David A. Gantz, “The Future of North American Trade and Economic Integration,” Rice University’s Baker Institute for Public Policy, June 27, 2025, https://doi.org/10.25613/B513-SM92.
This working paper addresses the challenges to the continued viability of the United States-Mexico Canada Agreement (USMCA), and more broadly, the future of North American economic and trade relations.[1] The USMCA provides for a mandatory review in July 2026, but the United States under President Donald J. Trump has already substantially and unilaterally modified (e.g., violated) the agreement.[2] The U.S. has imposed 50% tariffs on Canadian and Mexican (and all other) source aluminum and steel, and 25% tariffs on autos and auto parts (with some variations). He has imposed 25% tariffs as well on any other imports of goods that do not meet USMCA rules of origin — discussed more fully in Part II. These wholesale violations of USMCA provisions have raised serious doubts about the continued viability of the USMCA, particularly with the three governments and their stakeholders in all three countries. After all, Mexico and Canada are the United States’ first and third largest trading partners, and both Canada and Mexico are dependent on the U.S. for most of their exports, 80% in the case of Mexico and about 78% for Canada.
Among the challenges is figuring out what Trump wants. Is it expansion of the U.S. manufacturing base? Reduction of trade deficits on a country-by-country basis? Increased government revenue so Congress can enact further tax reductions for the wealthy? A stronger (or weaker) dollar? Punishment of China? Does he intend to continue to ignore trade in services, where the United States runs a substantial world-wide surplus?[3] These questions are not answered in this working paper but remain relevant.
The stakes for all three USMCA parties are enormous, threatening recessions or severe economic downturns, suspension of many new investments and hiring throughout the reason, and increased unemployment in all three countries, particularly in the automotive sectors in Canada and Mexico. In the United States, the tariffs on imports from Canada and Mexico, and those on virtually all other U.S. trading partners, are a federal tax on all businesses and consumers that rely directly or indirectly on goods from outside the U.S. Those increased taxes will cause widespread pain for many, particularly low-income workers, who spend all their weekly paychecks on food, clothing, rent, gasoline, medical expenses and other essentials, workers who may well see their access to Medicaid and food stamps reduced or eliminated if Trump’s “Big, Beautiful Tax Bill” in enacted by Congress.[4] Under the best of circumstances, businesses and consumers will pay more, while cost increases and foreign country retaliation will reduce U.S. exports. Arguments can be made for strongly encouraging U.S. manufacturing in chips, EVs and EV batteries and pharmaceutical products among others, but U.S. manufacturing for such basic items as footwear, clothing, smart phones and TV sets will never return to the United States because of high labor costs and the lack of adequate supply chains.
The remainder of this working paper is divided into four parts.
It is important to keep in mind that Trump’s tariffs are new, imposed in the first five months of his administration, and are always subject to unexpected changes. For example, the high reciprocal tariffs initially proposed April 2 were postponed, April 9–July 8, apparently because the stock market exhibited significant decline and the bond market saw an historic outflow of U.S. government bond revenue and an increase in interest rates paid by the Treasury Department.[5] The 145% tariffs initially imposed on China, effectively an embargo, were drastically reduced on May 14, to an aggregate of 30%, for at least 90 days. (Most of the Phase One tariffs imposed during Trump's first term on about two thirds of U.S. imports from China were 25%, although Biden raised some tariffs in October 2024, to 100% on EVs, 25% on EV batteries and 50% on solar cells. [6] As of this writing, the effective rate on most imports from China is 55% plus the U.S. most-favored nation (MFN) tariff.[7]) Similar abrupt changes are possible at any time.
View the full paper (PDF).
[1] Agreement between the United States of America, Mexico and Canada (USMCA), November 30, 2018, in force, July 1, 2020, https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement/agreement-between.
[2] USMCA, article 34.7.
[3] in 2023 the United States exported over $1,025 billion of services. It imported $748 billion, yielding a trade surplus for services of some $278 billion. See Simon Evenett, “Crossfire: The U.S. Trade Surplus in Services as America Contemplates an Inward Turn,” Global Trade Alert, November 25, 2024, https://globaltradealert.org/reports/crossfire/.
[4] See Theodore Meyer and Jacob Bogage, “GOP tax bill could hurt the poorest households more than it helps them,” June 16, 2025, Washington Post, https://www.washingtonpost.com/politics/2025/06/16/trump-tax-bill-low-income/.
[5] Rob Wile, “Stocks Unleash Remarkable Comeback After a Historic Dive from Trump’s Tariffs Announcement,” May 4, 2025, NBC News, https://www.nbcnews.com/business/markets/stocks-unleash-remarkable-comeback-after-volatile-month-trump-tariffs-rcna204213.
[6] See “Fact Sheet: President Donald J. Trump Secures a Historic Trade Win for the United States,” May 12, 2025, The White House Maclellan et al., “US-China Trade Deal as It Happened: Tariffs to Be Lowered for 90 Days, US Stocks Rally,” May 12, 2025, Reuters, https://www.reuters.com/world/us-china-tariff-live-updates-bessent-greer-announce-details-constructive-geneva-2025-05-12/; Katie Lobosco,” Biden finalizes increases to some of Trump’s China tariffs,” September 13, 2024, CNN Politics, https://www.cnn.com/2024/09/13/politics/china-tariffs-biden-trump.
[7] Lisa O’Carroll and Dominic Rushe, “Trump says China will face 55% tariffs as he endorses trade deal,” June 11, 2025, The Guardian, https://www.theguardian.com/business/2025/jun/11/trump-says-china-will-face-55-percent-tariffs-us-trade-deal-rare-earth-minerals.
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