Brace for More Trade Limbo Between the U.S., Mexico and Canada. These Sectors Could Feel It Most. — Barrons.com

By Reshma Kapadia and Molly Bordoff

Trade is back on the agenda this week. The U.S., Mexico and Canada need to decide by Wednesday to renew their trade pact, which governs roughly $2 trillion in goods trade, scrap it — or enter a limbo period of continued negotiations and annual reviews of the deal over the next decade until one calls it quits or they compromise on changes for an extension.

The pact, known as USMCA, was heralded as one of the biggest successes of the President Donald Trump's term. But as the July 1 deadline for the agreement's first formal joint review approaches, analysts don't see a clean renewal of the pact that governs America's largest trading relationship, with 30% of U.S. exports going to Canada and Mexico.

Trump has said he would like to terminate it, and prefers bilateral rather than trilateral deals. While formal discussions have begun with Mexico, which has a larger amount of issues on the table including security and immigration, relations with Canada remain fraught.

Analysts see more trade limbo ahead, with no renewal nor withdrawal but instead continued negotiations and the pact subject to annual review for the next decade — or until a country pulls the plug or the three agree to renew it. While this purgatory may not rattle the market like last year's tariff battles, it will be an irritant for sectors reliant on the relationship such as autos, metals and agriculture.

Analysts are also bracing for threats this week from Trump that he will pull out of the pact. Follow-through would require six months' written notice and Congress to signoff — moves that would likely trigger a market and economic earthquake by raising tariffs on a swath of goods that have been exempt from last year's levies.

But geopolitical strategists note recent frustration among Republicans with the war in Iran and worries about further cost increases ahead of the midterms lowers the odds of a withdrawal. Another consideration: Nine of the 10 states with the biggest chunk of their exports coming from Canada or Mexico voted for Trump in 2024, according to the Peterson Institute.

That lowers the odds of an actual withdrawal. But even limbo could mean higher costs. "The prospect of annual reviews is fatal to long-term investment, such as mining or refining," says Gary Hufbauer, an analyst at the Peterson Institute for International Economics. "Just too much business uncertainty."

That uncertainty will be felt most in sectors dependent on the trade such as autos, metals like aluminum, energy, fruits and vegetables. The North American trading bloc's competitiveness could end up as collateral damage if the extended delay slows investment plans, says Grace Fan, head of global policy at TS Lombard. The most likely beneficiary: China.

One of the changes the U.S. is seeking pertains to rules of origin — increasing the required local content percentage for tariff benefits — to prevent China from using neighboring countries to evade tariffs. Meanwhile, Mexico and Canada want some reprieve in sectoral tariffs such as the 50% levies on aluminum, steel and copper.

The U.S. is unlikely to reduce these much unless it gains ground on thornier issues, especially with Canada on lumber or dairy, says Owen Tedford, an analyst at Beacon Policy Advisors. If they get some reductions, it could be a boost for U.S. autos and manufacturers impacted by the levies.

Autos

Jefferies analysts see autos as the "core fault line" in negotiations, as more than a fifth of USMCA-related trade is auto-related. U.S. Trade Representative Jamieson Greer wants to see more auto production move back home, with more content of each car coming from the U.S.

One complication: Carmakers can't make a vehicle without China because it is an electronics powerhouse and often the exclusive provider of cameras and sensors, said Flavio Volpe, president of Canada's Automotive Parts Manufacturers' Association, during a trade panel held by Cato Institute.

In a letter to Greer, U.S. auto trade groups said that extending the pact would signal to them to invest, innovate and hire in the U.S. while a move toward separate bilateral pacts would "undermine the very supply chains the agreement was designed to strengthen."

A bilateral deal with Mexico that increases U.S. car content would boost production and benefit U.S. auto makers, with General Motors the most exposed to USMCA of the U.S. auto makers, says RBC Global's lead auto analyst Tom Narayan.

But bilateral deals would create more complexity and undermine the investments that have integrated supply chains. U.S. auto prices could see a 10% increase if the deal was unwound, estimates Hufbauer.

Energy

The trade pact offered a regulatory framework and investor protections for cross-border energy investments — including the electricity, natural gas and refined product trade critical for data centers, according to a recent report by analysts at the Center for Strategic and International Studies. Without USMCA, the analysts caution that the capital needed to expand and modernize energy infrastructure could dry up.

Agriculture

Farmers rely on integrated supply chains running through the continent to export livestock, grains and produce and unraveling the deal would mean higher food prices and lower margins for food producers who would face more inspections and need to navigate differing standards. The trade pact has reduced Americans' average grocery bill by $700 a year, Scott Linciome, vice president of general economics at CATO said during a panel the think tank held last week.

About a third of U.S. agricultural products go to Canada and Mexico, with Mexico consistently one of the top two buyers of U.S. corn and Canada the largest importer of U.S. ethanol. Those positions give the countries bargain power, especially as farmers have already been hit by last year's tariffs, losing share to Brazil that could gain even more share if the pact unravels.

Companies to watch include grain processors and traders like Archer Daniels Midland and Cargill, ethanol producers and machinery and fertilizer companies with direct exposure to the economic fate of U.S. farmers. Any moves that reduce U.S. production could hit these companies as well as agricultural commodities broadly.

Elijah Nicholson-Messmer contributed to this article.

Write to Reshma Kapadia at reshma.kapadia@barrons.com and molly.bordoff@barrons.com

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