Reshma Kapadia

The U.S. Trade Representative's office on Wednesday decided not to renew the U.S.-Mexico-Canada trade pact, or USMCA, in its current form after a virtual meeting with trade officials with the other counties. That keeps the pact alive but kicks off annual reviews of the deal, a new form of trade limbo for America's biggest trading relationship.

One reason the U.S. trade representative opted against renewal of USMCA, which was struck during the first Trump administration, was because it didn't control the trade deficit, a senior administration official told reporters Wednesday. It also didn't deliver on market access issues, especially related to corn or energy, the official added.

Most analysts expected the U.S. would pick a middle ground rather than rubber stamp USMCA or withdraw from the pact that governs roughly $1.6 trillion in trade between the neighbors and underpins critical supply chains.

Trump has for months voiced a preference for bilateral deals. While the U.S. has held formal bilateral negotiations with Mexico, with another meeting planned July 20, relations have been more fraught with Canada.

The official said the president's tariffs and trade policies have "already subsumed USMCA" but the U.S. trade representative plans to continue negotiating with both countries. The official added that it is in no one's interest to drag this on for a decade, noting that there could be an agreement reached within Trump's term.

The U.S. would like to see tighter rules of origin, not just in autos but for broader industrials — increasing the amount of content coming from the U.S. or its partners to get USMCA tariff treatment. The Canadians and Mexicans are seeking a reduction in sectoral tariffs. The administration official said it would be up to Trump to see if an adjustment would be warranted.

While some of the issues the U.S. trade representative has outlined to Congress are trilateral issues — related to autos, aluminum, steel, and rules of origin — there are also specific issues with each country like dairy and digital issues with Canada and investment-related concerns with Mexico.

Kelly Ann Shaw, an international trade lawyer and partner at Akin Gump who worked in the first Trump administration, expects the U.S. to eventually maintain USMCA but have extra bilateral protocols on top with each trading partner.

Though it isn't the worst-case scenario of ripping up the pact that governs more than $1.6 trillion in trade between the neighbors and underpins interwoven supply chains for everything from agriculture to autos, this period of limbo isn't great news for either Canada or Mexico. In a note to clients, Carlos Capistran, BofA's Latam and Canada economist, said this default situation of annual reviews and a pact that expires in 2036 unless the trio find a way to extend it isn't good for investment confidence and is likely to keep a lid on economic growth.

"We don't believe the market is adequately pricing in the risk of extended negotiations heading into the winter or even 2027," said John Aiken, an analyst at Jefferies in a note to clients on Wednesday. Rolling annual reviews "effectively institutionalizes a state of permanent trade negotiation," Aiken says. That state of long-term planning limbo could chip away capital investment, delay near-shoring and hurt operating margins for cross-border logistics, he said.

Others note that the uncertainty of annual reviews and the threat of tariffs rising could dampen hawkishness out of the Bank of Canada, which may stay poised to cut rates even as it deals with inflation from the Iran war disruptions.

Until a deal emerges, Mexico is relatively well-positioned versus exporting rivals even though uncertainty will keep much-needed investment on the sideline, according to Capital Economics. If Mexico emerges with a bilateral pact, that could offer a catalyst for its economy, a laggard in the region with 2026 growth expected at just 1.3%, and the market.

The iShares MSCI Mexico exchange-traded fund was little changed at $75.39. The iShares MSCI Canada ETF was up 0.43% at $57.89.

Write to Reshma Kapadia at reshma.kapadia@barrons.com

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