FACT: 30% of all U.S. goods trade is with Canada and Mexico.

THE NUMBERS: Canadian and Mexican shares of U.S. goods exports* –

* 2024 or most recent year available. Census/BEA for exporters by race and ethnicity, Census for small businesses and total exports, and Commerce TradeStats Express for states. 

WHAT THEY MEAN: 

Next July, the U.S., Canadian, and Mexican governments are supposed to review their six years’  experience with the “U.S.-Mexico-Canada Agreement” that replaced the earlier North American Free Trade Agreement in 2020. Should they wish, they can suggest changes in it. Per a new Policy Memo today from PPI’s Ed Gresser, the “USMCA” is working reasonably well, and big revisions would be a mistake.

This year brought genuinely large crises in intra-North American security and trade, and in U.S. trade policy more generally. But the “USMCA” didn’t cause them – they’re the result of the Trump administration’s tariffs and threats against Canada and Mexico – and changing it won’t fix them. Congress should therefore confine any changes in USMCA to technical, consensus matters on which the three governments can easily agree, and focus the next year’s work on these larger matters.

Should the administration nonetheless want some more ambitious thing, Congress should insist on passage of legislation like Rep. Linda Sanchez’s HR 2888, terminating the administration’s “emergency” and “national security” decrees and requiring Congressional approval of any similar new tariffs, first.

Background and detail:

“USMCA” is the third-generation version of the North American integration policy launched in 1965 with the Lyndon Johnson-Lester Pearson “U.S.-Canada Agreement Concerning Automotive Products”. The Ronald Reagan-Brian Mulroney U.S.-Canada FTA in 1988, and its expansion to Mexico in 1993 with the North American Free Trade Agreement came a quarter-century later, and USMCA is the most recent version. As the Policy Memo says:

“Each step rested on the once-uncontroversial idea that it’s good strategy to have close and friendly relationships with one’s immediate neighbors. Pooling strengths can make everyone a bit better off, with more suppliers, more customers, and more common interests. Close relations among neighbors can make these common interests easier to realize, while making problems less explosive and easier to solve or mitigate. Contrariwise, in a tense and economically fragmented region, everyone is a bit worse off, common interests fade, and problems not only grow harder to solve but tend to multiply.”

USMCA maintained its predecessors’ tariff-free trade principle and added some new things: digital trade topics such as cross-border data flow and anti-spam policy; labor rules including a “rapid response” program examining allegations of failure to enforce labor laws in specific facilities; environmental issues including marine pollution, sustainable fisheries, and endangered species protection; a revised and much more restrictive “rule of origin” defining what it means for an automobile to be “made in” North America.

How is it working? Since 2020, Gresser’s Policy Memo observes, “real-world U.S./Canada/Mexico trade has grown rapidly, both in traditional goods and digitally deliverable services. The Biden administration used USMCA’s labor provisions heavily, with (for example) 32 “rapid response” cases. And until the second Trump administration took office last winter, the vast majority of goods and services flowed back and forth in easy and mutually beneficial ways.”

To put some numbers on this, trade with Canada and Mexico accounted for $1.6 trillion of the U.S.’s $5.3 trillion in worldwide international goods trade in 2024 — 30% — and $141 billion of $1.24 trillion in services trade. Canada and Mexico rank 1st and 2nd as buyers of American goods, and are overwhelmingly important as customers for Native American and Hispanic-owned exporters. As buyers of U.S. farm goods, they provide 7 cents in each dollar of American farm income. And typically, they buy anywhere from a fifth to nearly all of a given state’s exports. Samples:

* Goods trade only — i.e., manufacturing, agriculture, mining, scrap, small packages, etc. The U.S. government doesn’t collect services trade data by state.

In sum, it’s working pretty well. Whether over the past six years or the past sixty, patient work by the U.S., Canadian, and Mexican governments — based, to paraphrase Pearson in 1965, on “the mutual understanding, goodwill, and confidence which has grown up between our countries” — has accomplished a lot.

And where to now?  

Big human things are by definition imperfect; USMCA isn’t an exception, and in some idyllic world, it might be useful to attempt something a little closer to perfection. But even that world would have limits on what agreements like USMCA can achieve. The Trump administration’s focus on trade balances is particularly naive, since its first- and second-term tax and fiscal policy is the main reason U.S. trade deficits are higher. (From the Memo: “If the administration is seeking an explanation for the higher post-USMCA imbalances with Mexico and Canada, the best place to look is a mirror.”) And others, such as revising auto rules, may have complex and possibly unwelcome consequences — the stricter USMCA rules haven’t brought the surge of U.S. auto output the first Trump administration predicted, and even stricter rules could do more to raise costs than encourage investment — and would need close study.

And of course, we don’t now live in that idyllic world. Over the past 10 months, mutual understanding, goodwill, and confidence have steadily eroded in the aftermath of the Trump administration’s February tariff decrees targeting Canada and Mexico, its subsequent threats of more, and Mr. Trump’s inexplicable attacks on Canada. This has had economic consequences – both specific, such as the collapse of some U.S. exports (e.g. wine, beer, and spirits, down from $440 million last year to $190 million this year) as Canadians turn away from visibly “American” goods, rising unemployment in Las Vegas as tourism revenue falls, and worries about heating oil prices in New England this winter; and more systemic, as tariffs raise prices for American families and production costs for American factories and farms.  And these economic problems, in turn, may be modest next to the new and radically unfamiliar national security problems long-term mistrust, ill-will, and lost confidence with Canada and Mexico would create for the Americans of the 2030s and 2040s.

In these circumstances, and since next July’s review requires no action, the Policy Memo concludes that Congress should confine the review to technical and consensus matters, and focus policy on fixing these larger matters. The close:

“Canada and Mexico are America’s permanent neighbors, and close working relationships with them are profoundly important in ways far beyond economics. And in economic terms specifically, Canada and Mexico are the largest two customers for American exporters, reliable suppliers of energy for American utilities, food and consumer goods for American families, and equally reliable providers of essential inputs for American industry. The terms of these relationships can always in principle be improved and adapted, but they’re already good and the USMCA is a strong foundation for them.

“Meanwhile, the second Trump administration’s approach to trade and to our two large neighbors is weakening the U.S. economy, eroding American national security, and damaging the Constitution. The USMCA did not create these crises, and changing it will not solve them. As the review approaches, Congress should make clear that the agreement does not need major revisions, and confine the administration’s work on it to consensus issues on which the U.S., Canadian, and Mexican governments can agree without controversy. Instead it should focus trade policy in 2026 on settling the larger problems:

• Arresting the damage that uncontrolled tariff escalation is doing to American family living standards and U.S. industrial competitiveness.
• Healing, or at least mitigating, the national security harm the administration has done through its approach to Canada and Mexico.
• Restoring constitutionally appropriate development of trade policy.

“Passage of the bill introduced by Rep. Sanchez, which would reverse most of Mr. Trump’s tariff decrees and ensure Congressional votes on any similar future ideas, would be an ideal first step in this. With it passed, the task of improving and perfecting existing agreements might return to the center of policy. But not before.”

FURTHER READING

PPI’s four principles for response to tariffs and economic isolationism:

• Defend the Constitution and oppose rule by decree;
• Connect tariff policy to growth, work, prices and family budgets, and living standards;
• Stand by America’s neighbors and allies;
• Offer a positive alternative.

PPI’s newest: Gresser on USMCA at 6.

USMCA:

The USMCA itself.

… for the review clause, see Chapter 34, “Final Provisions”, Article 34.7.

… for some innovations, Chapter 19 on Digital Trade, Chapter 23 on Labor, and Chapter 24 on Environment.

… and for a challenging but illuminating read, Chapter 4 on Rules of Origin, pp. 4-B-1-1 to 4-B-1-47, explains automotive rules of origin. TL/DR: 75% of the value must be North American (as opposed to 65% during the NAFTA period); metals used in cars and trucks must all be North American (current average is about two tons of metal per vehicle); and 40% of labor content must be “high wage.”

Next step:

Rep. Linda Sanchez and Ways and Means Committee Democrats’ HR 2888.

And backstory:

The 1993 North American Free Trade Agreement.

The 1988 U.S.-Canada FTA.

The 1965 U.S.-Canada Agreement Concerning Automotive Products.

ABOUT ED

Ed Gresser is Vice President and Director for Trade and Global Markets at PPI.

Ed returns to PPI after working for the think tank from 2001-2011. He most recently served as the Assistant U.S. Trade Representative for Trade Policy and Economics at the Office of the United States Trade Representative (USTR). In this position, he led USTR’s economic research unit from 2015-2021, and chaired the 21-agency Trade Policy Staff Committee.

Ed began his career on Capitol Hill before serving USTR as Policy Advisor to USTR Charlene Barshefsky from 1998 to 2001. He then led PPI’s Trade and Global Markets Project from 2001 to 2011. After PPI, he co-founded and directed the independent think tank ProgressiveEconomy until rejoining USTR in 2015. In 2013, the Washington International Trade Association presented him with its Lighthouse Award, awarded annually to an individual or group for significant contributions to trade policy.

Ed is the author of Freedom from Want: American Liberalism and the Global Economy (2007). He has published in a variety of journals and newspapers, and his research has been cited by leading academics and international organizations including the WTO, World Bank, and International Monetary Fund. He is a graduate of Stanford University and holds a Master’s Degree in International Affairs from Columbia Universities and a certificate from the Averell Harriman Institute for Advanced Study of the Soviet Union.

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