The five stages of a USMCA shakeup
On July 1, North America may enter a new era of economic relations. The United States is set to formally announce it will not renew the United States-Mexico-Canada Agreement (USMCA), beginning a potentially decade-long negotiation process over the future of the free trade agreement.
That announcement will not immediately terminate the USMCA, as that would require the countries to fail to extend it over the next ten years. Accordingly, some insist there will be few immediate consequences. However, the countries will hold prolonged dialogues about the agreement in an attempt to save it. Such uncertainty and bargaining looming over such deeply integrated economies, which should instead be coordinating on critical issues, is harmful to growth and geopolitical stability.
Therefore, what might seem like an inconsequential deadline could have long-term economic and political impacts for decades to come. Below is what each stage of negotiations could mean for the regional and global economy.
Initially, there would be business as usual
Despite unprecedented tariffs and US President Donald Trump’s insistence that the US would “do better” without the USMCA, the economies remain deeply integrated and dependent on the trade agreement. A missed July 1 deadline is unlikely to deter talks: Canada and Mexico have shown they are willing to absorb threats to preserve open markets. So far, Mexico has engaged in formal bilateral talks, and Canada has called for a quick renewal of the agreement.
However, after a couple of months, the economies will have to come to reality: Years of discussions over maintaining the agreement could be ineffective, distracting, and economically harmful. The traditional negotiation process may give Canada and Mexico little leverage, threats of withdrawal from the agreement could distract from productive talks on real issues, and prolonged uncertainty may trigger businesses to shift sourcing.
Tariffs would remain on the table
Trump is already operating by a new rulebook, and months of slow negotiations could push him to reach for a tougher bargaining chip: high tariffs. Washington could expand Section 232 tariffs, launch new Section 232 investigations, tighten USMCA eligibility rules, or apply Section 301 tariffs regardless of whether a product falls under USMCA. The Section 301 modification alone could raise tariffs dramatically. If all imports from Canada and Mexico were to face additional tariffs of, say, 25 percent—the tariff rates based on the International Emergency Economic Powers Act, which were announced before the USMCA exemption was made—it would result in an additional $70 billion in tariffs. Even without higher Section 301 rates, Section 232 tariffs have already strained the relationship, with Canada and Mexico making the removal of steel and aluminum duties a top priority. Additional Section 232 tariffs would only deepen those tensions while raising costs for businesses.
Canada and Mexico could impose retaliatory tariffs of their own, though it’s unclear if they would. They have shown that they will be placative to maintain market access and relative stability, so they may have to look to other partners to diversify and continue growing.
External trade agreements would become more important
As negotiations drag on, new agreements could play a bigger role in the region. The trilateral agreement could dissolve into bilateral ones. Trump prefers bilateral deals and could strike one with Mexico, which has weathered recent trade tensions with Washington better than Canada. Canada and Mexico could also build on the foundation of their 2025-2028 action plan and make a new bilateral agreement. But no bilateral option would match the strength of the trilateral, and thus this arrangement could push countries to look elsewhere. Canada has expanded trade talks with partners across the world, while Mexico has advanced agreements with the European Union and Brazil.
China would be one of the biggest winners from a fragmented North America. Canada has already deepened its economic relationship with China, engaging in ongoing negotiations over expanding Canadian exports and easing tariffs. Mexico has reduced its dependence on Chinese imports under pressure from Washington, but without incentives, it would have greater reason to turn back to China for inputs, investment, and low-cost goods. And the lack of a united front would in itself give China an opening to redirect exports and work around rules of origin.
Economic impacts would kick in after a couple of years
Years of negotiations could have significant economic consequences. For example, the auto sector, the largest component of total North American trade, has faced an increase in tariffs of nearly 625 percent due to Section 232 tariffs, leading to a 10 percent drop in imports and a 19 percent drop in exports in the year after Liberation Day, in comparison to the year before it. The industry, weakened despite high USMCA usage, would be incredibly vulnerable if the foundation of the free trade area began to fall away.
Even if additional tariff hikes don’t materialize, years of bargaining would come with their own consequences. Supply chains are built with thirty-year visibility, not five, and uncertainty could dissuade investment and growth. Additionally, negotiations over whether to keep the agreement would distract from critical conversations on developing technology, competing with Chinese electric vehicles, and remaining competitive. A destabilized USMCA would ripple through the entire economy and weigh on growth and employment in every sector.
Long-term uncertainty could linger
At the close of the Trump administration, the US, Canadian, and Mexican economies may be struggling from rounds of negotiations, tariffs, and offshoring. Coordination on key issues could be lost in the shakeup, meaning little trilateral engagement on important issues in global trade. Instead, the region may stagnate in its renewal cycle, leaving the next US administration with a choice: keep engaging in the same cycle of negotiations or buckle down and make a new deal.
From the chaos, a new trilateral agreement or new bilateral deals may rise. This isn’t necessarily a weakness. North America could emerge with a framework better suited to today’s challenges—one prepared to handle China, artificial intelligence, labor and environment issues, and supply chain shocks. Alternatively, years of negotiations spent keeping the current agreement alive instead of making it better could waste time, producing a scenario where the economies continue limping through uncertainty with an agreement that no longer fits reality.
A trilateral relationship test
If these stages have sounded familiar, it’s because they are: They’re not unlike the five stages of grief after an interpersonal breakup. First comes denial, as policymakers convince themselves that the relationship can continue as before. Then comes anger, expressed through tariffs and retaliation. Bargaining follows as governments search for side deals and companies begin diversifying. Eventually, the economic costs become harder to ignore. In the end, a choice must be made about whether to accept a new painful reality or build back stronger together.
The North American free trade area is not ending, but it may be changing. The future of what that looks like is unclear, but two things seem certain: Ongoing negotiations over the agreement will come with their own economic hardship, and the relationship will likely never be what it was again. Some relationships survive uncertainty. Few emerge from it unchanged.
Madeline Chalecki is an assistant director at the Atlantic Council’s GeoEconomics Center, where she leads the center’s work on trade policy, tariffs, and supply chains, including the Trump Tariff Tracker.
Further reading
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