The Biden administration raised concerns over recent judicial reforms in Mexico, suggesting they threaten the United States-Mexico-Canada Agreement (USMCA).
Recent policy changes in Mexico present significant sources of concern among trade officials and the private sector.
Concerns – new and longstanding – raise the risk that the trade deal could be changed or annulled during its 2026 review.
Published: 18 Oct 2024
WHAT’S HAPPENING
The Biden administration raised concerns over recent judicial reforms in Mexico, suggesting they threaten the United States-Mexico-Canada Agreement (USMCA).
Why it matters: The judicial reform and other policies enacted by the previous Mexican administration are considered adverse to foreign businesses. As a result, the concerns could pressure the US and Canada to impose punitive measures (i.e., tariffs) on Mexico or annul the trade agreement altogether in 2026.
Context: Various policies enacted in Mexico have produced scrutiny from the governments of Canada and the US, including the recently passed judicial reforms, land expropriation, and various other previous actions.
What is the USMCA: The USMCA (or CUSMA in Canada) is the free-trade agreement (FTA) signed by Canada, Mexico, and the United States in 2018.
The USMCA replaced the North American Free Trade Agreement (NAFTA) after the Trump administration demanded the deal be canceled or renegotiated.
The USMCA strengthened trade protections, covered new areas of the countries’ trading relationship, and included a periodic recertification review in which all parties must affirm the continuance of the deal (the first review is by July 1, 2026).
In addition, US presidential candidate Donald Trump has recently stated that he would consider another renegotiation of the trade deal.
● Why it matters: If elected in November, Trump could force the USMCA to be negotiated earlier than its 2026 review. Doing so would present significant uncertainty in firms’ efforts to move production to Mexico and regional supply chains.
RISK ASSESSMENT
Recent developments present several risks related to the US-Mexico trade relationship with varying impacts and likelihoods.
Trump wins US election
If Trump wins the November US election, risks to the US-Mexico trade relationship will increase significantly. Not only has Trump threatened to seek another renegotiation of the USMCA, but he also has proposed tariffs on all US trading partners of over 10%), which would significantly impact trade between the two countries.
The threat of renegotiation or tariffs could upend firms’ plans to shift production to Mexico.
A Trump administration would likely pressure Mexico and Canada to renegotiate the trade deal – even before 2026 – resulting in heightened uncertainty in the future of North American trade cooperation.
Harris wins the US election
A Harris administration would not likely call for an end to the trade deal.
It could pursue trade disputes with Mexico that see retaliatory tariffs implemented on certain imports.
Resolutions of ongoing disputes
Mexico’s previous president, Andrés Manuel López Obrador, was responsible for many policies that caused concern. His successor, Claudia Sheinbaum, will decide how those policies are implemented and the direction of future policy, which will determine the direction of Mexico’s trading relationships with Canada and the US.
Sheinbaum may opt to implement policies less aggressively than proposed by López Obrador. Additionally, Mexico’s courts will play a role as they will review the constitutionality of the reforms (although the reforms are unlikely to be reversed).
A less aggressive implementation of the policies of concern may reduce pressures in the US and Canada for punitive actions targeting Mexico.
While Canada’s government has criticized Mexico’s policy changes, the USMCA was passed with the support of all parties in 2018, making it unlikely that Canada would call for the deal to be annulled – even with elections set to occur in 2025 – unless a significant threat to Canadian investment emerged.
Longer-term considerations
Terminating the USMCA in 2026 or sooner could present even more significant risks to supply chains linked to Mexico. Not only would the terms of trade between the three countries be highly uncertain (although US-Canada trade would likely remain covered by the US-Canada trade agreement that preceded NAFTA), but firms’ past investments in Mexico would also be at heightened risk.
The provisions of the USMCA provide safeguards to US and Canadian firms’ investments in Mexico. Terminating the trade deal could expose those firms to other risks (e.g., unfair legal processes, unequal access to Mexico’s internal market, expropriation, etc.).