Failing to Renew USMCA Would Result in Tariff Uncertainty

On July 1, 2026, trade representatives from the US, Canada, and Mexico face the first review deadline for the US-Mexico-Canada free trade agreement (USMCA), which took effect in July 2020. President Trump has said he does not intend to renew the agreement in its current form, raising the likelihood of further rounds of review and negotiation. A prolonged review process would heighten trade policy uncertainty, which is already elevated by the president’s current and pending tariffs. And if it ends in higher tariffs, those new trade barriers would slow economic growth.

The USMCA Is Vital for the US Economy

USMCA modernized the North American Free Trade Agreement (NAFTA). While NAFTA had reduced tariffTariffs are taxes imposed by one country on goods imported from another country. Tariffs are trade barriers that raise prices, reduce available quantities of goods and services for US businesses and consumers, and create an economic burden on foreign exporters. rates to zero on most goods traded among the three countries, USMCA focused on the remaining non-tariff barriers in digital services, e-commerce, and intellectual property. It requires all parties to ensure the free movement of data across borders and forbids discriminatory treatment, such as tariffs on digital products or forced localization of computing facilities.

Other significant changes included scaling back the investor-state dispute settlement mechanism (which had allowed investors to sue in an international tribunal if they suffered unfair regulatory treatment), tightening rules-of-origin requirements (ROOs) for automobiles, and requiring Mexico to strengthen its labor standards by improving its collective bargaining arrangements. Altogether, the United States International Trade Commission (USITC) estimated that the agreement would boost long-run GDP by 0.35 percent and increase US employment by 176,000 jobs.

While not all the new provisions were beneficial to the US economy (the same USITC report estimated that the ROOs would reduce economic growth by increasing the costs of auto parts and making domestic manufacturing more expensive), allowing consumers and businesses to continue purchasing goods and services relatively freely from Canada and Mexico was (and is) vital to the US economy. Together, Canada and Mexico accounted for more than $1.8 trillion in goods and services trade in 2024, largely supporting the manufacturing, agriculture, and energy sectors.

USMCA Is Up For Review

USMCA is scheduled to expire after 16 years unless the US, Mexico, and Canada confirm, through a joint review process, that all three wish to continue it. The first review takes place this year, six years after the agreement took effect, and the three governments must decide by July 1, 2026, whether to continue it as is or make changes.

If they do not reach an agreement for a clean extension by July 1, that failure would trigger a series of annual reviews. If no consensus is reached, the agreement would expire at the end of its 16-year term, in 2036.

The Trump administration’s grievances include the trade deficit with Canada and Mexico, Chinese exports routing through Mexico, and lack of access to the Canadian market for US dairy exports. Mexico hopes to relax some ROOs through negotiation, while the US wants to tighten them further.

Clean extension by July 1 seems unlikely, leaving annual reviews, a shift toward bilateral deals, or new concessions as the more likely outcomes.

Taxing North American Trade Would Shrink the US Economy

Nowhere is the importance of America’s trade relationship with Canada and Mexico more evident than in the context of the president’s tariff regime.

In February 2025, President Trump used the International Emergency Economic Powers Act (IEEPA) to announce 25 percent tariffs on most imports from Canada and Mexico. The tariffs took effect in March 2025, but he quickly announced a 30-day exemption for USMCA-covered imports, which was then extended indefinitely.

In July 2025, the president announced that he would raise the tariffs on Canadian and Mexican imports to 35 percent and 30 percent, respectively, by August. The Canada increase went into effect as scheduled, but the Mexico increase was delayed 90 days and then postponed indefinitely. A Supreme Court ruling in February 2026 struck down the IEEPA tariffs, but the administration quickly replaced them with a 10 percent Section 122 tariff that also exempts USMCA-compliant goods.

After the tariffs took effect, and with further hikes threatened, USMCA-compliant imports rose substantially, as the USMCA exemption increased the incentive for importers to file the compliance paperwork. Between June and July 2025, compliant imports from Mexico rose by 83 percent and from Canada by 62 percent, and they have remained well above 2024 levels. The compliant share of imports from the two countries climbed from 44 percent in 2024 to 67 percent in 2025, peaking at 89 percent in October and remaining above 80 percent so far this year.

The exemption has partially insulated US importers from the tariff shock, though they still face Section 232 tariffs on some imports, including Canadian and Mexican steel and aluminum.

To illustrate the impact of the USMCA exemptions, we model a scenario in which they end: USMCA imports now shielded from Section 232 tariffs on autos, auto parts, and trucks would face the 25 percent rate, while other USMCA imports would face a 10 percent rate.

Ending the exemptions would increase the harm of the president’s tariff policy. The tariffs currently in place will cost American households about $700 this year and reduce long-run GDP by 0.3 percent. Ending the USMCA exemptions for the tariffs would reduce long-run GDP by an additional 0.1 percent and cost 95,000 jobs. It would amount to a $466 billion taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. increase from 2027 through 2036 on a conventional basis—roughly $300 per US household in 2027.

Table 1. Revenue Estimates of a 25% Tariff on USMCA Auto and Auto Parts Imports and a 10% Tariff on All Other USMCA Imports, Billions of Dollars

Source: Tax Foundation General Equilibrium Model, June 2026

Table 2. Economic Effects of a 25% Tariff on USMCA Auto and Auto Parts Imports and a 10% Tariff on All Other USMCA Imports

Source: Tax Foundation General Equilibrium Model, June 2026

With the current Section 122 tariff set to expire in July and Section 301 tariffs on the horizon, tariff policy uncertainty will likely rise yet again. Policymakers have no reason to compound that uncertainty by stalling USMCA renewal, or worse, by withdrawing from the agreement altogether, as the president has threatened to do. With almost 2 million jobs across the US supported by trade with Canada and Mexico, the agreement remains vital to the American economy.