A New Chapter for North American Trade

0:00Ariana Salvatore:Welcome to Thoughts on the Market. I'm Ariana Salvatore, head of U.S. 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'd anticipated, the U.S. declined to extend the agreement for another 16-year term. U.S. Trade Representative Greer stated that the U.S. 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.

0:44Ariana Salvatore:So what happens next? This decision triggers an annual review process that could continue until the agreement's 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.

1:22Ariana Salvatore: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.

1:59Ariana Salvatore: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 U.S.-Mexico negotiations is scheduled for the week of July 20th. while substantive text-based negotiations between Canada and the U.S. have not yet begun. That asymmetry could mean that bilateral issues between the U.S. 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.

2:38Ariana Salvatore: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 U.S. 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 U.S. imports across computers, semiconductors, communications equipment, and advanced electronics.

3:11Ariana Salvatore: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 U.S. IT hardware imports and nearly 50 % of U.S. server imports. And the North in particular has emerged as a vital interconnection hub between Latin America and the U.S. That's been driven by nearshoring trends, AI adoption, and multi-cloud strategies, as my colleagues Nick Lippman and Fernando Sedano highlight. That means the scope and the objectives of the bilateral talks between the U.S.

3:46Ariana Salvatore:and Mexico and the U.S. 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 agreed 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. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share thoughts on the market with a friend or colleague today.

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