A New Chapter for North American Trade

**Ariana Salvatore** (0:00)
Welcome to Thoughts on the Market. I'm Ariana Salvatore, Head of US. Public Policy at Morgan Stanley Research. Today, I'll be talking about the USMCA review. What happened on July 1st, what it means for North American trade, and how investors should be thinking about the road ahead. It's Friday, July 10th at 10 a.m. in New York.
Last week, the six-year review deadline for the USMCA came and went. And as we had anticipated, the US declined to extend the agreement for another 16-year term.
US. Trade Representative Greer stated that the US did not agree to renew the USMCA in its current form, pointing to shortcomings and trade deficits with both Canada and Mexico, much of which echoed his testimony in front of Congress in December of last year.
So what happens next? This decision triggers an annual review process that could continue until the agreement scheduled expiration in 2036 So that means effectively the new deadline for negotiations is now July of 2027 And if we get to that point and see a similar outcome, this procedure repeats until the deal is terminated in 2036
Now importantly, the agreement itself remains fully enforced during this period. The current tariff regime, rules of origin, investment protections, and dispute settlement mechanisms are all unaffected for now. That's actually in line with the expectation that we laid out earlier this year. In short, we anticipated an outcome in which negotiations stall and the deal moves to annual reviews. We thought that was becoming more likely than an ambitious expansion of the agreement in its current form. That being said, there are some important implications of this outcome. First, we think North American trade is being reshaped by a transition from a rules-based framework where tariff schedules and preferential access anchored trade decisions toward a more discretionary sector-specific approach tied to industrial policy objectives. That of course increases uncertainty around exemptions, sector treatment, and consequently investment decisions for corporates. Second, we think two bilateral deals may not be off the table. While it's still our base case that the trilateral framework remains intact, reporting seems to suggest that negotiations are progressing much more substantively with Mexico than with Canada. A third round of US-Mexico negotiations is scheduled for the week of July 20th, while substantive text-based negotiations between Canada and the US have not yet begun. That asymmetry could mean that bilateral issues between the US and Mexico are resolved more easily, while outstanding frictions like Canada's dairy market quota system could prove to be an overhang in those bilateral talks.
Third, the structural divergence between Mexico and Canada is accelerating, which is something my colleagues have highlighted in their recent work. If we think about Canada's manufacturing export base, autos, metals, machinery, energy, and transportation equipment, that actually overlaps with the areas that the US government is increasingly defining as strategic and therefore necessitating more government involvement through in things like Section 232 tariffs. Canada accounts for only a negligible share of US imports across computers, semiconductors, communications equipment, and advanced electronics. Those are actually the sectors where Mexico has become deeply integrated, particularly through assembly and re-export activity linked to AI servers, electronics, and industrial hardware. Mexico now supplies roughly 35% of US. IT hardware imports and nearly 50% of US server imports. And the North in particular has emerged as a vital interconnection hub between Latin America and the US. That's been driven by nearshoring trends, AI adoption, and multi-cloud strategies as my colleagues, Nik Lippmann and Fernando Sedano, highlight. That means the scope and the objectives of the bilateral talks between the US and Mexico and the US and Canada may diverge even more from here. So where does that leave us? The USMCA is still intact, but the annual review process means North American trade policy is now a recurring negotiation, not yet a settled framework, and that will likely remain the case if policymakers agree next July to punt the issue yet another year. The primary risk, in our view, stems less from the possibility of a full USMCA collapse and more from the prolonged uncertainty around implementation details, sector-specific trade measures, and Section 232 tariffs.
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**SPEAKER_2** (4:29)
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