Preparing for a New Era in North American Trade

Despite a year of unprecedented US tariff hikes and dealmaking that restructured long-standing trade relationships around the world, trade within North America has remained relatively robust. Yes, the US imposed higher duties on Canadian and Mexican steel, aluminum, and certain automotive products. And yet nearly 60% of goods imported from Canada and Mexico continue to enter the US duty free.

The foundation of this stability—the US-Mexico-Canada Agreement (USMCA)—could soon change. (See “The USMCA in Brief.”) Following the US global tariffs announced in April 2025, the Trump administration has negotiated more than a dozen new bilateral deals with other countries, leading to a global patchwork of trade rules. However, despite ongoing trade tensions between the United States and its neighbors, the USMCA has remained in place and has not been renegotiated.

A formal joint review of the USMCA, which entered into force during President Donald Trump’s first term, is set to begin in July 2026; negotiations could continue well into 2027. The outcome may significantly impact trade and tightly integrated industrial supply chains across North America. Trade rules for everything from automobiles to digital services are expected to be on the table. Talks could also cover rules for trade and investment involving China and other nations.

This article explores how companies can prepare to navigate the potential risks and opportunities from USMCA 2.0 and a reshaped trade landscape.

The Expansion of Trade Within North America

The economies of the US, Mexico, and Canada have become deeply intertwined under the USMCA and its predecessor, the North America Free Trade Agreement (NAFTA). These agreements have allowed for tariff-free access among the three nations, provided products meet requirements on the share of content from within North America. For the auto sector, the North American content threshold for vehicles and core components under the USMCA is as high as 75%.

US trade with its two neighbors surpassed $1.5 trillion in 2024. In fact, the volume of US goods imported by Canada and Mexico was on par with the combined US imports by the 27 member states of the European Union. The two US neighbors also each imported more than twice as many US goods as China. (See Exhibit 1.) Trade in services within North America also grew strongly, reaching $243 billion in 2024, with the US enjoying services trade surpluses with both its neighbors.

Trade with Canada and Mexico is also critical to US manufacturing competitiveness in many sectors: more than 50% of US imports from those countries are in capital or intermediate goods used in its factories as inputs to US production; such inputs also account for around 60% of what the US ships to Canada and Mexico.

The USMCA hasn’t stopped the US from unilaterally imposing trade restrictions through other policy mechanisms. In March 2025, for example, the Trump administration announced a 25% tariff on all goods originating from Mexico and Canada under the International Emergency Economic Powers Act (IEEPA). Soon afterward, the US exempted goods from these tariffs if they complied with USMCA content rules. In the case of Canada, the US raised tariffs on nonexempted goods to 35% in August 2025. After the US Supreme Court struck down the IEEPA tariffs in February 2026, the US imposed tariffs of 10% on Canada and Mexico under Section 122 of the Trade Act of 1974 but maintained the exemption on USMCA-compliant goods.

In parallel, and not affected by the Supreme Court ruling, the US imposed a 25% tariff on Canadian and Mexican steel, aluminum, and certain auto products under Section 232 of the Trade Expansion Act of 1962 (subsequently raised to 50% for steel and aluminum). Notably, in the auto sector, the 25% tariff applies only to the value of the Mexican and Canadian content of vehicles imported from those nations.

In addition, the US has concluded Section 232 investigations of copper, medium- and heavy-duty trucks, semiconductors, critical minerals, and timber. It has initiated investigations of commercial aircraft and jet engines, medical devices and equipment, and pharmaceuticals. These investigations could lead to further US tariffs on goods from Canada and Mexico.

In advance of the joint USMCA review in July, the three countries have launched formal consultations under domestic legislation, indicating that they intend to proceed with the review process. Hundreds of companies have put forth their perspectives as part of these consultations.

Where Will USMCA 2.0 Land?

We offer several scenarios for potential renegotiation outcomes (see Exhibit 2):

• Option 1: Keep the USMCA as is with targeted changes in side agreements. All three parties agree to extend the USMCA while negotiating side agreements on issues or sectors that are important to certain countries, such as automotive or regulation of digital technology sectors. This outcome would be the fastest to achieve and may not require approval from the US Congress or legislative bodies in Mexico or Canada.
• Option 2: Reach a renegotiated single agreement. The three nations reopen and entirely renegotiate the USMCA. The new agreement could potentially include stricter rules of origin, labor standards, and regional or national content requirements for goods crossing borders with low tariffs. It might also include rules regarding the origin of capital, such as restrictions or higher tariffs on goods made by companies with ownership in certain nations outside North America. And the US might press Canada and Mexico to align their own tariffs on goods from China and other nations with its own. Due to the voluminous details and the likely need for US Congressional approval, such an agreement would likely take much longer to complete than Option 1.
• Option 3: Replace the USMCA with bilateral agreements. It’s also possible that one country terminates the USMCA altogether, which legally only requires six months’ notice, and that no new North America-wide free trade agreement (FTA) is reached. In its place, the US may seek to negotiate separate bilateral FTAs with Mexico and/or Canada. This would lead to greater asymmetry of terms. But negotiating such agreements would be challenging, and the new FTAs would require US Congressional approval. This option could also disrupt regional integration and established trade rules.

Across all scenarios, a key uncertainty remains: the durability of commitments made under any agreement. Even if the USMCA is formally extended or renegotiated, member countries might still unilaterally raise tariffs or impose trade restrictions under other domestic laws with little notice. This limits the degree of stability and predictability that any negotiated outcome can fully guarantee for companies and investors.

Five USMCA Topics to Watch

However the negotiations unfold and whatever new form the USMCA takes, some key issues are likely to be on the table. They include:

Automotive Trade. Recent US trade actions have already diminished the value proposition of the USMCA. For example, non-US content of vehicles produced in Mexico and Canada currently attract a 25% tariff under Section 232. That could result in a higher tariff bill for the complete vehicle than a 15% tariff on the full value of a vehicle produced in the EU, Japan, or South Korea under their 2025 trade deals with the US. The Section 232 tariffs on steel and aluminum products also add to the cost of certain imported auto parts that previously entered duty free. The US is expected to push for higher US content requirements for autos in USMCA 2.0. One consideration, however, is that if the US pushes too hard on Mexico and Canada, North American tariff disadvantages could continue to make products uncompetitive with imports from the EU, Japan, and South Korea.

Regulation of Strategic Technology. The US and other nations over the past decade have increasingly focused on strategic technologies—particularly those with both civilian and military applications. The US, for example, has deployed a suite of industrial policy tools, including subsidies, export controls, inbound and outbound investment screening, and even direct equity stakes in manufacturers to strengthen its competitiveness and to limit the access of geopolitical rivals to strategic technologies.

The China “Back Door.” Starting in 2018, after the US began imposing tariffs ranging from 7.5% to 25% covering more than half of all imports from China, many companies shifted some production from China to Mexico to serve the US market. The US sees this as a “back door” through which Chinese companies can ship goods duty free to the US by investing in factories in Mexico and adding minimal value to Chinese components. The US has been clear that it seeks to close this perceived back door in a new USMCA. The US could also ask Canada and Mexico to align with US restrictions on Chinese investment in strategic technologies or sectors, such as semiconductors, AI, or critical minerals. Mexico has already implemented tariffs of up to 50% on several goods, including metals, cars, clothing, and appliances on countries with which it does not have free trade agreements. These additional tariffs therefore impact not only China but also nations such as Thailand, India, and Indonesia.

Services Trade. The USMCA included more extensive provisions on services than NAFTA. Domestic and cross-border regulation of growing digital services trade will be hot negotiating topics. The three nations could address sectors such as digital services, financial services, and entertainment, for example, leading to unified North American standards that would facilitate more of this trade. Negotiations will be complicated because the US already enjoys a large trade surplus in services with its neighbors, and Canada and Mexico regard regulation of certain services sectors as matters of national sovereignty.

Origin of Capital Rules. Trade rules for goods have historically centered on a product’s “origin”—where it was extracted and/or transformed. But the system was agnostic regarding the national origin of the capital invested in extraction and production facilities. The US is increasingly focusing more on where investment comes from and where profits go. Several recent US bilateral trade deals, such as the one with the UK, include terms related to third-country ownership of production facilities. The US could ask Canada and Mexico to align their rules regarding manufacturing investments from certain nations, such as China, with its own.

Four Priorities to Prepare for USMCA 2.0

With so much at stake, we do not recommend that companies take a wait-and-see approach to the upcoming USMCA negotiations. In addition to the potential impact the USMCA negotiations could have on their own operations, manufacturers will come under mounting pressure from other stakeholders in their value chains to address risk exposure.  

Here are four actions companies operating in North America can take right away to maintain and enhance their competitive position in this shifting environment:

Establish a tariff command center to monitor the USMCA negotiations and other emerging trade opportunities and risks. The command center provides a global, company-wide assessment and quantification of a business’s exposure to potential outcomes under different scenarios. Develop an organization-wide tariff response toolkit to run a diagnostic across products, sourcing footprints, and financial performance for the business as well as competitors to understand both the absolute and relative impacts under each scenario. Pay particular attention to the levels of content in traded goods. When the USMCA was negotiated, for example, one aerospace manufacturer was confident its US content was enough to protect its position in the US market. A more detailed analysis revealed that it was far more exposed to potential tariffs than its main competitor in its most profitable product line.

Strengthen the capability to anticipate geopolitical shifts early. Develop business-relevant scenarios and embed insights into executive decision making. This geopolitical muscle will help the organization anticipate and manage sudden shifts in policy as they arise. For example, one major oil and gas company develops and monitors geopolitical and trade scenarios as part of its annual strategic planning process involving hundreds of leaders of its global organization. It then embeds these scenarios into ongoing business planning and execution.

Redesign sourcing and manufacturing networks. Adjust the procurement and manufacturing footprint to preserve flexibility, protect margins, and enable rapid adjustment as policies, trade rules, and cost conditions evolve. For example, one auto parts remanufacturer took proactive steps to reduce its reliance on low-value components from China that could have led to stock outs of components and suspended the assembly of high-value finished products in North America.

Prepare to engage with stakeholders. A solid fact base for your company, employees, and suppliers on the implications of various USMCA 2.0 changes will be indispensable when engaging with investors, media, and government decision makers.

Although formal negotiations for USMCA 2.0 are still months away, companies that have spent years building integrated manufacturing and sourcing chains spanning North America must begin preparing now for potential disruption. Those who act now to put contingency plans in place for various outcomes will be ready to move quickly to seize competitive advantage out of uncertainty in a shifting trade and investment landscape.

The authors thank Dominic DeSapio, Kyle Kang, and Will Klintworth for their contributions to this article.