Navigating North American Trade: The USMCA Under Pressure

Trump's Tariff Tightrope: A Threat to North American Manufacturing?

Former President Trump's unpredictable tariff tactics targeting Mexico and Canada have raised concerns about the future of North American manufacturing and the resilience of crucial mineral supply chains. Experts warn that these actions could inadvertently empower China, which currently dominates these sectors.

Speaking at a Brookings Institution event on the future of the United States-Mexico-Canada Agreement (USMCA), experts analyzed the potential fallout from Trump's imposition and subsequent delay of 25% tariffs on goods from Mexico and Canada. While the administration eventually provided exemptions, the uncertainty surrounding these tariffs has accelerated the timeline for USMCA renegotiations, potentially moving them up to 2025 from the original 2026 date.

The USMCA: A Framework for Cooperation or Conflict?

Replacing the North American Free Trade Agreement (NAFTA), the USMCA was designed to benefit workers, farmers, ranchers, and businesses across North America. The agreement bolstered intellectual property protections, addressed digital trade and regulatory practices, and included provisions for small and medium-sized businesses (SMBs).

While acknowledging the USMCA's adaptability and potential for improvement, Brahima Sangafowa Coulibaly, vice president and director of global economy and development at Brookings, cautioned against the disruptive impact of Trump's tariffs. "The latest challenge is the unilateral tariffs imposed by the Trump administration... which are inconsistent with the agreement and do not bode well for regional cooperation," he stated.

Unintended Consequences: Strengthening China's Hand

Joshua Meltzer, a senior fellow at Brookings, warned that imposing tariffs on key trading partners could push them towards closer ties with China. "Trump's willingness to impose tariffs... sends a signal... that they should reconsider their trade exposure to the U.S.," he explained. This could lead to increased trade and investment relations with other countries, including China.

Meltzer argued that instead of targeting allies, the U.S. should focus on updating the USMCA to deepen collaboration and strengthen domestic manufacturing, ultimately enhancing its competitive edge against China.

"The one country that will be a winner from a trade war between the U.S., Canada and Mexico will be China." - Joshua Meltzer, Senior Fellow, Brookings Institution

The Economic Fallout: Disrupting Supply Chains and Critical Mineral Access

Meltzer highlighted the unprecedented scale of the proposed 25% tariffs, dwarfing even those imposed on China during Trump's first term. He projected a potential 60% contraction in U.S. automotive and manufactured product exports to Canada and an up to 80% decrease in lumber, metal, computer, and electronic equipment exports to Mexico.

The tariffs' impact on intricate cross-border supply chains, particularly in the automotive and electronics industries, could render entire industries uneconomical.

Bentley Allan, associate professor of political science at Johns Hopkins University, emphasized the vulnerability of critical mineral supply chains, citing the example of zinc mined in Alaska, refined in Canada, and then used in semiconductors that frequently cross the border – potentially facing tariffs at each stage. This vulnerability is amplified by China's export controls on gallium and germanium.

The USMCA's Potential: Collaboration and Innovation

Despite the challenges, the USMCA offers opportunities for collaboration and innovation. Leila Aridi Afas, director of global public policy at Toyota, showcased the automotive giant as a "true USMCA success story," highlighting the seamless cross-border operations facilitated by the agreement.

Experts also pointed to the USMCA's potential to support the U.S. CHIPS and Science Act, fostering collaboration in AI workforce development, technology investment, and regulatory alignment. Daniela Rojas, senior program officer at the Eon Institute, emphasized the potential of AI as a "key element" in future USMCA negotiations and competition with China, building upon the existing digital trade chapters.

The Road Ahead: Balancing National Security and Economic Cooperation

Victor Dodig, president and CEO of the Canadian Imperial Bank of Commerce, underscored the enormous economic impact of the USMCA, facilitating $1.8 trillion in trade and supporting up to 17 million jobs in 2022. He stressed the importance of addressing U.S. national security concerns, such as fentanyl and illegal migration, through dialogue and collaboration, to ensure the USMCA's continued success.