Aim should be to confirm the essential elements of the agreement and enhance U.S. and North American competitiveness.

BY DAVID A. GANTZ AND TONY PAYAN

The United States-Mexico-Canada Agreement (USMCA) — replacing the North American Free Trade Agreement (NAFTA) — helped generate an integrated North American economic juggernaut. Goods manufacturers and services suppliers could compete effectively with their counterparts in Asia, particularly China, and the European Union. In 2024, total intra-regional trade amounted to $1.93 trillion dollars in goods and services. In that same year, country-to-country trade amounted to the following: $935.1 billion between U.S and Mexico; $909.1 billion between the U.S. and Canada; and $56 billion between Canada and Mexico.

As a result of the USMCA, many sectors, particularly automobiles and auto parts, produce high-quality products at a moderate cost. In addition to serving the businesses and consumers well in all three countries, the USMCA helps facilitate exports that are also highly competitive in price and quality to countries beyond the North American region. Overall, the United States, Mexico, and Canada together represented approximately 30% of world GDP in 2023. Based on government data from each country, various sectors across regional trade — including manufacturing, transportation, insurance services, and others — drive 56.2 million total jobs. According to former U.S. Trade Representative Carla Hills, who negotiated NAFTA on behalf of the United States, 14 million jobs depend on trade with the United States, Mexico, and Canada.

POSITION STATEMENT

In the Claudio X. González Center for the U.S. and Mexico’s view, the overriding aim of the 2026 review and revision of the USMCA should be to confirm the essential elements of the agreement and enhance U.S. and North American competitiveness through improvements to the accord. In a similar vein, negotiators should avoid measures that could reduce efficiency, raise costs for consumers, cause substantial inflation, and threaten jobs and exports. Without a robust USMCA, the United States’ future competitiveness may be at risk, especially with China and other emerging players in the global market.

According to the World Trade Organization, the United States accounts for about 8.4% of world exports and 14.5% of global imports in 2024. In that same year, China’s share of global imports is approximately 10.6%, while its exports account for around 14.7% of the world total. In other words, the United States is an important player but far from dominant. If North America were to forego more than 30 years of economic integration at a time of increased geopolitical uncertainty and confrontation, particularly with China, negative implications would await the economies of all three countries.

Maintaining a robust share of world trade, even if it is more focused, should be one of the policy goals of the USMCA review because North America’s position in global trade goes hand in hand with a level of U.S. negotiating power, which surpasses strictly economic issues and cannot be maintained otherwise. The first Trump administration was generally successful in modernizing and modifying NAFTA in 2017–20 into the USMCA; a similar constructive approach would be appropriate in 2026.

POLICY LANDSCAPE

USMCA Review Process

In accordance with the USMCA’s Article 34.7, which mandates the review for July 2026, the U.S. government in September 2025 published a Federal Register notice (90 FR 44869) inviting interested parties to submit public comments by Nov. 3, 2025, which will be followed by a public hearing. Topics available for comment include:

• Aspects of USMCA’s implementation.
• Issues of compliance with the USMCA.
• Recommendations to promote balanced trade, new market access, and alignment on economic security with Mexico and Canada.
• Factors affecting the investment climate in North America and, more specifically, the effectiveness of the USMCA in promoting investment that strengthens U.S. competitiveness, productivity, and technological leadership.
• Strategies for strengthening overall North American economic security and competitiveness, including collaborative work under the North American Competitiveness Committee — as established in USMCA’s Chapter 26 — and cooperation on issues related to nonmarket policies and practices of other countries.

Under the USMCA Implementation Act (19 U.S. Code 4611), the current presidential administration is required to report its objectives for the negotiations to U.S. Congress in early January 2026, which equates to 180 days before the mandated review in July 2026. The United States has also announced that much of the negotiation process will likely be on two bilateral tracks, despite periodic interruptions.

Experts affiliated with the Claudio X. González Center for the U.S. and Mexico have submitted public comments and recommendations to the Office of the U.S. Trade Representative.

In Mexico, the government also opened a public comment period on Sept. 17, 2025, with a specified comment period of 60 days. Shortly thereafter, Canada published a notice seeking the public’s comments and feedback on the review. The Canadian and Mexican governments will likely continue to consult one another formally or informally on strategies for issues of common interest, such as U.S. tariffs on automobiles and auto parts, aluminum, steel, and copper.

CORE ISSUES

The following are several key issues that will likely be negotiated and warrant updates during the 2026 USMCA review, along with the recommendations from the Claudio X. González Center for the U.S. and Mexico.

Agriculture

Chapter 3

In 2024, Mexico became the largest market for U.S. agricultural product exports, surpassing China. These commodities include corn, soy, wheat, meats, and dairy. Given the recent decline in Chinese purchases of soy and other U.S. commodities, along with the enormous significance of the Mexican market for U.S. farmers, the USMCA review should include additional protection for U.S. market access. A USMCA panel decision in December 2024 confirmed that a proposed Mexican ban on genetically modified organism (GMO) corn was inconsistent with Mexico’s obligations under the USMCA. While President Claudia Sheinbaum has indicated that Mexico will comply, further steps to secure U.S. market access are likely necessary.

Mexico has also planned to ban a common herbicide, glyphosate, which is frequently used to kill weeds for GMO corn crops, but that decision has been delayed.

Perhaps through a separate agreement, the United States should request a guarantee that Mexico will refrain from any actions to restrict the importation of GMO corn or other GMO grains into the country as well as glyphosate. The United States should also call for an expanded commitment from Mexico to comply fully with its obligations under Chapter 3 of the USMCA — particularly those related to agricultural biotechnology — to encourage transparency and cooperation. The U.S. promotion of climate-smart agriculture through technology sharing could also be a route to improved access to the Mexican market.

Automobiles and Auto Parts

Chapter 2, Chapter 4, and Appendix to Annex 4-B

The automotive industry accounts for about 22% — the largest segment — of total trade under the USMCA. Thus, this industry is a key driver of overall North American trade and investment, and its production is deeply integrated across all three countries. For example, in 2022, the United States supplied 52.5% of Mexico’s imports of auto parts and accessories, and Canada contributed approximately 5.9%. According to a 2025 American Automative Policy Council report, in the United States, auto and auto parts manufacturing companies employ approximately 436,000 individuals, and the entire U.S. auto sector supports 9.6 million jobs. Maintaining or expanding these numbers is a worthwhile objective for the U.S. government. However, this goal depends, in part, on maintaining a high level of auto sales through both domestic and export transactions, particularly those to Mexico and Canada, despite any production cost constraints.

In the center’s view, maintaining the auto trade integration for the U.S. and regional economy is vitally important. At the same time, there are competing regional objectives. Both the USMCA rules of origin in Chapter 4’s Appendix to Annex 4-B and U.S. tariff policies since January 2025 are largely designed to encourage auto manufacturers in the U.S. region to shift more production of automobiles and auto parts from Mexico, Canada, and other countries and toward the United States. Moreover, the exceedingly complex USMCA’s rules of origin for automobiles and auto parts pose a challenge to manufacturers and traders, particularly small- and medium-sized businesses, throughout North America. However, the possibility that tariffs costs in addition to supply disruption could threaten the survival of auto and auto parts companies is a legitimate concern. More specifically, tariffs could also result in higher retail prices, fewer annual car sales and exports, and lower industry employment.

The preferred approach from the center’s perspective would be to revert to the USMCA side letters on auto trade, which were effectively designed to protect duty-free auto and auto parts exports from Canada and Mexico at then current levels. For example, in a 2018 side letter to Mexico from the United States on Section 232 — part of the original USMCA — the United States agreed to exempt 2.6 million passenger vehicles annually imported from Mexico from Section 232 restraints. Under this side letter, vehicles meeting the USMCA rules of origin entered the United States duty-free, while those that did not meet these rules would be subject to the most-favored-nations (MFN) tariffs of 2.5%, the base rate for decades until 2025. This approach could be modified, perhaps, by converting into a tariff or rate quota at the 2.6 million vehicle or similar level.

At minimum, it is in the North American automotive sector’s interest that when exporting to the United States, Mexican and Canadian producers have, at least, parity with competitors in Japan, South Korea, and the EU. Currently, these nations have a 15% tariff rate on auto and auto parts, while Mexico and Canada have a 25% tariff rate, with certain credits. While a more balanced tariff rate would not necessarily provide a level playing field, it would improve the automotive industry’s competitiveness throughout the region. Ultimately, the U.S. economy stands to benefit more if small cars, with some or substantial U.S. parts content and currently manufactured in Mexico, are exported to the United States rather than being replaced by imports from Japan, South Korea, or the EU.

Chinese origin auto parts should be subject to related but separate discussions, as they are not explicitly covered in the USMCA. In 2024, imports of electronic vehicles from China into the United States and Canada were already effectively blocked by 100% duties, which are still currently in place. Additionally, separate U.S. “connected vehicle” regulations bar the importation of related hardware and software designed in China or Russia into the United States, regardless of country of origin. President Sheinbaum in September 2025 announced her support of new legislation that would raise tariffs on automobiles from countries that do not have free trade agreements with Mexico — which includes China — to 50%.

Energy Cooperation and Investment

Chapter 8

Energy, both fossil fuels and renewables, is an area where Mexico has fallen significantly short of fulfilling its obligations under the USMCA. Mexico’s sovereignty over its energy resources was not questioned, per Chapter 8 of the USMCA. However, under Article 32.11 of the agreement, Mexico effectively agreed to a MFN clause, whereby Mexico’s actions under the USMCA may be taken “only to the extent consistent with the least restrictive measures that Mexico may adopt or maintain under the terms of applicable reservations and exceptions to parallel obligations in other trade and investment agreements that Mexico has ratified prior to entry into force of this Agreement.” The previously ratified agreement to which this article primarily refers is the Comprehensive and Progressive Trans-Pacific Partnership Agreement, particularly its Chapter 9 on investment, which details, inter alia, national treatment for foreign investors.

Energy sovereignty is a high-profile, politically sensitive topic in Mexico. In 2024, former President Andrés Manuel López Obrador asked his National Regeneration Movement (MORENA) Party to repeal the legal and constitutional energy reforms undertaken by former President Enrique Peña Nieto in 2013, which centered on a limited opening of the energy sector to private investment by ending the monopoly of state-controlled enterprises. President Sheinbaum has fully endorsed her predecessor’s measures focused on promoting state-owned energy industries.

The 2024 reversion to Mexico’s statist policies will likely lead to significantly detrimental implications, reflecting the economic challenges across the 1970s and 1980s. As one of the most highly indebted energy companies in the world, Pemex has neither the financial resources nor the technical expertise to reverse Mexico’s steadily declining petroleum production. Additionally, expanding the power of the state-managed Federal Electricity Commission (Comisión Federal de Electricidad, CFE) threatens efforts to expand Mexico’s electric grid to meet anticipated demand. Considering these reforms, it is not in the interests of the U.S. government or American businesses, which could assist Mexico in meeting its energy challenges, to allow this situation to continue.

It would also be politically difficult for President Sheinbaum to repudiate the 2024 reforms entirely. However, there may be possible compromises that could include Pemex and CFE providing added incentives and security for partnerships with private American and Canadian enterprises, which would then have the capabilities to aid Pemex and CFE with their formidable challenges. The center recommends that such options should be pursued. For example, a timeline for Mexico to open increasing portions of their energy market to competition could be implemented during the USMCA negotiations. While gradual changes to Mexico’s energy sector may not be ideal, this approach would be more effective than the current reforms.

Digital Trade, Artificial Intelligence, and Security

Chapter 19

Despite robust provisions on digital trade in Chapter 19 of the USMCA, the Biden administration did not pursue further U.S. efforts to seek broad international agreement on cross-border data flows, source code protections, and digital services market access, which was not advisable in the center’s view. The now five-year-old USMCA provisions would benefit from updates adapted to the increasingly data-driven economy of 2025.

In particular, the United States through the USMCA review can be a leader in addressing artificial intelligence (AI). AI innovation is specifically dependent on flexible and open cross-border data flows, and continued U.S. leadership in AI is likely essential to U.S. national security. A revised Chapter 19 could further facilitate cross-border data flows and other aspects of digital trade in North America, as well as address new concerns relating to national security, competition, and privacy. It could also be used to formally ban digital services taxes, such as the Digital Services Tax that Canada rescinded in June 2025 under pressure from the United States. Also, Canada continues to charge U.S. online services providers contribution fees for the creation of Canadian content under its Online Streaming Act, which some members of Congress and several U.S. firms regard as discriminatory and contrary to Canada’s obligations under USMCA.

From the center’s standpoint, it also seems likely that the Trump administration will be negotiating digital trade agreements with countries outside North America now and in the future to promote U.S. interests. An expanded and revised version of the USMCA’s Chapter 19 incorporating rules on AI could serve as a model for broader negotiations. Provisions consistent with U.S. policy to enhance cybersecurity cooperation should also be considered.

Mexico’s Regulatory and Competition Challenges

Chapter 21 and Chapter 22

In July 2025, the Mexican government announced a Mexican Federal Economic Competition Law, implementing a major reform of its competition legal framework. This new law raises questions regarding its consistency with Mexico’s obligations under several USMCA chapters, particularly Chapter 21: “Competition Policy” and Chapter 22: “State-Owned Enterprises and Designated Monopolies.” Issues under Chapter 27: “Anticorruption,” Chapter 28: “Good Regulatory Practices,” and Chapter 29: “Publication and Administration” may also be affected, for example, by exempting state monopolies, such as Pemex and CFE, from the scope of the law. This would appear to violate, inter alia, the USMCA’s Article 21.1.5.

When Mexico’s constitutional reforms that authorized significant changes to its administrative state, including the elimination of many independent agencies and the antitrust commission, were announced in February 2024, Mexico was warned by economic partners and experts that these reforms likely transgressed USMCA provisions. Another concern is that these authorized powers in unchecked hands could be used to favor some enterprises over others and permit market interventions that could create inefficiencies and encourage favoritism as well as corruption. The possibility of USMCA violations largely depends on how Mexico’s constitutional reforms and Federal Economic Competition Law are implemented, as for example, whether the quasi-independent new National Antitrust Commission administers the law in a nondiscriminatory manner and whether court review is effectively available under Mexico’s new — and concerning — elected judge system.

More broadly, various legal and constitutional reforms implemented by Presidents Sheinbaum and López Obrador and their MORENA Party, especially those related to judicial, electoral, and autonomous agency changes, appear to challenge Mexico’s democratic institutions by weakening their systems of checks and balances. A further weakening of the country’s investment climate will likely occur in the process. Observers have suggested that U.S. economic, trade, and national security interests could experience disruptions due to these reforms. They may also complicate the 2026 USMCA review.

Given the potential risks of Mexico’s constitutional reforms, the United States may seek to request changes to the laws or in their administration. However, it will be another 6–8 months before reasonable U.S. requests can be formulated. It does not seem feasible for the United States to challenge many aspects of Mexico’s new constitutional order as part of the USMCA review. Rather, U.S. actions to protect its thousands of investors in Mexico and its own strategic interests may be better suited to separate high-level bilateral discussions.

RECOMMENDED ACTIONS

One of the greatest challenges for the 2026 USMCA review negotiations is effectively addressing China’s economic presence. Most American policymakers in the Trump administration and Congress would agree that China poses a pervasive, long-term threat to the United States economically, politically, and militarily. Moreover, this challenge not only exists today but also requires wise U.S. policies that look toward impacts and outcomes for the coming decades.

Addressing China’s economic influence in the North America region is only one aspect of this larger challenge, and a complex one. In the center’s perspective, a well-functioning USMCA that maintains North American economic integration can assist the United States in meeting China’s economic threat. This can be done by expanding non-China-dependent supply chains for American manufacturers and assisting these manufacturers with securing efficient production systems that preserve or increase U.S. employment, stimulate exports, and benefit both businesses and consumers. For Mexico, there is considerable risk of being caught in the crossfire between its largest trading partner — the United States — and its second largest — China.

The following are proposed additions to the USMCA based on the Claudio X. González Center for the U.S. and Mexico’s recommendations.

Restrictions and Rules on Transshipping

An issue that did not garner much attention during the original USMCA negotiations was Chinese exports to and investment in Mexico, despite the evidence that Mexican production or imports were being used as an indirect means of exporting Chinese goods to the United States.

It is legal under the USMCA for Chinese firms operating in Mexico to produce goods for export that do not meet the USMCA rules of origin. If there is “substantial transformation,” such goods have traditionally been subject to low U.S. MFN tariffs. Although as of March 2025, such goods became subject to 25% U.S. tariffs, which in many instances were still lower than if the goods were shipped directly from China to the United States. Concerns probably first surfaced around 2023, regarding Chinese steel that appeared to be entering the United State via Mexico, although the volume of Mexican steel imports from China has declined since 2023 after Mexico increased its tariffs. Questions regarding transshipment of vehicle parts have also been raised.

Transshipment of Chinese goods to the United States was a major issue in an antidumping case involving solar panels, where the U.S. Department of Commerce decided in 2023 that such panels assembled in Cambodia, Malaysia, Thailand, and Vietnam — though not from Mexico — were effectively Chinese goods and should be treated as such upon entry. More recently, several U.S. trade deals, including one with Indonesia, contain general language to address the possibility of transshipment, while undefined: “If there is any Transshipment from a higher Tariff Country, then that Tariff will be added on to the Tariff that Indonesia is paying.”

Given the ongoing risks of transshipment by China via Mexico to the United States, it is highly advisable to include a mechanism to address transshipment in a revised USMCA. This mechanism should contain very specific language as to what transshipment consists of, along with an administrative review mechanism. The center recommends that these rules should be drafted in such a way as to recognize that many goods produced in Mexico may well continue to depend on international supply chains for an extended period, and to assure that goods meeting the USMCA rules or origin are automatically excluded. It would also be advisable to automatically exclude goods that meet USMCA rules of origin from transshipment actions.

Limits on Chinese Investment in and Exports to Mexico

Moreover, the United States should prioritize protections against Chinese goods made in Mexico that threaten national security, such as the potential importation of “connected vehicles” assembled in Mexico that could be utilized for espionage, inter alia, against American military installations and power plants. During the negotiation process, adding a provision that aids in determining which goods pose national security risks, such as China-produced connected vehicles, certain medical devices, and chips, and those that do not pose these risks, such as consumer electronics, furniture, and the like, would help promote security protections.

Apart from national security matters, the United States should also address the problem of transshipment of Chinese goods to the United States via Mexico and Canada during the USMCA review, as noted earlier.

Limits on Chinese direct foreign investment (FDI) in Mexico, perhaps through a trilateral investment screening mechanism, which was initially considered during the Biden administration, could also be revisited. This could be accomplished alongside a Mexican version of the Committee on Foreign Investment in the United States (CIFIUS), which appears to have been under discussion currently since 2023 with the United States.

Estimates of Chinese FDI in Mexico vary widely. Based on work from the Baker Institute, the center finds that the best estimate is approximately $15 billion, which far exceeds official figures from the Mexican government through 2024 of over $2 billion. This is a substantial figure but less than 10% of estimated U.S.-owned FDI in Mexico, which equates to $145 billion in total. However, the number of Chinese FDI in Mexico would have been higher if a planned $2 billion investment by Chinese automaker BYD had not been indefinitely postponed.

Steel, Aluminum, Copper, and Other Section 232 Tariffs

During the first Trump administration, 25% tariffs on imported steel and 10% on imported aluminum were originally imposed on a worldwide basis, with many exceptions for certain countries and for downstream products. These tariffs were put into place through Section 232 of the Trade Expansion Act of 1962 with the objective of supporting U.S. national security. This program also remained mostly unchanged throughout the Biden administration, except for negotiated tariff rates for a few countries. However, Canada, the largest U.S. supplier of imported aluminum and steel, and Mexico, the third largest supplier, were exempted after 2018 USMCA negotiations as a condition for the agreement’s ratification. Recently, Canada has made major improvements to scrutinize, verify, and validate the origin of imported steel to address U.S. concerns about transshipment of steel. In July 2025, Canada also increased its tariffs on steel imports from other countries, except the United States.

In 2025, the U.S. tariff rates have significantly shifted: copper products are included; fewer exemptions exist; Mexico and Canada are not excluded; and the current worldwide rate on steel, aluminum and copper products is 50%. Since both Mexico and Canada are top U.S. suppliers, the Trump administration should consider exempting all or, at least, some Mexican and Canadian source imports from these high tariffs. The USMCA serves as ample justification to treat these countries as such.

Additionally, all U.S. users of steel, aluminum, and copper in manufacturing — from automobiles to soft drinks — would see a significant reduction in materials costs, making their products more competitive and anti-inflationary in both the U.S. and export markets. One approach could well be a series of sectoral individual deals between the United States with Canada and then with Mexico under which the USMCA parties would conclude tariff or rate quotas or similar arrangements to assist producers in those countries as well as businesses in the United States.

Other Section 232 actions have recently been applied to products, such as heavy trucks, furniture, and timber and wood products, with new probes on medical products and robotics, among others. Additional future Section 232 investigations are also likely. Mexico is a major supplier of furniture and medical supplies, both of which typically satisfy USMCA rules of origin. Future Section 232 actions were contemplated during the 2018 USMCA negotiations, and another side letter details Mexico’s rights in such cases, including to retaliate or to refer the matter for a World Trade Organization dispute settlement. While such rights may not be relevant today, the letter could be a useful basis for future discussions.

Development of Critical Minerals

Given the importance of critical minerals to the U.S. economy, the development of new suppliers is urgently needed. The importance of this issue has increased as the Chinese government has threatened to place expanded restrictions on critical mineral shipments to U.S. auto companies and defense equipment producers, which heavily rely on these supplies. Currently, these expanded restrictions are temporarily suspended. Still, with the risks of China’s growing efforts to control not only mineral exports but also trade by downstream users, development of alternative suppliers among the United States and its allies becomes even more critical.

To address this issue, the center recommends that the USMCA includes a new chapter or side letter that would cover, inter alia, tariff elimination, regulatory alignment, and stockpiling and processing cooperation for rare earth minerals and related materials and processing, along with appropriate protections against expropriation for interested foreign investors. While the Trump administration is already focusing on this issue in the U.S. context, addressing the need for critical mineral suppliers across the North American region has clear advantages, given the potential mining opportunities in Mexico, Canada, and the United States. If the objective is to reduce dependence on China as promptly as possible, close allies such as Mexico and Canada can assist the United States in these efforts, even though some minerals are primarily available in U.S. territory. Also, extraction of minerals is complex and requires metallurgical expertise from U.S. and other global firms.

A possible concern toward developing North American critical mineral suppliers is the barriers surrounding the substantial lithium deposits in Sonora, Mexico, which are reported to be one of the largest in the world. Yet, the Mexican government, which nationalized the deposits in 2022 through a reform of the Mining Law, likely cannot develop the deposits on its own due to technological and political barriers. There seems to be little indication of any movement in Mexico to develop these lithium deposits. The challenges appear significant, given that the deposits are covered by a layer of clay and are not easily exploited.

Lithium, like petroleum, is the property of the Mexican state. However, unlike petroleum, lithium and other critical minerals carry much less political sensitivity, which suggests that it could be feasible for Mexico to offer broad access to the lithium deposits without major political disagreements.

To construct more attractive proposals to Mexico, they could be combined with an expansion of the U.S.’ announcement of “New Partnership with Mexico to Explore Semiconductor Supply Chain Opportunities” in March 2024. For example, chips packaging could be completed in Mexico rather inexpensively, under strict conditions. The logistics are favorable since much of the U.S. chip production, by Intel and the Taiwan Semiconductor Manufacturing Company, occurs in Phoenix, Arizona, which is only about 225 miles from the Mexican border.

Supply Chain Management

Before the COVID-19 pandemic, particularly when the USMCA was negotiated, supply chain management issues were not a high priority. Long supply chains were only beginning to be reduced through reshoring and nearshoring, even though much of the new production encouraged in the United States, Mexico, and Canada by then President Trump was still dependent on parts and components from China and elsewhere. Much of this system, including reliance on “Just-in-Time inventory systems,” continued until the time of major disruptions caused by the COVID-19 pandemic.

Much has changed in five years. Numerous legitimate reasons exist for businesses selling goods in the United States to be located in the United States, Mexico, or Canada. At the same time, the concept of nearshoring with businesses established in Mexico to sell to the United States is a practice that predates NAFTA by some years. Production of goods sourced from dependable U.S. allies, such as Mexico and Canada, with their shorter supply chains and common ownership with many American businesses is worth preserving and encouraging, rather than concentrated trade with opponents, such as China.

Moreover, as recent proposed actions by the Chinese government to further restrict their critical minerals and product supply demonstrate, supply chains are a significant national security issue for the U.S. government. Supply chain management arising partially from U.S. competition with China is a long-term challenge for North America and should be treated as such in the USMCA review.

Under these circumstances, the economic security of all three USMCA parties is likely threatened. Thus, the United States should propose a new USMCA chapter or side letter or letters to mitigate future supply chain disruptions and promote security and transparency. Aspects of the chapter could include efforts to analyze current global supply chains to identify vulnerable areas in addition to rare earth mineral supplies. Logically, the USMCA parties would collectively establish standards to trace and verify a material’s country of origin efficiently. The chapter could also address transshipments to a further extent pending its coverage elsewhere in the revised USMCA as well as misclassification of goods to evade tariffs.

These objectives overlap with other desirable new provisions, including robust mechanisms for screening FDI where they are currently not in place, such as Mexico, and commitments to improve national security screenings in the United States and Canada where advisable. Both Canada and the United States have existing mechanisms for national security screenings, such as the CIFIUS and Canada’s Ministry of Innovation, Science, and Economic Development. The center recommends a trilateral investment review, in part, to assist Mexico in effectively developing its own parallel committee. The level of coordination and overlap would need to be addressed during USMCA negotiations. Investment screenings could also aid Mexico in addressing Chinese investments proposed for the country, a likely negotiation topic by both the United States and Canada in the review.

Ideally, the USMCA negotiations would eventually lead to a joint security framework with the United States and Mexico that focuses on conducting trade inspections in airports, seaports, land ports, and other areas to reduce corruption and criminal activities. Fuel theft and corruption in the Mexico’s Navy, which is currently responsible for the customs functions in Mexico, has become a serious challenge for the MORENA Party. Under such circumstances, Mexico, despite sovereignty concerns, may be receptive to some level of customs coordination and inspection.

POLICY PATHWAYS

The following are USMCA provisions that the Claudio X. González Center for the U.S. and Mexico advises to preserve in their current state or to slightly revise during the 2026 review process.

State-to-State Dispute Settlement

Chapter 31

The state-to-state dispute settlement mechanism in the USMCA’s Chapter 31 embodied significant and welcome changes compared to its previous version in NAFTA’s Chapter 19. The USMCA provisions greatly improved major procedural aspects of the mechanism; in particular, it impeded any party to significantly delay the arbitration process, without reducing complainant discretion as to the timing of the proceedings. The USMCA panel’s jurisdiction was also slightly broadened to cover challenges, such as the U.S.’ allegation that energy reforms were inconsistent with Mexico’s obligations under the USMCA.

The appointment of a full roster of arbitrators in 2020 has also helped to streamline the state-to-state dispute process. As expected, the updates encouraged the use of the mechanism. Since the USMCA was established in 2020, five panel processes have been completed, compared with only three in more than 20 years under NAFTA, while two consultation requests are pending. These include important settlements for the United States in access to the Mexican market for GMO corn and access to the Canadian market for dairy.

Several of these U.S. dispute matters seem likely to be resolved either in bilateral negotiations with Mexico and Canada or during the USMCA review. These include a 2022 Biden-era request for consultations challenging the consistency of the López Obrador administration’s energy reforms with the USMCA. The United States is expected to and, in the center’s view, should raise these issues during the review process, especially considering how Mexico’s fulfillment of their USMCA obligations is likely at risk due to the formal repeal of the Peña Nieto administration’s 2013 energy reforms, as discussed above. However, should the Trump administration choose to do so, it could reactivate the pending Chapter 31 action and request a dispute settlement panel at any time.

Additionally, a final December 2022 panel report decided that the United States did not comply with certain complex provisions of the USMCA’s automotive rules of origin. However, the United States has clarified that it would not comply with the panel report. These complex USMCA rules of origin, along with Trump-era tariffs on automotive goods, indicate that the issues discussed in the panel report could be appropriately addressed in the 2026 review.

Still, from the center’s standpoint, the state-to-state dispute settlement mechanism has performed properly. Thus, there is no need for significant revisions, and the mechanism should remain intact, as the United States and other parties have access to its future use if necessary.

Antidumping and Countervailing Duty Cases Rulings

Chapter 10

NAFTA’s Chapter 19 outlines a binational panel process to provide reviews of administrative decisions in antidumping and countervailing duty cases. However, this mechanism was not modified in the USMCA and simply was moved to Chapter 10: “Trade Remedies.” While the mechanism was widely utilized under NAFTA, with a total of 132 completed cases, fewer cases have gone forward under the first five years of the USMCA, with 26 filed and only six decided. Canadian actions against the United States in the decades-old softwood lumber dispute account for 10 of these cases.

In the center’s view, it is unclear if the USMCA review of this mechanism should be on the negotiating agenda, given the many more pressing matters, although it probably remains highly important to Canada and Mexico. However, if the United States decides to review the binational panel mechanism, the “Extraordinary Challenge Procedure” under USMCA’s Article 10.12.13 should be modified. This mechanism was designed to provide limited review of panel decisions. It has been used only sparingly and unsuccessfully by the United States. In practice, the mechanism effectively precludes review of panel decisions, which is a major deficiency. Per Article 10.12.13, the relevant provisions allow a review only under these circumstances: “(a, iii) the panel manifestly exceeded its powers, authority or jurisdiction set out in this Article, for example by failing to apply the appropriate standard of review” and “(b) any of the actions set out in subparagraph (a) has materially affected the panel’s decision and threatens the integrity of the binational panel review process” (emphasis added).

While several panel decisions against the United States arguably resulted in violations by the panel under the article’s a-iii paragraph, demonstrating that a single panel decision, regardless of how erroneous, “threatens the integrity of the binational panel review process” has proven to be incredibly difficult. Consequently, if the United States decides to seek revisions in the binational panel process, the center recommends that the emphasized language above be modified or excised.

Investment Provisions and Outstanding Disputes

Chapter 14

Investor-state dispute settlement (ISDS) in U.S. free trade agreements has been controversial in the United States since the NAFTA negotiations in 1991–92. Thus, the willingness of the Trump administration to significantly narrow the scope of available ISDS reflected a major change in U.S. policy, but one that was supported by members of both political parties at the time of ratification. Instead of making ISDS broadly available to private investors seeking recompense from the NAFTA governments, the USMCA eliminated ISDS between the United States and Canada. It provided full ISDS rights by U.S. investors against the Mexican government only in government contracts relating to oil and gas, power generation, telecommunications services, transportation services, and certain infrastructure, as outlined in USMCA’s Annex 14-E. Other investment disputes brought under the USMCA by U.S. investors in Mexico require the exhaustion of local remedies and exclude protection against denials of fair and equitable treatment or indirect expropriation per USMCA’s Chapter 14.

Other than so-called “legacy” claims based on a three-year grace period — 19 in total, with 14 against Mexico — the mechanism has not been widely used. Should the United States wish to eliminate ISDS, certain U.S. investors, primarily those in the power sectors, might oppose such a measure. The Mexican government reportedly favored limited ISDS during the USMCA negotiations in 2018. Given the decisions by the López Obrador and Sheinbaum administrations and the MORENA Party to restore the Pemex and CFE monopolies, Mexico’s position on ISDS may have shifted.

At the same time, Mexico’s 2025 constitutional reforms that significantly reshaped the judicial system and weakened certain business protections suggest that the current version of Chapter 14 should be preserved. Still, Mexico’s declining investment climate may well encourage reshoring in the United States rather than nearshoring in Mexico, although this would not affect nearshoring in Canada.

In some cases, individual U.S. company disputes with Mexico may not be public or have been resolved through negotiations. The U.N. Trade and Development (UNCTAD) investment hub lists four cases filed against Mexico since 2024, when legacy actions under NAFTA were no longer permitted. However, the complainant enterprises in those cases were one each from Canada, France, China, and Spain. Still, before the USMCA review, the U.S. government should compile a list of outstanding disputes for use in the 2026 negotiations. It is probable that other outstanding disputes exist even though they have not been brought to ISDS, in part because the costs of ISDS are prohibitive for smaller enterprises.

Labor

Chapter 23

As is well known, the USMCA’s Chapter 23: “Labor” and the “rapid response” state-to-state dispute settlement mechanism in Annexes 31-A and 31-B were transformative, welcome innovations compared to the largely ineffective labor protection mechanisms in NAFTA and earlier U.S. free trade agreements. The inclusion of such mechanisms when the first Trump administration negotiated the USMCA was broadly attractive to U.S. stakeholders and the American public. Many Democrats saw the revisions as critical to initiating much needed improved labor standards in Mexico. The first Trump administration saw the enhanced labor provisions as ensuring the agreement benefitted American workers.

Although the rapid response mechanism has only been infrequently used, 39 matters have been submitted for consultation to Mexican authorities to promote the Mexican government’s action against individual Mexican company due to noncompliance, and all but a few with jurisdictional discrepancies have been satisfactorily resolved. After more than five years of the USMCA, some improvements and modifications are likely warranted, particularly with implementation by Mexico and monitoring by the United States.

The 2025 majority report of the Independent Mexico Labor Expert Board (IMLEB) — a group created by U.S. Congress in 2020 — recognizes that some progress has been made in Mexico, such as increased wages and a higher number of workers represented by independent unions. However, the IMLEB report also identifies several shortcomings in the mechanism and recommends changes. While the center does not endorse this report, the U.S. government officials should review the report to prepare for the USMCA negotiations. In particular, they should focus on both the majority and dissenting section of the IMLEB report, along the Interagency Labor Committee’s forthcoming report, as aids to deciding what or if any limited changes in the USMCA labor provisions should be negotiated by the United States.

The majority section of the 2025 IMLEB report alleges, inter alia, that Mexico has not adequately addressed violence against union organizers nor sufficiently applied sanctions to enterprises that violate labor rights, in contravention of its USMCA obligations. It also criticizes inadequate financial support for labor protection enforcement and monitoring in both Mexico and the United States. Yet, the minority report paints a starkly different and more optimistic picture, one with which the center is inclined to agree. It notes that the “Board has concluded, unanimously, that Mexico has implemented the required changes, and that Mexico was able to make this change in such a short period of time is an impressive achievement.”

This section of the 2025 IMLEB report also outlines Mexico’s significant accomplishments: enacting new labor laws, creating new labor institutions and courts, providing substantial budgetary increases, launching public disclosure and electronic records mechanisms, and implementing secret ballot voting. Perhaps, most importantly, union representation has grown, with the registration of over 10,000 employee-supported union contracts, while union representation in Mexico increased by 22% from 2018 to 2025. In 2024, wages increased by a nominal 7%, resulting in the best growth in two decades.

Despite some shortcomings, the center finds that the USMCA’s labor provisions instituted by the first Trump administration and U.S. Congress have been largely effective. Under these circumstances, major changes to the USMCA’s labor-focused measures are likely unnecessary. However, specific political reasons may warrant the pursuit of attending to key shortcomings. For example, it could be advantageous to revisit the labor provisions during the USMCA review to achieve bipartisan support, should a protocol to the USMCA be concluded in 2026 or later, and should the U.S. administration decide that formal congressional approval is warranted.

The original USMCA negotiated under the first Trump administration was approved by U.S. Congress with a larger bipartisan majority than NAFTA and other trade agreements, with 385-41 in the House of Representatives and 89-10 in the Senate. Presumably, this broad support incurred, at least, in significant part due to the USMCA’s inclusion of robust labor protections for Mexican workers. Among other benefits for the United States, this mechanism could be strengthened with better funding from both countries to modestly and more rapid move toward reducing wage discrepancies.

STAKEHOLDER IMPLICATIONS

To begin, the Claudio X. González Center for the U.S. and Mexico notes that virtually every exporter, importer, manufacturer, retail business owner, and consumer in or supplying the United States is a stakeholder, whose economic and personal interests will be affected by the successes or deficiencies of the USMCA review. Stakeholders alike in Canada and Mexico will also be impacted.

On the one hand, if a revision of the USMCA results in higher tariffs — a further federal tax increase — on U.S. imports from Mexico and Canada, then it could make such imports even more expensive, increasing production costs and the costs of most goods purchased by consumers, such as automobiles, washing machines, and products for home construction and renovation. Grocery prices could also be affected despite the U.S. government’s recognition in November 2025 that tariffs on food prices are also inflationary.

On the other hand, if the review results in reduced tariffs on U.S. imports of steel, aluminum, copper, autos and auto parts, trucks, wood, furniture, kitchen cabinets, and other products — all goods currently subject to tariff levels not seen for decades at 16.1% to 17.5% — the entire country will benefit. As a key example, if automobiles made in or imported into the United States become significantly more expensive, fewer consumers will be able to purchase them, affecting auto industry profits and production levels.

For Canada and Mexico, reduced access to the U.S. market, particularly in the automotive sector, will reduce exports and investment, as some production is shifted to the United States. Thus, employment in the auto industry in both Mexico and Canada could also be impacted. It can be hoped that goods from Mexico and Canada that are USMCA-compliant will, with few exceptions, continue to benefit from duty-free entry into the United States.

Trade within North America is not isolated. U.S. imports and exports as well as those of Mexico and Canada compete in a global market that is increasingly dominated by China, the world’s leading exporter since 2009, and Southeast Asia. For many in the United States, economic, political, and military competition with China has become an existential challenge for the United States and will be for decades.

The center is mindful that higher costs resulting from tariffs for manufacturers and consumers in the United States make it more difficult to maintain sales in the United States against imports from China and to compete in export markets. Total U.S. trade with China remains substantial at approximately $582.5 billion in 2024. The U.S. trade deficit with China increased $5.3 billion to $14.7 billion in July 2025. During the same month, U.S. exports decreased less than $0.1 billion to $10.0 billion, and imports increased $5.3 billion to $24.7 billion. Eventually, many American companies and consumers may be able to find alternate supply chains, but this could be a long and expensive process.

There are also strategic costs to the United States from high tariffs that treat allies, including Mexico and Canada, and challengers alike. The policy may have the effect of encouraging U.S. trading partners — most of which trade with both China and the United States — to shift their economic relations more in the direction of China and less in the United States’ direction. This possibility is particularly relevant in Asia, as it would lead to the deepening of regional integration. It is too soon to tell the extent of this shift, but it could foreshadow a complicated future for laborers and consumers who live, work, and invest in North America.

Closer to home, the United States’ fractured relationship with Canada — two countries that have “the world’s longest undefended border” — is encouraging Canada to pivot away from dependence on the United States. U.S.-Mexico relations have remained more cordial, but aspects of their relationship, particularly related to sovereignty, have been strained for much of the past 175 years. In the center’s view, the United States should not assume that long-term North American relations will remain as cordial as they have been historically.

The Claudio X. González Center for the U.S. and Mexico believes if the United States takes the recommendations as detailed above into account for the USMCA review, which reflect an objective approach, this will benefit most of the over 600,00 million residents of North America and their businesses.

CONCLUSION

The 2026 review of USMCA offers the United States, Mexico, and Canada an opportunity to evaluate the functioning of the USMCA and make improvements to strengthen its future operations. All three USMCA parties should take advantage of the review provisions to this end, so that North American economic integration continues to support North American production and further the region’s competitiveness, particularly with goods manufactured in Asia and Europe.

David A. Gantz is Will Clayton Fellow in Trade and International Economics at Rice University’s Baker Institute for Public Policy.

Tony Payan is Claudio X. Gonzalez Fellow in U.S.-Mexico Studies, Françoise and Edward Djerejian Fellow for Mexico Studies and Director, Claudio X. González Center for the U.S. and Mexico at Rice University’s Baker Institute for Public Policy.

This publication was produced on behalf of Rice University’s Baker Institute for Public Policy. 

Republished with permission from the authors.

 

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