Businesses Brace for Uncertain Canada-Mexico Trade Deal (1)

Industries want to see this summer’s negotiations on the US-Mexico-Canada trade agreement usher in more than a decade of certainty—but they’re anticipating years of flux.

The trade deal, a signature of President Donald Trump’s first term, is approaching a joint review period in July. There are two options built into the deal: All three governments could agree to renew the deal for 16 years. If they don’t, they’ll continue to meet for annual reviews for ten more years. If one country wants out at any time, it can withdraw.

The governments of Canada and Mexico have indicated they’d like to see long-term renewal, but talks are still ongoing. But Trump on Wednesday said he would not renew the deal, setting the stage for yearly reviews.

Negotiators are nominally working against a July 1 deadline, but they’re not going to meet it. That’s not a hard cut-off. If the governments don’t agree to a 16-year renewal by then, annual reviews would become the default, and they could still reach agreement on the longer-term option months or even years later.

The worst outcome for many industries would be the trilateral deal falling apart. But they’re also worried about losing long-term stability, especially where investment decisions have a multi-year runway.

“Even though we don’t fall off a cliff on July 2, obviously the longer this goes on, the worse it is for businesses who are looking to make investments and to know and understand what the rules will be, so they can operate accordingly,” said Blake Harden, a managing director at EY’s Washington Council.

Long-Term Renewal

A 16-year renewal would benefit manufacturing sectors like the automotive industry, given the timeline to bring a new product to market.

The auto industry makes model line decisions on a five-to-seven year time frame, said Jennifer Safavian, president and CEO of Autos Drive America, which represents international automakers with US manufacturing operations, including Toyota and Volkwagen.

“A lot of investments are dependent on those decisions, but the uncertainty of USMCA really calls into question where those investments should be made,” and how soon, she said.

Automakers and their suppliers are currently holding off on important investment decisions because of uncertainty around the agreement, she added.

If the annual reviews were to go on for ten years, “it would be very disruptive for the industry,” she said.

The auto industry is among those most affected by USMCA, as parts often cross North American borders multiple times during the manufacturing process. Changes to the agreement’s rules on the amount of regional content required to qualify for preferential tariff treatment, for example, could leave companies scrambling.

Consumer technology companies would also struggle to quickly meet new regional content requirements, said Ed Brzytwa, vice president of international trade at the Consumer Technology Association.

“Many of the components and sub components are still made outside of North America today,” he said. “Maybe that will change over time. But if they tried to impose a very onerous rule of origin right now, many of these products would not qualify.”

The 16-year renewal would also include another joint review.

Annual Review

Trade groups are largely expecting annual reviews to be the most likely outcome.

“I think everyone is of the same mindset that we will have an annual review going forward, versus a 16-year,” said Beth Hughes, vice president of trade and customs policy at the American Apparel and Footwear Association.

The apparel and footwear industry could get the certainty it needs from that outcome, Hughes said—as long as the agreement remains trilateral.

Soy farmers—already hit hard by tariffs—are concerned that “if this goes to either bilaterals or yearly review, that inserts instability into the trade relationship at a time when farmers desperately need more stability, and not less of it,” said Virginia Houston, speaking in her capacity as director of government affairs at the American Soybean Association. She has since joined the American Farm Bureau Federation.

Dissolution of Trilateral Agreement

There’s also the nuclear option: Any of the countries can withdraw from the agreement six months after providing written notice. This option isn’t tied to the July review.

“I think withdrawal is very unlikely,” said Christopher Sands, who leads the USMCA initiative at the Brookings Institution. “It’s maybe a 5% chance, but a withdrawal would create immediate negative effect.”

There are currently frictions between the US and Canada. US-Mexico progress appears to be farther along: Delegates from both governments met in Mexico City in May, with further rounds scheduled through the week of July 20—another sign that negotiations will extend past July 1.

Breaking apart the trilateral agreement “would be very problematic for many US companies,” and introduce compliance costs and difficulties, said Vanessa Sciarra, vice president for trade and international competitiveness at the American Clean Power Association.

“Everything doesn’t work perfectly all the time—that’s why you have disputes,” she added. “But generally speaking, those of us who are business and trade lawyers will tell you that we’re firmly behind USMCA as a means of regional economic integration.”