Overview
On July 1, 2026, the United States, Mexico, and Canada must decide whether to extend the US-Mexico-Canada Agreement (USMCA). When USMCA was initially negotiated in 2020, the parties agreed to a 16-year term. However, the US proposed a “sunset clause,” which calls for the parties to meet six years after the agreement’s implementation for review. With USMCA’s sixth anniversary now upon us, it appears unlikely that the agreement will be extended by 16 years, meaning it will enter an annual joint review process until 2036, with termination on the table. The US wants to extract additional concessions to narrow its trade deficit and avoid the transshipment of Chinese goods, while Mexico and Canada seek to broadly preserve USMCA. Amid strained US relations with its neighbors, the rocky negotiations risk a continuation of tariffs on Mexican and Canadian goods and greater uncertainty around long-term investment decisions from companies.
From NAFTA to USMCA
NAFTA, which was approved under President Bill Clinton, eliminated most trade barriers among the United States, Mexico, and Canada and created a more integrated North American market. The agreement proved highly successful at unifying the economies, but by the mid-2010s, the agreement’s age was showing: there were limited rules for digital commerce, intellectual property, and services provisions were outdated, and the agreement could not anticipate the global trade implications of China’s rise as a leading exporter. Further, President Trump, a long-time critic of NAFTA, argued that the agreement encouraged offshoring and degraded the US industrial base. As a result, NAFTA underwent a line-by-line review during the first Trump administration, and the negotiations that followed led to a revised deal that was signed in 2018: USMCA.
Since the agreement took effect in 2020, North American trade has expanded substantially: total intra-regional goods and services trade increased about 37%, reaching roughly $1.93 trillion in 2024, including about $935 billion in US-Mexico trade, $909 billion in US-Canada trade, and $56 billion in Canada-Mexico trade. Mexico became the United States’ largest import source, Canada remained the largest destination for US exports, and both countries remained essential to US manufacturing and supply chains. Mexico and Canada have also received outsized amounts of global FDI as foreign companies seek to gain access to the integrated North American market.
The deal did not go entirely to plan, however. The performance of the US automobile industry, a key reason that the deal was renegotiated, has not improved as expected. USMCA introduced new key rules that raised the regional value-content threshold for passenger vehicles from 62.5% to 75%, required 70% North American steel and aluminum purchasing, and added labor-value rules requiring 40% of passenger-vehicle and 45% of truck content to come from workers earning at least $16 per hour. This helped shift production into US engines, transmissions, axles, and steel. However, the USITC’s July 1, 2025, report on USMCA found that automotive rules of origin had a negligible effect on the overall US economy.
North American Leaders Divided on Key Revisions
The second Trump administration’s position on USMCA is ambiguous. Despite ongoing negotiations, Trump has repeatedly stated that he is not committed to renewing the agreement. Mexico and Canada are both in favor of renewal. The hesitancy expressed by the US, plus the time sensitivity of review, is likely negotiating leverage, as the Trump administration does have clear goals that it hopes to achieve.
US Trade Representative Jamieson Greer has emphasized the Trump administration’s focus on reducing the US trade deficit with Mexico and Canada. Indeed, the US trade deficit with Mexico has increased 87% since the USMCA took effect in 2020. The US is also seeking increased access for agricultural products, including genetically modified corn in Mexico and dairy in Canada; preventive measures against China, including limits on Chinese transshipment and FDI in Mexico; and stronger support for North American manufacturing, including 50% US-specific content for all North American-made vehicles and higher regional content requirements for key materials.
President Sheinbaum would like a clean 16-year extension of the agreement, as the country has greatly benefited from having the cheapest labor costs and currency in the USMCA market. The lower cost of doing business in the country makes it the top destination for nearshoring, receiving $106.2 billion in FDI from the US and Canada from 2020 through Q2 2025. Sheinbaum wants to preserve tariff-free access and use Plan México, her approximately 300-billion-dollar plan to develop the nation over the course of her tenure, to raise the Mexican value added in regional supply chains.
Prime Minister Carney views the deal as a key battleground over maintaining Canadian autonomy and respect from its southern neighbor. Upset over threats from Trump, Carney has declared the review as “not a case that the United States dictates the terms.” Canada would also prefer a 16-year extension but is more willing to walk away from the negotiations than Mexico if Canada feels mistreated. As for tangible outcomes, Carney is looking for stability, seeking protection from any new tariff threats from President Trump to reduce volatility and uncertainty.
The Annual Review Scenario
Preliminary trade negotiations between the US and Mexico have been ongoing since March 18, while Canada formally requested a 16-year renewal on June 1. Given the hesitancy expressed by the US, it is not likely that the parties will come to a full 16-year renewal agreement on July 1. If no deal is reached, USMCA would remain in force for the next 10 years but would be subject to ongoing yearly negotiations. The deal would terminate on July 1, 2036, if further negotiations failed to produce an agreement by that date.
While this scenario would not necessarily mean the end for USMCA, it would kick the can down the road, creating persistent uncertainty. An annual review scenario could undermine confidence in long-term investment decisions. Negotiations are expected to continue beyond July 1 if no agreement is reached.
Additional Scenarios
If all three parties do come to an agreement on Wednesday, USMCA could be renewed for another 16 years. In this case, the agreement would remain in effect until 2042, with an additional joint review process six years from now, in July 2032. However, for this scenario to occur, Mexico and Canada would likely have to make significant concessions. While the US’ northern and southern neighbors would prefer securing an outright renewal, they may strategically benefit from a chance to negotiate with the next US administration.
Another scenario could be the negotiation of two bilateral agreements, one between the US and Mexico, and the other between the US and Canada. Negotiations between the US and Mexico kicked off earlier this year without Canada, partially due to Canada’s diplomatic tensions with the US. However, Mexico and Canada have strengthened ties in the lead-up to negotiations, with President Sheinbaum highlighting Mexico’s support for a trilateral solution.
USMCA allows any country to withdraw from the agreement with six months’ notice. While this scenario is not likely due to the immediate toll it would take on North American economies, the threat of withdrawal can be used as a negotiating tactic by the US.
High Stakes and Emerging Risks
The talks come at a delicate time for diplomatic relations in North America. In April, the US took the unprecedented step of indicting 10 current or former Mexican government officials for allegedly collaborating with cartels. President Sheinbaum decried the actions as foreign interference. As she seeks to unify her Morena party around this defiant stance, some members of the party have chosen to cooperate with the Drug Enforcement Agency, deepening fractures within Morena and escalating the tensions with the US.
Meanwhile, US-Canada relations are at an all-time low, exemplified by President Trump’s repeated proposal to make Canada the “51st state.” Prime Minister Carney, much like President Sheinbaum, has defined his leadership in opposition to perceived US coercion. While the North American neighbors still benefit greatly from cross-border commerce, these political tensions risk spilling over into trade negotiations and raising the political costs of compromise.
The issue of tariffs will also play a role in the negotiations. As a result of Trump’s (now defunct) IEEPA tariffs, USMCA compliance among Mexican and Canadian exports to the US shifted from less than half to almost 80% in 2025 to avoid additional levies. Still, Mexican exports to the United States increased by 5% in the first quarter of 2026. As Mexico aims to benefit from the phenomenon of reshoring, the US has raised concerns that Chinese companies are using Mexico as a path to avoid paying tariffs. This could lead to increased investment screenings and origin tracing for Chinese companies in Mexico and Canada. Tariffs may also be utilized as a strategy to extract concessions during negotiations. However, even if a renewal agreement is reached, some tariffs will likely stay in place.
The arrival of the July 1 renewal deadline without an agreement indicates a rocky road ahead for North American commerce. According to the US Chamber of Commerce, 13 million American jobs depend on trade among the three countries. Investment in Mexico was down roughly 10% year over year, US job creation had slowed to near-zero growth in 2025, and Canada lost more than 100,000 full-time jobs in the first two months of 2026. Amid these pressures, businesses in USMCA economies are seeking greater certainty. The outcome of the current negotiations has failed to provide it.
