the Canadian government announced plans to bolster the RCMP and other federal forces.
Stopping illegal immigration
New enforcement measures taken by President Joseph R. Biden Jr. in 2024 reduced the monthly number of unauthorized immigrants encountered in the southwestern land border by CBP from around 270,000 in September 2023 to around 100,000 in September 2024.4 Nevertheless, to Trump’s advantage, illegal immigration remained a central issue in the 2024 election campaign. In January 2023, Trump claimed that Mexico posted 28,000 troops to deter border crossings during his presidency. While that claim was never verified, in June 2019, CNN quoted the former Mexican defense secretary Luis Sandoval as saying that 15,000 troops were posted to the border. A Mexican promise to post 20,000 troops on the border for an extended period might satisfy Trump.
Illegal immigration numbers from Canada are far smaller than from Mexico. In September 2024, the monthly number was about 17,000, about 2,000 less than in September 2023. The Canada-US border is not only much longer (5,500 miles) than the Mexico-US border (2,000 miles) but also largely unprotected by barriers. Hence the Canadian Border Security Agency (CBSA), with a force of about 8,500 officers, is stretched thin. Again, a Canadian promise to add 2,000 officers to the CBSA might buy a delay in Trump’s threatened tariffs.
What areas of USMCA are likely to be renegotiated?
The sections below describe parts of the USMCA that remain subject to disagreement and are likely to be renegotiated when the pact is reviewed in 2026.
USMCA Review: Dairy Products
Canada’s dairy farmers represent only a tiny portion of the nation’s economy, but they are concentrated in certain influential areas like Quebec (home of 10,000 dairy farmers) and Ontario, wielding disproportionate clout with Canadian leaders. As a result, the entire industry is protected by Canada’s elaborate “supply management” system, which regulates production and prices of milk and dairy products while protecting them from cheaper US imports with an elaborate tariff and quota regime. Successive US administrations have railed against this system, but as one of Canada’s “sacred cows,” it has been mostly impervious to change.
The US has its own system of agriculture price supports, subsidies, and financial assistance. But Canadian supply management has been a long-standing target of US trade negotiators, even though the US enjoys an annual trade surplus in dairy products with Canada of around $200 million. Opponents of the Canadian regulations are vociferous, citing free market principles and noting that on average, dairy farmers are far richer than the average Canadian household, with an average net worth of almost C$5 million per farm in 2021. Nevertheless, like farmers in many countries including the US, dairy farmers are part of the nation’s cultural identity and enlist public sympathy, even though Canadian milk prices exceeded US levels by an average of around 14 percent in 2024.5
There is no telling how any future negotiations over dairy products will be affected by a trade war with Canada and Mexico under President Trump. But dairy was a highly contentious issue in USMCA negotiations under Trump’s first term. In those talks, the US secured a modest liberalization of Canadian dairy imports. Liberalization took the form of tariff-rate quotas (TRQs), which allow a specified amount of a dairy product to be imported at a lower tariff rate, while imposing a higher tariff on imports beyond that threshold. TRQs were identified in the USMCA for 14 individual dairy products. The agreed quotas are scheduled to gradually expand between 2020, when the USMCA entered into force, and 2039. For Canadian dairy imports, customary tariffs are steep, ranging to over 300 percent ad valorem. Altogether the 14 agreed TRQs amount to about 3.5 percent by volume of the Canadian dairy market. In value, US dairy exports to Canada were more than $1 billion in 2024.
Figure 9 summarizes US two-way trade with Canada and Mexico in dairy products. Two-way trade between the US and Canada for selected dairy products has increased, and the US trade surplus rose from $123 million in 2018 to $232 million in 2024. Exports of cheese and butter drove the increase: Cheese and curd exports more than doubled, rising from $56 million in 2018 to $142 million in 2024, while butter exports grew from $81 million to $154 million.
US dairy exports to Mexico far exceed exports to Canada. The US-Mexico two-way trade surplus surged from around $1.2 billion in 2018 to over $2 billion in 2024. US milk and cream exports to Mexico rose from $690 million in 2018 to $1.1 billion in 2024. Cheese and curd exports climbed from $388 million to $897 million in 2024.
The administration of TRQs is itself controversial and a source of US complaints that Canada was running the program that continued to protect Canadian dairy farmers. The reason for the controversy is that a TRQ scheme inevitably creates a “quota rent”—the difference between the lower price in the export market and the higher price in the protected import market. The administrator of the TRQ scheme determines who gets the quota rent by virtue of the TRQ allocation. Awarding TRQs is like awarding free money. For example, a firm awarded the right to import 20 tons of cheese can buy the cheese at a low price in Wisconsin and sell the cheese at a much higher price in Ontario.
The USMCA names the Canadian government as the dairy TRQ administrator. According to paragraph 3(c) of Section A in Canada’s TRQ Appendix in the USMCA, “Canada shall allocate its TRQs each quota year to eligible applicants. An eligible applicant means an applicant active in the Canadian food or agriculture sector.” After the USMCA entered into force in July 2020, Canada’s interpretation of “eligible applicants” triggered two dispute settlement panels that were convened under Article 31 of the USMCA.
In May 2021, at US request, the first dispute settlement panel (“Canada–Dairy TRQs I”) examined Canada’s allocation of dairy TRQs to formal “pools” of Canadian dairy processors. Obviously, these pools could use their bargaining power to acquire US dairy products at prices close to the prevailing US market prices, and thereby capture the quota rent when the products were resold in Canada. In December 2021, the panel found that processor TRQ pools were inconsistent with the USMCA.
In May 2022, Canada issued new TRQ allocation procedures. Under the new procedures, Canada allocated TRQs just to individual Canadian processors and distributors based on their respective shares of the Canadian dairy market for the 14 identified products. While Canadian dairy processors number in the hundreds, the top five firms account for over 50 percent of the market. Accordingly, the new procedures—with just five firms holding half the quotas—do not ensure intense competition between TRQ holders for US dairy products; hence the largest Canadian dairy processors can still capture the lion’s share of quota rents.
US dairy farmers felt cheated by this outcome. They called for action, and the USTR requested a new panel in January 2023 (Canada–Dairy TRQs II). The specific US legal complaint was that Canadian retailers and fast food chains were excluded from TRQ allocations. Without spelling out its internal analysis, evidently USTR believed that a wider circle of Canadian TRQ holders would, through competitive bidding, shift more of the quota rents to US dairy farmers.
To US disappointment, in November 2023, two of the three panelists held that USMCA conditions on “eligible applicants” did not require Canada to allocate TRQs to retailers and fast food chains. Canadian Trade Minister Mary Ng applauded the report: "Canada is very pleased with the dispute settlement panel's findings, with all outcomes clearly in favour of Canada."
US Trade Representative Katherine Tai under President Biden had a different take: "I am very disappointed…. Despite the conclusions of this report, the United States continues to have serious concerns about how Canada is implementing the dairy market access commitments it made in the agreement. While the United States won a previous USMCA dispute on Canada's dairy TRQ allocation measures, Canada's revised policies have still not fixed the problem for U.S. dairy farmers." Tai’s sentiments were echoed and amplified in Congress and by US dairy producers.
The strong US reaction ensures that procedures for allocating TRQs will be on the table in the USMCA review if not resolved sooner. Political heat generated by this issue far exceeds the magnitude of trade at stake. A plausible outcome, assuming a renewal of good faith by negotiators on both sides, would find Canada agreeing to a wider roster of TRQ holders, including Canadian retailers and fast food chains. That outcome would benefit both Canadian consumers and US producers.
USMCA Review: Digital Services Tax
President Trump’s new threats to impose tariffs on Canadian imports have taken center stage in US-Canada economic disputes. But whether or not the tariffs materialize, a looming separate fight with Canada is certain over Ottawa’s enactment in 2024 of a tax on US technology and digital giants like Meta (Facebook), Amazon, Google, and Netflix over the services they provide to Canadian consumers. The Biden administration objected to the tax and threatened to retaliate. Trump’s team has indicated that they plan to follow suit if the tax is imposed in 2025 as planned, perhaps by imposing retaliatory tariffs on Canada over this issue, above and beyond other tariff plans.
The dispute over Canada’s digital services tax (DST) is also certain to become a major focus of contention in negotiations to renew the USMCA running up to 2026. Mexico has not proposed a DST like Canada’s but has similar methods to tax digital consumers and could use a DST in the future. Here is a primer on the issues as they relate to the renewal of the USMCA.
Before its concerns with Canada, US opposition to DSTs was a long-running dispute with the European Union as part of Europe’s crusade to tax the profits of giant corporations that make money off European consumers but are based elsewhere. Many in the US share Europe’s concern over the practice of US corporations locating their profit centers in low-tax havens like the Cayman Islands.
In 2013, the Organization for Economic Cooperation and Development (OECD) launched an ambitious tax project named Base Erosion and Profit Shifting (BEPS). It had two central and related goals: first, increase global taxation of large corporations; and second, revise established boundaries of tax jurisdiction for the internet age. After years of analysis and debate by the OECD and its member countries, in 2021 the two goals were crystallized into two “Pillars” of corporate tax reform. Pillar One called for a portion of the earnings of large “consumer-facing” firms—essentially digital giants and a few others—to be attributed to countries where consumers are located, rather than countries where production takes place (the historical test for defining tax jurisdiction). Pillar Two called for a minimum tax rate of 15 percent on the earnings of large corporations, aimed at those that located in low-tax havens.
The BEPS project was launched when President Barack Obama occupied the White House. In his first term, President Trump, rejected the OECD handiwork, but President Biden and Treasury Secretary Janet Yellen again looked favorably on the BEPS project and its two Pillars.
Meanwhile, led by France, several countries enacted DSTs calculated as a percent of revenue garnered indirectly by tech giants from domestic consumers in the taxing jurisdiction, largely through directed advertising placed by third companies. As enacted, and as a practical matter, the DSTs discriminate against US tech giants. The US argues that these taxes also violate WTO tariff bindings and flout the boundaries of tax jurisdiction agreed in bilateral tax treaties. USTR investigated seven national DSTs in 20216 and found grounds to impose retaliatory tariffs under Section 301 of the Trade Act of 1974, which allows retaliation against unfair trade barriers.7
Mindful of these developments, as part of the two Pillars proposal in 2021, Secretary Yellen negotiated a supplementary agreement that OECD member countries would not enact new DSTs before January 1, 2024. The plan was to give the US and other members time to enact the two Pillars themselves. It was believed that, once enacted, Pillar One would replace existing DSTs. That plan was upset when Republicans captured the House of Representatives by a small margin in the November 2022 mid-term election. With their opposition against higher corporate taxes and the promise of some to lower these taxes, Republicans hold no affection for the OECD Pillars. That extinguished prospects for enactment of Pillar One prior to the end of the DST moratorium on December 31, 2023. As a stop-gap measure, the moratorium was then conditionally extended by nearly all OECD members to December 31, 2024.
Canada, along with four other countries, did not agree to the extension and instead announced that its parliament would enact the Digital Services Tax Act (DSTA). The Canadian DSTA, at a rate of 3 percent, applies to tech revenues derived from Canadian consumers from online advertising, marketing, social media, and user data. Tech firms liable are those with global revenues at least $818 million and Canadian revenues at least $15 million. The US Computer and Communications Industry Association estimates that the DSTA will cost US business firms between $900 million and $2.3 billion a year. The lower estimate is close to Canadian revenue projections. Members of the Industry Association include Amazon, Apple, BT Group, Cloudflare, Dish Network, eBay, Facebook, Google, Intel, and Intuit.
Faced with strong opposition from these US tech giants, in November 2023, Canada backpedaled on dates for implementation and retroactivity. However, the Canadian implementing legislation, known as Bill C-59, the Digital Services Tax Act, took effect on June 28, 2024, with retroactive application to 2022. No US firms have publicly refused to pay the tax. However, US trade associations requested USTR to retaliate, once again invoking Section 301 of the Trade Act of 1974. The Biden administration left office in January 2025 without taking action against the Canadian DSTA.
As soon as he entered the White House for his second term, President Trump issued an Executive Order withdrawing the US from the two OECD Tax Pillars. Accordingly, the Canadian DSTA will certainly be challenged, if not right away as part of the renewed tariff threats against Canada and Mexico, then certainly in the USMCA six-year review. Separately, President Trump has threatened to double the US tax rate, invoking Internal Revenue Code (IRC) Section 891, against firms based in countries that discriminate against US firms, including those that implement DSTs. Section 891, enacted in 1934, has not to date been invoked, but the plain intent is to discourage foreign countries from discriminating against US firms, and the sole remedy is to double the otherwise applicable rate of US taxation (but not to exceed 80 percent). As for Canada, the outcome may hinge on national elections, which must be held by October 2025. Prime Minister Justin Trudeau has stepped down, and conceivably his successor in the Liberal Party, or the Canadian Conservative Party, led by Pierre Marcel Poilievre, might resolve the dispute with Washington before Trump imposes Section 891 taxes.
Meanwhile, Ottawa enacted regulations to implement another digital tax, labeled the Online Streaming Act. The act imposes a tax of 5 percent on revenues earned from the sale of entertainment and music to Canadian consumers. Unlike the DSTA, where the tax base is the Canadian fraction of advertising, marketing, and kindred revenue earned by the tech platform from third party companies, the tax base of the online streaming tax is revenue paid by Canadian consumers to companies that provide both audiovisual and music streams. In other words, companies such as Netflix, Amazon Prime, Amazon Music, Apple Music, and Spotify. The tax applies to any company, Canadian or foreign, that earns revenue of C$25 million (US$18 million) or more from Canadian consumers for streaming services. According to a lobbying organization cited by the Wall Street Journal, the tax revenue from Canadian and foreign sellers of entertainment and music could reach U$740 million annually. Proceeds of the tax will be used to support French and indigenous language programming.
Affected US firms strongly object to the streaming tax, claiming discrimination contrary to the USMCA. On its face, the Online Streaming Act applies equally to Canadian firms, but US firms fear de facto discrimination in the threshold for application (US$18 million) and in the details of administration. A prominent Canadian lawyer, Lawrence Herman, rejects the discrimination claim, characterizing the Online Streaming Act as nothing more than a sales tax, which, by its nature, may collect more revenue from foreign than domestic wares. Whatever its legal merits under current USMCA provisions, Trump will likely seek provisions that reduce or eliminate the Canadian online streaming tax.
Mexico has not proposed a DST or a distinct online streaming tax. However, under current Mexican tax law, the standard 16 percent value added tax (VAT) applies to business-to-consumer (B2C) and business-to-business (B2B) internet purchases of goods and services by Mexican residents. In theory, the VAT should reach revenues earned from online sales of entertainment and music to Mexican consumers. But Mexico does not attempt to tax the earnings of US tech giants on revenues derived from third companies for advertising or marketing associated with programming delivered to the Mexican public. Mexican authorities might consider a DST, but given other frictions in US-Mexico relations, this seems unlikely.
The election of Trump and a Republican Congress dooms the immediate prospects for US adoption of the OECD Tax Pillars. Nevertheless, the North American partners will need to reach an accommodation on the Canadian DSTA and the online streaming tax in order to forestall retaliatory US Section 301 tariffs on merchandise imports or IRC Section 891 double taxation of Canadian firms operating in the US.
A plausible bargain—if Trump is willing to make any concessions—would entail agreement to end de facto discrimination against US tech giants inherent in Canada’s DSTA and online streaming tax, plus an agreement on the maximum DSTA tax rate, say 1.5 percent rather than the Canadian DSTA rate of 3 percent. There would also need to be an agreement on the formula for calculating the share of online revenue arising from Canadian (and possibly Mexican) consumers. The formula, for example, might reflect the number of Canadian users of internet platforms originating in the US and the average household income of Canadian users. Likewise, some adjustments may be made in the Online Streaming Act to ameliorate demonstrable de facto discrimination. Before the November 2024 presidential election, US and Canadian finance officials were inching towards an agreement on the DSTA. If the US can reach such an agreement with Canada, that might provide a useful benchmark for accommodating DSTs and streaming taxes enacted in Europe and elsewhere.
USMCA Review: Environmental Issues
At least since the 1990s, environmental groups in the US and in many of its trading partners have raised concerns about trade agreements. These groups maintain that trade accords wipe out farming livelihoods and encourage destruction of forests, carbon emissions, mining, drilling, and other forms of pollution. More specifically, the criticism centers on the claim that foreign investment in developing economies allows companies to challenge local environmental laws and regulations.
Environmental issues were an afterthought when the original NAFTA was negotiated between President George H.W. Bush, President Carlos Salinas of Mexico, and Prime Minister Brian Mulroney of Canada. In his presidential campaign that year, Governor Bill Clinton of Arkansas was wary of embracing NAFTA because of labor and environmental concerns among Democrats. After he was elected, his administration negotiated two “side agreements” for NAFTA—one on labor, the other on environment—to answer their misgivings. Negotiations centered on the concern that Mexico would relax its environmental and labor standards to attract foreign investment. Accordingly, the two side agreements called for NAFTA members not to lower their standards to induce investment. Even so, US ratification of NAFTA in November 1993 was a hard fought battle, with 234 yeas and 200 nays in the House of Representatives. Among Democratic members, only 102 voted in favor and 156 opposed.
The two side agreements ensured ratification of the NAFTA package, but their results in subsequent years disappointed labor and environmental advocates. The environmental side agreement established a Commission on Environmental Cooperation (CEC) in Montreal. When an environmental complaint is submitted about practices in a member country, the CEC was supposed to develop a factual record if it deemed an investigation is warranted. The factual record may prod action and can inform consultation but does not compel resolution of the grievance. According to the CEC, some 107 submissions were received between 1995 and 2024, and 27 factual records were created.8
The NAFTA environmental agreement focused on local issues, like disposal of hazardous waste and protection of wildlife, but did not call out CO2 emissions or climate change. Yet between NAFTA implementation in January 1994 and its renegotiation during the first Trump administration in 2018, climate change escalated to the number one global environmental issue. As a climate skeptic, however, Trump announced on June 1, 2017, that the US would withdraw from the Paris Agreement on climate change signed during the administration of President Barack Obama in 2015. Under the terms of the agreement, however, US withdrawal did not become effective until November 2020, but once Trump announced withdrawal, the US ceased to actively participate in Paris Agreement proceedings.9 President Biden rejoined the international pact in 2021, but Trump again announced US withdrawal, effective January 2026, when he reclaimed the White House in January 2025.
Chapter 20 of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), negotiated by the administration of President Obama with 12 other countries, is broadly similar to Chapter 24 of the USMCA, calling for national observance of multilateral agreements and other environmental concerns. The CPTPP serves as the successor to the Trans-Pacific Partnership (TPP), which the US left on January 30, 2017, at Trump’s direction. It’s worth noting that the TPP environmental chapter did not include the words “climate change.” Instead, it called for the “Transition to a Low Emissions and Resilient Economy.” President Obama’s negotiators refused to use the words “climate change” for fear they would cost needed Congressional ratification votes.
The content of the TPP environmental chapter was essentially replicated in the CPTPP,10 its successor after the US withdrew. Like USMCA Chapter 24, CPTPP Chapter 20 creates submission and factual reporting procedures, encourages consultations between parties, and establishes a dispute panel system—but does not authorize penalties. Mexico and Canada are both CPTPP members.
Given this background and similarities between USMCA and CPTPP chapters, and the policies of the Trump administration, it seems highly unlikely that the North American partners will make substantive changes to existing USMCA environmental obligations.
USMCA Review: Farm Trade
The cross-border flow of farm products to and from the US, Canada, and Mexico has always been a fraught issue for trade negotiators. Back in the early 1990s, the NAFTA opened Mexico and Canada to US agriculture exports—but up to a narrow limit for Canada. US farmers, dissatisfied with the NAFTA trade rules, won some improvement when the USMCA was enacted in 2020, the last year of President Trump’s first term.
The problem is that farmers in all three countries want more access to markets in the neighboring countries, and less access from those countries to their own markets in farm products. In the current protectionist climate, more liberalized trade of farm products seems unlikely.
The USMCA devotes three chapters to aspects of farm trade: Chapter 2 (National Treatment and Market Access for Goods); Chapter 3 (Agriculture); and Chapter 9 (Sanitary and Phytosanitary Measures).
USMCA Chapter 2 (National Treatment and Market Access for Goods) lays out each country’s tariff schedule on imports from its partners. For the great majority of tariff lines, the applicable duty rate is zero. However, each country’s tariff schedule contains an appendix that lists tariff lines subject to continuing tariffs and tariff-rate quotas (TRQs). A TRQ limits how much a product can be imported at a lower tariff rate. Nearly all the not-free-trade lines cover farm trade. Canada’s limits on US exports are concentrated in poultry, milk, cream, cheese, sugar, chocolate and food preparations that contain significant quantities of these items. Many of the not-free-trade items are subject to TRQs that are scheduled to phase out between 6 and 11 years. The US imposes barriers on Canadian exports in the same broad categories minus poultry but plus peanuts and cotton, again to be phased out between 6 and 11 years.
US-Mexico sugar trade is regulated in both directions. Canadian imports of sensitive items from Mexico are subject to highly restrictive most favored nation (MFN) tariffs. Mexico similarly restricts Canadian exports of poultry, milk, cheese, yogurt, eggs, raw sugar, sweetened powdered cocoa, ice cream, and kindred products.
Despite restrictions, US two-way trade with its neighbors is substantial. In 2023, US agricultural exports to Mexico totaled $28 billion and to Canada another $28 billion. US agricultural imports from Mexico were $45 billion and from Canada $40 billion.
Figure 10 shows the main farm products in US-Mexico and US-Canada two-way trade. The listed products imported from Canada amounted to $10.7 billion, with rapeseed colza or mustard oil topping at $4.8 billion. Fruits and vegetables are among the main farm products the US imports from Mexico, adding up to $12.8 billion, and corn and soybeans are the main exports to Mexico at $8.3 billion in 2023.
The less-than-free trade in North America results from entrenched defensive agriculture sector lobbies ready to do battle, a phenomenon that has curtailed trade for decades. In the background of President Trump’s proposed or threatened tariffs against Canada and Mexico is the looming deadline for the USMCA to be reviewed and possibly amended or renegotiated in 2026. But all the good intentions to liberalize trade will run up against political realities.
Separately, although official tariff rates enable more free agricultural trade between the US and Mexico, other tools can be used to impede imports. For example, US imports of Mexican tomatoes have faced antidumping and countervailing duties for decades, on the ground that tomato imports get unfair subsidies to compete at below-market prices (see Chapter 3). Back in 2023 Mexico invoked biotechnology and sanitary and phytosanitary (SPS) restrictions on US exports, notably corn. These restrictions are addressed in Chapter 9.
USMCA Chapter 3 (Agriculture) addresses several more aspects of farm trade. It prohibits export subsidies on agricultural trade between partner countries and disciplines the imposition of export controls. It spells out detailed procedures for addressing the Low Level Presence (LLP) of DNA from genetically engineered agricultural goods in imported farm products. These procedures are among the issues raised by the US-Mexico corn dispute, discussed below. And it gives detailed guidance for the administration of TRQs, a matter of intense dispute between the US and Canada over dairy trade.
USMCA Chapter 9 (Sanitary and Phytosanitary Measures, or SPS) devotes 22 pages of legal text to spell out and qualify two conflicting propositions: countries have the right to protect their citizens from farm products that pose a risk to human, animal, or plant health and safety; but SPS restrictions should not unnecessarily interfere with trade or discriminate between partners, and they should be based on “sound science.” USMCA Chapter 9 builds on the WTO Agreement on the Application of Sanitary and Phytosanitary Measures, which wrestles with the same two conflicting propositions. It doesn’t take a legal degree to anticipate that national SPS authorities will disagree on the balance between deflecting risk and fostering trade. And that they will disagree as to which research findings constitute “sound science.” Nor can it come as a surprise that SPS trade restrictions can easily serve as the cover for commercial protection.
Corn is the largest US farm export to Mexico, followed by soybeans. The two main varieties are white corn for human consumption and yellow corn for animal feed.
In 2023, total US corn exports to Mexico amounted to $5.5 billion, some 19 million tons. The Mexican USMCA tariffs on both varieties are zero, but the Mexican MFN rate (applied to imports from countries other than Mexican FTA partners) on white corn is 20 percent, while yellow corn is duty free. Corn is a staple crop in rural Mexico and essential to the livelihood of over 5 million farmers, who produced some 28 million tons in the 2022/2023 marketing year.11 White corn accounts for almost 90 percent of Mexican production. Successive Mexican governments have launched multiple trade barrier measures to raise the price of corn or otherwise boost farm income. Given the magnitude of Mexican imports of US corn (predominantly yellow corn), in 2023 amounting to around 50 percent of total Mexican corn production (predominantly white corn), limiting imports of either variety, thereby boosting prices, raises the income of Mexican farmers.12 If Mexican imports of yellow corn are limited, farmers could easily switch more of their fields from growing white corn to growing yellow corn.
Thus, in February 2023, Mexico issued a Decree Establishing Various Actions Regarding Glyphosate and Genetically Modified Corn, endangering a major US export market for corn. An earlier decree, issued in 2020, put genetically engineered (GE) corn imports on notice of prospective limitations. The 2023 decree immediately banned GE corn for flour production, mainly used to make tortillas, and called for the phase-out of GE corn for animal feed. Whatever protectionist intent the decree harbored, it had two rationales: first, the possible GE risk to human, animal, and plant safety; and second the imperative of food self-sufficiency for white corn. The risk argument, invoking the supposed danger to human, plant, and animal safety, draws on “precautionary principle” claims advanced by the European Union in agricultural disputes with the US. As well, since Mexico has long banned the domestic production of GE corn, the decree sought to avoid the introduction of GE strains to rural Mexico through imported corn.
Reacting quickly, in March 2023, the USTR initiated technical consultations with Mexico, citing notification and consultation provisions in USMCA Chapter 9. Technical consultations can at best lead to advisory opinions from qualified experts, but they cannot resolve a dispute. Accordingly, in June 2023, USTR held dispute settlement consultations with Mexico, again citing USMCA Chapter 9, followed in August 2023 by the creation of a dispute settlement panel. This action was applauded by Senators and Congress members representing farm districts, and by powerful farm lobbies. The reason for applause was clear: between January 2017 and August 2022, US exports of white corn to Mexico averaged 69 tons a month; between September 2022 and May 2023, exports plunged to 8 tons per month.
The panel was formed in October 2023, chaired by Christian Haberli, a Swiss trade expert, with Hugo Perezcano Diaz (Mexico) and Jean E. Kalicki (US) as members. At the end of January 2024, the panel announced it would hold a hearing in June and issue its report in fall 2024. The US argued that Mexico has not followed the notification and consultation procedures agreed in the USMCA, and that Mexico failed to provide adequate scientific evidence that GE corn poses a risk to human, animal, or plant safety. Mexico argued that its 2020 decree provided ample notice, that meetings with USTR officials satisfied consultation requirements, and that various studies (often from European sources) establish the requisite degree of risk.
In June 2024, USTR attended the panel hearing to challenge the Mexican measures, such as its Tortilla Corn Ban and the Substitution Instruction, and their violation of USMCA obligations. Mexico distinguishes between corn for direct human consumption (e.g., tortillas) and GE corn for industrial uses (e.g., starch), defending its 2023 decree as protecting native corn, mitigating health risks, and promoting food self-sufficiency. The final report ruled in favor of the US. It was published on December 20, 2024. Mexico’s Economy Ministry in conjunction with the Ministry of Agriculture released a statement in which they expressed their will to comply with the decision. A few days after the US administration provisionally paused the imposition of 25 percent tariffs on imports from Mexico and Canada, Mexico repealed the February 2023 decree, a decision that was welcomed by USTR.
Since GE crops represent a growing share of US farm exports, complete victory in the corn dispute sets the tone to establish a valuable precedent for US farm trade with the world.
Since Mexican exports to the US of agricultural products ($45 billion in 2023) substantially exceed Mexican imports from the US ($28 billion in 2023), the US has leverage over trade in farm products from Mexico, and a US threat of retaliating against Mexican farm exports would have served as a powerful lever had Mexico not implemented the adverse panel decision or had the US not paused the imposition of 25 percent tariffs on USMCA partners.
USMCA Review: Government Procurement
Before the modern trade agreements of the post-World War II era, it was considered natural for countries to favor their own domestic suppliers and contractors in government procurement. Then as world trade opened up, it was equally natural for the US and other countries to want to press for openness and the ability to sell services and supplies for massive government spending projects undertaken by their trading partners.
The United States, Canada, and Mexico reached a limited agreement opening up government procurement to each other in the original NAFTA of 1994. But by the time President Trump renegotiated NAFTA in his first term, enthusiasm over open government procurement rules waned, replaced by ardor for “Buy America” imperatives that were embraced as well by President Biden.
Accordingly, the USMCA signed by Trump in his last year in office limited the ability of Mexico and Canada to bid for US government procurement contracts. It is doubtful that any revision of the USMCA in 2025 or 2026 will expand the ability of trading partners to go back to more open bidding for such contracts in the future.
Some history of the evolution of government procurement agreements helps clarify where the three North American trading partners are today.
The Tokyo Round of Multilateral Trade Negotiations (1974-79) established the first Government Procurement Agreement (GPA) opening specified national procurement to foreign competition. The agreement applied only to GPA members and not to the postwar General Agreement on Tariffs and Trade (GATT) members at large.13 The first GATT GPA was expanded in 1987. When the World Trade Organization was created as a successor to the GATT in 1995, a new edition of the GPA emerged, which was revised in 2014.
Canada and the US were founding GATT GPA members and continued as signatories to subsequent editions. Mexico, like most developing countries, never joined the GPA.14 Consequently, the WTO GPA applies to US and Canadian procurement while USMCA Chapter 13 applies to US and Mexican procurement.
Because Mexico did not subscribe to GPA obligations, and because the United States wanted GPA-plus concessions from its North American partners, NAFTA Chapter 10 (Government Procurement), implemented in 1994, spelled out obligations between North American partners. Of significance to the US and Canada, Mexico opened some procurement by its powerful state energy monopolies, Pemex and CFE, as well as other government agencies and entities. The US and Canada made reciprocal concessions.15
The text of NAFTA Chapter 10 details requirements for qualifications, notice and tendering of government contracts. The reason is that government procurement agencies tend to be more concerned about preserving relations with established national suppliers than saving taxpayer money, unlike private procurement officers who energetically seek savings for the corporate bottom line, and readily buy from the most competitive supplier, domestic or foreign.
While NAFTA Chapter 10 did not open procurement either by the US or Mexican states or the Canadian provinces, it promised future negotiations (which never happened). By contrast, the WTO’s GPA provision committed certain US state and Canadian provincial procurement to competition from other GPA members.
NAFTA Chapter 10 was tested in the global financial crisis of 2007-2009 and found wanting. As one measure to stabilize the US economy, the Obama Administration in its first months in office persuaded Congress to pass the $800 billion American Recovery and Reinvestment Act of 2009, committed to infrastructure projects. Buy America provisions were inserted for steel and manufactured goods, arguably contravening both the WTO GPA and NAFTA Chapter 10 but considered necessary to ensure its passage.
President Barack Obama’s USTR lawyers tried to reconcile these international obligations with the Buy America spirit, but their workaround measures satisfied neither Canada nor Mexico. Obama’s Buy America precedent set a pattern for the Trump and Biden administrations. President Biden was a dedicated Buy America advocate, both in his campaign and in the White House—despite high taxpayer cost and foreign grievances. A recent NBER paper confirms that Buy America requirements may have created 100,000 manufacturing jobs, but at a cost of more than $110,000 per job. Current Buy American content rules are scheduled to raise the required share of US intermediate inputs from 50 percent to 75 percent by 2029, in turn raising the cost per US job to figure between $154,000 and $238,000.
The USMCA Chapter 13 (Government Procurement), negotiated in 2018 under Trump, was crafted under a different star than NAFTA Chapter 10. No longer did the United States champion open competition for government contracts. Neoprotectionism had superseded neoliberalism. Within the lengthy USMCA Chapter 13 text and schedules, three features ensure ample room for Buy America—and likewise for Buy Mexico and Buy Canada.
First, USMCA Chapter 13 was confined to the United States and Mexico; Canada was no longer a party (though US-Canada procurement rights were still covered by the WTO GPA). Second, there was no coverage of US or Mexican states, nor any suggestion that sub-federal coverage might be negotiated in the future. This meant that expenditure of federal funds that “flowed down” through state agencies—the dominant channel for Biden’s $1.2 trillion Infrastructure Investment and Jobs Act and an important channel for his $800 billion Inflation Reduction Act of 2021—was not covered. Third, Pemex and CFE were allowed to set aside annually hundreds of millions of dollars of procurement not subject to US competition.
These limitations reflected the reality of political affection for Buy America, both in the Trump and Biden administrations. Running for reelection in 2024, Biden repeated his “Made in America” promises 29 times in a campaign document. Moreover, he committed to close loopholes that allow foreign content to creep into American made goods purchased by the federal government. Like Trump, Biden is politically attuned to preserving and expanding manufacturing jobs, for iron and steel melted and poured on American soil, and for the merchant marine as a carrier of goods between US ports (protected by the Merchant Marine Act of 1920, also known as the Jones Act). The claim of generating well-paid employment is central to the argument for spending taxpayer dollars solely on American goods.
Analysis done at the Peterson Institute (prior to the mentioned NBER paper) concluded that Buy America provisions are equivalent to a 26 percent ad valorem tariff on government procurement, and that similar restrictions in Canada amount to a 36 percent tariff and in Mexico to a 38 percent tariff. These are high tariff-equivalent figures, implying substantial cost elevation on government contracts. Buy America, like other buy national policies, essentially shuffles jobs from other sectors of the economy, including exports, to the government procurement sector.
Despite the high cost, President Trump’s devotion to Buy America makes it likely that the United States will not seek more open regional procurement provisions in the USMCA review. Possibly President Claudia Sheinbaum of Mexico might welcome more competition in Mexican government procurement, if only to get better value for public funds. The same sentiment might be embraced by the Canadian successor to Prime Minister Justin Trudeau, to be elected no later than October 2025. If so, Mexico and Canada might propose attractive liberalization packages in schedules to USMCA Chapter 13 as enticement for the US to do the same.
But unless Mexico and Canada take the initiative, nothing much is likely to change in North American government procurement.
USMCA REVIEW: Investment Disputes
Booming trade in goods and services between the US and Mexico has received most of the attention by analysts of economic interdependence. Less noticed, perhaps, has been the growth of mutual foreign direct investment (FDI), led by US firms holding nearly $145 billion of FDI stock in Mexico in 2023, making the US the top source of foreign investment in that country. Much of that investment has been in manufacturing automobiles and auto parts for export to the US, as well as food and beverage products also for export.
This investment has been facilitated over the years by the NAFTA, which was proposed in the early 1990s by President George H.W. Bush and negotiated and enacted by President Bill Clinton in 1994. To encourage such investment, NAFTA contained strong provisions to protect US investors from expropriation and other arbitrary actions in Mexico, which had a history of nationalizing the energy assets and interfering in other sectors of the economy with sometimes arbitrary regulations.
When NAFTA was renegotiated in the first term of President Trump, however, his top trade envoy, Robert Lighthizer, then the protectionist-inclined trade czar, took a dim view of the investment arbitration provision in NAFTA. His view was that the provision provided an implicit subsidy for US firms to invest abroad by reducing the risk of arbitrary behavior by host governments with uneven judicial systems and weak property rights. Lighthizer preferred that US firms themselves bear the risk of investing in Mexico—or better invest in America. Consequently, Article 14 of the USMCA significantly curtailed investment protection in Chapter 11 of NAFTA, with quite different provisions as between US-Mexico and US-Canada disputes.
US-Mexico. As between the US and Mexico, for most sectors under Article 14 of the USMCA, new cases of unfair treatment of US investments could only be brought by citing denial of national treatment or most favored nation treatment, or by citing direct expropriation. US investors could not invoke a previous provision of NAFTA that allowed for making the broader claim of denial of “fair and equitable treatment.” Moreover, foreign investors had to first seek relief in the Mexican judicial system before invoking USMCA Article 14. However, under Annex 14-E, new cases in the important oil and gas sector and four other sectors entailing government contracts—electric power, telecommunications, transportation, and transportation infrastructure (namely roads, railways, bridges, and canals)—could be based on denial of fair and equitable treatment as well as the traditional discrimination and expropriation grounds, and they need not be preceded by litigation in Mexican courts.
For three decades, Mexico has thereby benefited from reassuring foreign investors that their apprehensions over the Mexican judicial system could be allayed by resort to arbitration. In fact, after NAFTA entered into force in January 1994, Mexico signed 31 bilateral investment treaties and 11 free trade agreements, all containing investment protection provisions. Since 1997, some 55 investment claims have been brought against Mexico under these treaties and agreements, 40 of them by US and Canadian investors. Almost half the claims have been brought since 2018, the year USMCA negotiations were concluded. Yet, as shown in figure 11, since NAFTA, FDI to Mexico has boomed. In the past decade, about half of inward FDI to Mexico has arrived from countries other than the US and Canada—mostly European countries and Japan. As of 2024, arbitrators have awarded $341 million claims against Mexico, a comparatively small sum even if investor protection clauses only motivated as little as 5 percent of inward FDI flows.
In 2025 and 2026, as the USMCA review (and likely renegotiation) is under way, crosscurrents of political and economic nationalism in the US will shape Mexico’s inward FDI. Mexico is laboring under new problems of cartel violence, including murders of visiting US tourists, as well as new US tariffs, and concern over constitutional changes in 2024 that called for political election of judges. On the other hand, rising anti-China sentiment in the US may encourage companies that export to the US to relocate to Mexico, a trend that the Trump administration might deem as positive. Mexico may well decide that retaining, and even strengthening, the investor protection provisions of Article 14 will best serve its national interests. If so, neither the US nor Canada will likely object. On the other hand, if Mexico decides that Article 14 creates more hassle than its contribution to FDI inflows is worth, neither the US nor Canada seems likely to defend investor protection.
US-Canada. Canada is an even bigger location for US FDI than Mexico, in part because there are fewer concerns about the safety of these investments. US FDI stock in Canada in 2023 was $750 billion, making the US once again the biggest foreign investor in that country. Investments are concentrated in manufacturing (again much of it for export to the US), finance, and insurance, which take advantage of Canada’s abundance of skilled workers and natural resources, and the reliability of Canada’s parliamentary system of government. Nevertheless, or perhaps because Canada was considered a reliable investment partner, investment protections have been eased by the USMCA compared with NAFTA. Under USMCA Annex 14-C, the prior NAFTA Chapter 11 provision is only available for “legacy” cases, involving pre-USMCA investments. Legacy claims had to be launched within three years after NAFTA was terminated, namely before July 1, 2023. No new claims can be brought for cases arising after the USMCA entered into force in June 2020. Consequently, Article 14 of the USMCA significantly curtailed investment protection previously available under Article 11 of NAFTA.
The most important legacy case, citing NAFTA Chapter 11, but brought under USMCA Annex 14-C, was the Keystone XL pipeline, designed to bring oil from Alberta Province to Nebraska, where it would then be carried through established pipelines to Houston refineries. Under a series of Executive Orders, beginning in 1968, US presidential permits are required for oil and gas pipelines, and electric transmission lines, that cross either the Canadian or Mexican border. In November 2015, reflecting the protests of environmentalists and Native Americans, President Barack Obama denied a permit for the Keystone XL pipeline. In March 2017, President Trump reversed course and issued the permit, allowing construction to commence. But when he entered the White House in January 2021, President Biden revoked the permit. TC Energy, the Canadian sponsor of Keystone XL, then launched its NAFTA Article 11 legacy case, claiming a loss of $15 billion. By a 2-1 vote, the arbitrators decided against TC Energy. The decisive argument was that Biden’s permit denial occurred after NAFTA was terminated in June 2020, and therefore the claim was not susceptible to adjudication under USMCA Annex 14-C. Needless to say, TC Energy felt cheated by the confusion surrounding these permitting decisions and the arbitration outcome. President Trump has signaled that he will likely reverse the US decision again and permit the Keystone pipeline, if TC Energy decides to revive the project.
Nevertheless, hostility to investor protection provisions, expressed not only by Lighthizer but also by numerous US and Canadian academic commentators, practically ensures that there will be no revival of NAFTA Chapter 11 in the course of US-Canada talks during the USMCA review. In fact, at the very end of its term in office, the Biden administration sought to further weaken investor-state dispute settlement (ISDS) protections under US trade agreements, including the USMCA.
However, some 38 Canadian trade agreements, apart from the USMCA, contain foreign investor trade protection provisions. As figure 12 shows, FDI to Canada has grown significantly since NAFTA was ratified in 1994. But investor protection provisions in trade agreements probably make little difference to foreign investment in Canada.
Likewise, the US has some 50 agreements in force containing investor protection provisions with countries other than Mexico and Canada. Again, as figure 12 shows, inward FDI to the US has grown steadily since NAFTA was ratified. But investor protection provisions in trade and investment treaties probably made no difference to the pace of expansion. It is noteworthy that the level of inward FDI flows has not changed much in any of the USMCA partners over the past decade.
Canada-Mexico. Under USMCA Article 14, Annex 14-C, only legacy cases launched prior to the USMCA’s entry into force in June 2020 can be brought between Canada and Mexico. However, since both countries are signatories to the Comprehensive and Progressive Trans-Pacific Partnership Agreement (CPTPP), which the US negotiated under President Obama, but which President Trump walked away from in 2017, Canadian and Mexican firms can seek investor protection arbitration under the traditional CPTPP rules.
China-Mexico. Chinese direct investment in Mexico has grown significantly, expanding already strong trade ties in the manufacturing sector. This investment flow has triggered mounting US concerns that Mexico has become a “backdoor” for Chinese goods entering the US market, particularly in the transportation sector (mainly autos and parts). Seeking to allay US concerns, Mexico points out that investment from China is small compared with investment from other regions. In a recent report, Rhodium Group identified some $13 billion of Chinese FDI transactions into Mexico, far higher than a stock of $1.2 billion recorded by Mexico’s Secretariat of Economy and $1.7 billion recorded by China’s Ministry of Commerce (MOFCOM). While this gap is partly due to investments entering through offshore entities based in Hong Kong or elsewhere, an upward trend in FDI from China and Hong Kong has been observed since the USMCA (figure 13). This trend has been particularly noticeable since 2022.
The role of China in exporting to the US through the “backdoor” of Mexico has compelled the Trump trade team to call for stricter “rules of origin” requiring Mexican exports to contain higher levels of North American inputs to quality for trade preferences. But it remains to be seen whether Chinese investments in Mexico become a major issue in renewal talks for the USMCA.
USMCA Review: Labor Issues
Organized labor in the US has grown increasingly skeptical of US trade deals that union leaders maintain have hollowed out industry and cost jobs, especially in the manufacturing sector. Labor’s supporters in Congress thus had to be placated when President Bill Clinton scrounged for votes to ratify NAFTA, previously negotiated under President George H.W. Bush, in 1993. To lure those votes, Clinton worked with Canada and Mexico to craft environmental and labor “side agreements” to the NAFTA text. The side agreements called on each NAFTA partner to enforce its own environmental and labor standards and not to weaken those standards as a means of attracting foreign investment.
Since ratification of NAFTA and its enactment in 1994, labor agreements have been part of nearly all trade negotiations that require Congressional approval, including the USMCA signed by President Trump in his first term. But organized labor and Congressional Democrats are highly likely to seek strengthened labor protections if and when the USMCA is renegotiated in 2025/2026.
NAFTA was approved in 1993 on a fiercely contested Congressional vote of 234 yeas to 200 nays, with only 102 House Democrats in favor. It was clear that the labor side agreement, formally titled the North American Agreement on Labor Cooperation (NAALC), enabled its ratification, although the accord’s opponents included not only organized labor but also critics of globalization and some environmental groups. The critics complained that the NAALC did not require Mexico to raise its labor standards and did not contain a robust system for ensuring compliance. The NAALC did provide for the submission of complaints to each National Administrative Office (NAO), and the possibility of arbitration, monetary penalties, and ministerial consultations. Through 2015, some 39 submissions were received by NAOs, of which 13 were received against Mexican practices by the US NAO, the Office of Trade and Labor Affairs (OTLA) in the US Department of Labor. Eight of the OTLA submissions led to Ministerial Agreements, but there were no arbitration panels or monetary penalties. NAFTA opponents characterized this record as a paper chase with no benefit.
President George W. Bush (2001-2009) concluded 13 new free trade agreements (FTAs) during his White House tenure. When negotiations were underway for the US-Peru FTA in 2007, Congressional Democrats threatened to withhold support unless labor provisions stronger than the NAFTA model were written into the text. This demand was the subject of the May 10, 2007 agreement between the White House and Congress. Labor provisions were the centerpiece of the May 10 agreement with Congress, but it also covered environmental compliance, medicines, investment, and government procurement. Chapter 17 of the US-Peru FTA, ratified in 2009 and formally named the Peru Trade Promotion Agreement (PTPA), carries out the May 10 agreement. Similar provisions are contained in subsequent US FTAs.
The cornerstone of Chapter 17 of the Peru accord is the obligation of parties to enact statutes and regulations that implement the five “Fundamental Principles and Rights at Work” enumerated in the International Labor Organization (ILO) Declaration of 1998 and amended in 2022. The five principles are (a) freedom of association and the effective recognition of the right to collective bargaining; (b) the elimination of all forms of compulsory or forced labor; (c) the effective abolition of child labor; (d) the elimination of discrimination in respect of employment and occupation; and (e) a safe and healthy working environment. Chapter 17 thus went beyond the NAFTA obligation to “enforce your own laws” to the May 10 obligation to upgrade labor laws. If consultations do not resolve a labor dispute, Chapter 21 in the Peru accord (PTPA) provided an arbitration mechanism followed by withdrawal of PTPA concessions as the ultimate penalty.
President Trump was in the process of courting organized labor when the USMCA was negotiated in 2018, and the AFL-CIO used its leverage to insist on more robust labor enforcement provisions than PTPA Chapter 17. Likewise, concerns voiced by Trump in his first term on auto production in Mexico led to two significant outcomes: the creation of the facility-specific Rapid Response Mechanism (RRM), which allows the US to act quickly if Mexico is violating workers' rights at a specific workplace, and the establishment of labor value content (LVC) requirements in the auto sector, which requires that at least some of a vehicle’s production take place in a “high-wage” environment. These provisions were established on a condition of preferential treatment in exporting to the US.
The RRM in Annex 31-A of USMCA Chapter 31 is applied just to the US and Mexico. Basically, the RRM facilitates the rapid formation of an arbitral panel, issuance of the panel decision, and imposition of appropriate penalties on exports by the offending plant. In September 2024, USTR issued a Fact Sheet recounting 27 RRM cases pursued by the US against deficient labor practices in Mexican plants, including unpaid backpay claims, reinstatement of workers, and union representation. Some 36,000 Mexican workers were said to have directly benefited from RRM cases. Reflecting the importance of auto trade between the US and Mexico, many of the cases involved auto plants.
In addition to the RRM provision, the USMCA’s LVC requires that 40 to 45 percent of the value of autos and parts exported by each Mexican plant be produced by workers earning average wages of at least $16 an hour. This condition is spelled out in Article 7 of the Appendix to Annex 4B of USMCA Chapter 4 on Rules of Origin. The LVC was designed to ensure that more content embedded in autos came from the US, given the wage differential between Mexico and the US. This differential has narrowed since the implementation of the USMCA but remains significant (figure 14): US earnings in the auto manufacturing sector are almost seven times the wages in Mexico.
At the time of writing, neither organized labor nor progressive Democrats have tabled proposals to amplify the USMCA labor provisions. But it would be surprising if those groups did not at least seek expedited imposition of monetary awards against offending Mexican plants and broader and higher minimum wage levels.
USMCA Review: Softwood Lumber
Canada and the US have been fighting over Canadian softwood lumber exports for at least four decades—possibly setting some sort of record for trade disputes relative to the amount of actual trade that takes place. The disputes are over what successive US administrations have charged are Canada’s unfair subsidies to its lumber industry.
A central issue is how to take into account the structural differences of the industries in both countries. The US claim that Canada unfairly subsidizes its lumber industry stems from the fact that most Canadian forests are publicly owned. Canada’s regional governments in British Columbia and elsewhere charge a price for cutting timber (known as stumpage fees) that the US argues are so low they act as a subsidy for Canadian producers. In the US, timberlands are mostly in private hands, located in politically important states in Georgia, Alabama, the US northwest, and Maine. Private forest owners feel free to charge higher prices for harvesting trees when demand is strong.
These differences have led to a succession of antidumping actions by the US, despite the desire of US homebuilders to purchase lower-priced lumber from Canada. The disputes have echoed through many rounds of negotiations, starting with the Canada-US Free Trade Agreement (CUSFTA) in 1988 and continuing through NAFTA in 1994, and finally the USMCA under President Trump in 2018. All of these trade deals failed to devise a permanent solution to softwood lumber trade. Temporary agreements have been reached, only to expire, reviving the long-running disputes.
The US imported an average of $6 billion of softwood lumber annually from Canada during 2014-24—mainly used for home construction and all subject to US countervailing and antidumping duties (figure 15, left panel). The import volume of lumber from Canada during this period has been steady at around 30 million cubic meters (figure 15, right panel), which is equivalent to approximately 13 billion board feet. Current combined duties range from 11.54 to 17.27 percent. A 25 percent tariff on top of that, as envisioned by Trump, would make the total around 40 percent for softwood lumber.
Because of the failure of negotiators to resolve lumber issues, disputes have followed their own meandering track in the US International Trade Commission (USITC), the US Court of International Trade, binational arbitration under CUSFTA and NAFTA, the WTO Dispute Settlement Body, and direct negotiations between US and Canadian officials. Given this history, officials may choose to ignore softwood lumber in any review of the USMCA. Figure 16 shows lumber prices over the period 2014-24, with two notable peaks in May 2021 and early 2022, partly due to the rise in housing demand during the pandemic. Between July 2024 and February 2025, US prices rose from around $420 per thousand board feet to around $600. Widespread damage from hurricanes and wildfires added to the lumber demand. Suspending penalty duties on imports from Canada would be a useful anti-inflationary measure, if that was a prime objective of the Trump administration.
Yet disputes have proven intractable for at least four reasons:
- The US and Canadian softwood lumber industries are critical components of regional economies in both countries—southern US states such as Georgia and Alabama, and Washington and Oregon in the northwest US; and British Columbia, Ontario, and Quebec in Canada.
- There is little or no cross-border ownership of lumber companies that might otherwise mitigate trade disputes. Moreover, Canada does not permit the export of whole logs.
- As mentioned above, Canadian timberlands are almost entirely owned by provincial governments, and stumpage rights are sold to Canadian companies at administered prices rather than auctioned at market prices. By contrast, in the US, lumber companies either own the timberland or purchase stumpage rights at market prices. Canadian stumpage prices are consistently cited as a subsidy.16
- While import restrictions perhaps added $24,000 to the cost of a new American home in 2021, the voice of the National Association of Home Builders is no match for the US lumber industry.
Past episodes in the softwood lumber saga have been temporarily resolved, after extensive litigation, in various ways.17 The first episode, initiated in 1982 and known as Lumber I, resulted in a USITC finding of no injury to the US industry. The second episode, initiated in 1986 and known as Lumber II, resulted in a Department of Commerce–imposed 15 percent countervailing duty and a USITC finding of injury. The duty was waived following a memorandum of understanding between the US and Canada requiring the provinces to apply export duties on softwood lumber exports. The third episode, initiated in 1991 and known as Lumber III, resulted in a Commerce Department–imposed 6.51 percent countervailing duty and a USITC finding of injury, but the injury finding was reversed by a binational panel. Subsequently, in 1996, to ward off a new case, the US and Canada signed a five-year Softwood Lumber Agreement, which imposed an annual quantitative limit of 14.7 billion board feet on Canadian exports. That agreement expired in 2001, clearing the way for the legal odyssey known as Lumber IV.
Responding to the US industry petition, in 2002 the Commerce Department found a combined countervailing duty and antidumping duty rate of 27.22 percent. That decision was appealed by Canada first to the WTO and then to a NAFTA binational panel. After multiple hearings, both sets of arbitrators largely decided in Canada’s favor. After more legal twists, Commerce cut the combined penalty duty rate to 10.8 percent. In March 2006, at Canada’s urging, a new NAFTA panel ruled against the duty, and a second Softwood Lumber Agreement was concluded. By that agreement, the US refunded $4 billion of penalty duties that had been collected from Canada, and new export controls were spelled out. While controversial, the deal was ultimately approved by the Canadian House of Commons. Subsequent arbitrations in the London Court of International Arbitration declared that Canada had not totally implemented its side of the bargain, and Canada complied. The second Softwood Lumber Agreement expired in 2015, but the US agreed not to launch a new case for one year.
In 2016, the US industry initiated new countervailing duty and antidumping duty cases, and the finding of the Commerce Department and USITC was ultimately in the industry’s favor. Penalty duties of 17.99 percent were initially imposed, but subsequent modifications lowered the combined duty to around 14.4 percent in 2023. Meanwhile, Canada opened fresh arbitration cases in the WTO and under CUSFTA and NAFTA provisions. In August 2023, Mary Ng, Canadian Minister of Export Promotion, International Trade and Economic Development, characterized the duties as “unfair, unjust and illegal” but declared that “Canada remains ready and willing to discuss a negotiated outcome to the dispute that provides the stability and predictability the sector needs to ensure its continued growth and success.”
The 2024 presidential election year was not an auspicious time to craft the third Softwood Lumber Agreement. Nor are the arbitration cases launched by Canada likely to yield a mutually agreed solution. The determination of President Trump to wage a trade war with Canada almost certainly ensures the continuation of trade remedy cases and US penalty duties on softwood imports. In fact, on March 1, 2025, Trump instructed the Commerce Department to launch a new antidumping investigation and at roughly the same time added lumber to a list of specific products that would soon be subject to 25 percent tariffs on all imports from Canada.
In theory, the softwood lumber controversy could be resolved by something resembling the 1996 Softwood Lumber Agreement. That pact dropped penalty duties but imposed a quantitative limit (14.7 billion board feet) on Canadian exports. While quantitative limits have the undesirable feature of eliminating price competition from Canadian imports once the quota is reached, they seem less susceptible to protracted disputes than import duties or export taxes. To provide flexibility in the event of a severe price spike—as happened between March 2020 and April 2021 when prices rose from around $340 to $1,240 per thousand board feet as shown in figure 16—the US president should have the power to relax the quota. For greater stability, a fourth Softwood Lumber Agreement, if negotiated, should have a life span of 10 years, approximately the life of the USMCA before its agreed 16-year life (subject to renewal) comes to an end.
NOTES
1Data for 2024 throughout this text are annualized trade flows calculated using the available year-to-date data (at time of writing) for 2024 and converted into annual terms by dividing the sum of the available flows by the available months, and multiplying this ratio by twelve.
2In comparing auto sector data from the Congressional Research Service and the Census Bureau’s FT 900, two key observations stand out. First, the data from the Congressional Research Service and FT 900 are similar, showing consistent trends between the two sources. Second, compared with the collected data above, FT 900 shows moderately larger trade deficit for autos and parts with Mexico, while it remains almost the same for Canada.
3For figures 5-8, nominal trade values are expressed in current US dollars, and real trade figures are expressed in 2019 prices. Real figures are thereby corrected for price level changes in US imports and exports. Import price changes for Chinese merchandise reflect the added cost paid by US households and firms of tariffs imposed by the Trump and Biden administrations.
4The figures here are the total US Customs and Border Protection (CBP) encounter numbers, which include US Border Patrol (USBP) Title 8 apprehensions, Office of Field Operations (OFO) Title 8 inadmissible volumes, and Title 42 expulsions.
5The percentage is calculated by comparing the average monthly per-unit retail price of milk in 2024 between Canada and the US.
6The seven countries are: France, India, Italy, Turkey, Austria, Spain, and the UK. As well preliminary investigations were initiated on Brazil, Czech Republic, the European Union, and Indonesia.
7Rather than imposing retaliatory tariffs on imports from the seven offending countries, the USTR reached an agreement with each country that DSTs collected in excess of Pillar One taxes that might be owed would be refunded to the affected firms once Pillar One was enacted. These agreements with six countries expired in December 2023, but USTR is now seeking their renewal. See “Amid skepticism, OECD aims for first-quarter conclusion of tax talks,” InsideTrade.com, January 4, 2024.
8 For an assessment of the early CEC reviews of environmental disputes under NAFTA, see Gary Hufbauer, Daniel Esty, Diana Orejas, Luis Rubio, and Jeffrey Schott, NAFTA and the Environment: Seven Years Later, Policy Analyses in International Economics 61 (Washington: Institute for International Economics, October 2000).
9 However, the US still submitted climate data to the Paris Agreement officials, per requirements under the UN Framework Convention on Climate Change (UNFCCC).
10 The content of the environmental chapter of the TPP is discussed in Cathleen Cimino-Isaacs and Jeffrey Schott, eds., Trans-Pacific Partnership: An Assessment, Policy Analyses in International Economics 104 (Washington: Peterson Institute for International Economics, July 2016).
11Marketing year is the 12-month period beginning just after harvest during which a crop may be sold domestically, exported, or put into reserve stocks.
12The calculation is a rough estimation comparing Mexico imports of US corn in 2023 to Mexican corn production in the 2022/2023 marketing year.
13The OECD procurement negotiations, involving a small number of developed countries, were shifted to the GATT during the Tokyo Round.
14The 21 parties to the GPA are: Armenia, Australia, Canada, the European Union (and its 27 member states), Hong Kong China, Iceland, Israel, Japan, the Republic of Korea, Liechtenstein, the Republic of Moldova, Montenegro, the Netherlands with respect to Aruba, New Zealand, Norway, Singapore, Switzerland, Taiwan, Ukraine, the UK, and the US. See USTR’s webpage on the WTO Government Procurement Agreement.
15Gary Clyde Hufbauer and Jeffrey J. Schott, NAFTA: An Assessment, Revised Edition, Institute for International Economics, Washington DC, October 1993.
16The US International Trade Commission publishes an annual report that details Canadian and other subsidies to foreign lumber producers.
17For more on the history, see Congressional Research Service (CRS) Reports for Congress, Softwood Lumber Imports From Canada: History and Analysis of the Dispute and Softwood Lumber Imports from Canada: Current Issues.
Correction: An earlier version of this page incorrectly cited the direct and indirect impacts on US price levels from 25 percent tariffs on Canada and Mexico.
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