If we can say one thing about U.S. President Donald Trump’s negotiating skills, they are very effective.
Within hours of the North American trading day, he’s put up a big win on the Mexican border.
Mexican President Claudia Sheinbaum says Mexico will deploy 10,000 national guard immediately to the border to avoid the trafficking of drugs into the U.S. The U.S. has committed to working to avoid the trafficking of high-powered weapons into Mexico, and teams from both countries have started to work today on security and business.
In return, tariffs on Mexican imports are paused for a month.
However, looking at the fact that the USMCA (United States-Mexico-Canada-Agreement) is up for review in 2026, the tariff overhang will likely last through then. Trump would like to have a renegotiated USMCA by the time 2026 mid-terms hit the 6 o’clock news cycle.
Under a novel provision in USMCA Article 34, the 2026 review also starts a 10-year clock for expiration of the free trade agreement. To prevent expiration in 2036, the parties must submit notifications at or after the 2026 review approving the renewal of the USMCA for another 16-year term.
For the United States, the Trump administration will likely withhold U.S. renewal approval to compel a partial renegotiation of certain commitments through the joint review. The full scope of the U.S. plan has not yet been developed, but initiatives under discussion in Washington include modifications to the automotive industry rules of origin, strengthened forced labour import prohibitions, new restrictions on Chinese companies in North America, and resolutions to ongoing USMCA implementation disputes.
From a trade flow perspective, Trump has some facts wrong, as he often does. Goods imports make up 11 per cent of U.S. GDP, and 43 per cent of U.S. imports come from Canada, Mexico, and China. This means that five per cent of U.S. GDP is directly impacted by higher tariffs on Canada, Mexico, and China.
This is meaningful when annual GDP growth normally is two per cent. The proposed tariffs clearly risk a U.S. recession. The trade deficit that Trump cites with Canada is all energy related so slapping a tariff on energy imports is beyond silly. Their infrastructure is also set up to process Canada’s heavier crude oil and they do not produce enough domestically to meet demand.
Excluding energy, there is basically no trade imbalance at all. One third of trade is in energy while less than 20 per cent is auto related.
Canada’s pending election and change in leadership is a complicating factor to be sure. Look for tariffs to remain in the headlines for most of 2025 and notwithstanding Trump doing what he said he would do, it’s likely a headwind that will likely overhang the markets.
In the long run, it will not matter much. For a while, get used to the headline risk.
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