WASHINGTON—The United States-Mexico-Canada Agreement (USMCA), which entered into force in 2020, has delivered predictability and stability to North American automotive manufacturers. But that stability is not permanent. The agreement’s built-in review and sunset mechanisms require the three countries to jointly affirm its continuation this July. While the USMCA’s future is far from certain, automotive manufacturers should take steps now to make their supply chains, investments, and factory locations more resilient to shocks resulting from significant changes to the agreement or its expiration.
Before the USMCA’s predecessor, the North American Free Trade Agreement (NAFTA), was implemented in 1994, the automotive trade was restricted to 2.5 percent tariffs on Mexican goods imported into the United States and up to 20 percent for US goods imported into Mexico. NAFTA removed these barriers, which especially helped the broader automotive sector, enabling highly specialized cross-border supply chains that improved productivity.
At the same time, these trade policies contributed to large trade deficits, the offshoring of manufacturing jobs, and an erosion of competitiveness in heavy industrial sectors such as the automotive industry. The USMCA was designed to modernize North American trade rules and help close these gaps.
The USMCA’s most consequential changes for the automotive industry fall into four areas. To be eligible for preferential tariff rates under the deal, automobiles are now subject to tighter rules of origin, requiring 75 percent regional content; establishing a 40–45 percent Labor Value Content (LVC) threshold; requiring that 40–45 percent of an automobile’s content be produced by workers earning at least $16 per hour; and mandating that at least 70 percent of manufacturers’ steel and aluminum purchases originate in North America.
The results have been mixed. US imports of Mexican vehicles and parts rose from $196 billion in 2019 to $274 billion in 2024, while the combined US trade deficit with Mexico and Canada more than doubled to over $250 billion by 2025. Macroeconomic effects on gross domestic product remained negligible, with an impact below 0.01 percent.
The review in July occurs amid geopolitical friction and domestic debate over whether the USMCA has delivered on its manufacturing and employment goals. This is a central issue for the US Trade Representative’s (USTR) America First Trade Policy, which seeks reciprocity, balanced trade, and reindustrialization. While the USTR’s 2025 comments acknowledged the USMCA’s improvements over NAFTA, persistent concerns about enforcement and content rules remain for the Trump administration.
In the review, the USTR will aim to address structural imbalances, including nontariff barriers and unfair practices, while better aligning the agreement with US economic and national security interests. Failure to reach a defined outcome could raise capital costs, delay localization decisions, and force supply-chain reorganization for US industries well before the deal is set to expire, which is in July 2036 if the parties do not agree on an extension.
These are the three scenarios that are possible:
First, renewal in substantially the same form. Trilateral consensus is reached with targeted modifications, such as improved LVC verification, stronger enforcement mechanisms, and recalibrated rules of origin thresholds for electric vehicles and batteries. Even a “clean” renewal would include a transition compliance period and potential recalibration of content-qualification models. This outcome would preserve integration and allow Mexican imports to keep growing, but US trade deficits would remain large.
Second, no trilateral consensus is reached, leading to separate bilateral arrangements. Manufacturers would face dual compliance regimes and increasing complexity. Mexico-favored terms would accelerate imports from Mexico, while Canada, vulnerable because of its upstream metals and subassemblies, would face medium-to-high risk of eroded preferences and cascading disruptions. Manufacturers with integrated North American platforms would face dual compliance regimes, increasing administrative and sourcing complexity.
Third, no consensus and no immediate bilateral replacements. North American trade would revert to pre-NAFTA conditions: elevated tariffs, uncertain access, and compressed investment horizons. Imports from Mexico could stall or decline from current levels as firms build up inventory. Canada would face the highest risk of qualification disruptions and supply-chain fractures. Furthermore, Canada’s moves to boost trade ties with China have raised concerns over Chinese content bypassing USMCA rules, which could jeopardize the agreement’s renewal. This would be the most disruptive outcome for the automotive sector.
Given the compressed timeline, range of possible outcomes, and the long lead times required for plant-location, supply-chain, and content-qualification decisions, automotive manufacturers should act now. They should rethink production footprints, strengthen US hubs, shift from just-in-time models to inventory buffers, invest in dual sourcing, and monitor supplier solvency. If Canadian or Mexican components lose preferred status, bill-of-materials audits will expose vulnerabilities, requiring major capital expenditures for tooling and new capacity.
The best-positioned companies will be the ones that treat the time between now and the USMCA review in July as a planning window rather than the lead-up to a final resolution on the trade deal’s future. To strengthen their resilience to each of the above scenarios, auto manufacturers should build supply chains that meet tighter content rules, make investments that are less dependent on any single bilateral relationship, and make factory location decisions grounded in rigorous market analysis.