The five stages of a USMCA shakeup

On July 1, North American economic ties may enter a new phase. The United States is expected to formally declare that it will not renew the United States-Mexico-Canada Agreement (USMCA), triggering what could become a negotiation process stretching up to a decade over the pact’s future.

This announcement does not immediately end USMCA; termination would only occur if the three countries fail to extend the agreement over the next ten years. Because of that, some observers argue that the short-term impact will be limited. In practice, however, the three governments will be locked into lengthy talks to try to preserve the deal. Prolonged uncertainty around such tightly linked economies—when they should be coordinating on strategic issues—can undermine growth and geopolitical stability.

What appears to be a routine deadline could therefore shape economic and political outcomes for many years. The following outlines how each phase of the process could affect the regional and global economy.

Initially, business would largely continue as normal. Despite heavy tariffs already in place and US President Donald Trump’s claim that the United States would be better off without USMCA, the three economies remain highly interdependent and reliant on the agreement. Missing the July 1 renewal date is unlikely to halt discussions: Mexico and Canada have repeatedly shown they will tolerate pressure to keep markets open. Mexico has already entered formal bilateral talks with Washington, and Canada is pushing for a swift renewal.

But after a few months, the reality would set in. Years of talks just to preserve the existing framework could prove unproductive, distracting, and damaging. The standard negotiation track may leave Canada and Mexico with limited bargaining power, while repeated threats of US withdrawal could derail substantive discussions. Extended ambiguity might also prompt companies to reconfigure sourcing and supply chains.

As negotiations drag, tariffs would remain a key pressure tool. Operating with a more aggressive approach, Trump could respond to slow progress by escalating trade measures. Options include broadening Section 232 tariffs, opening new Section 232 probes, tightening rules for USMCA eligibility, or imposing Section 301 tariffs even on products covered by USMCA. A change in Section 301 alone could sharply increase duties. If all imports from Canada and Mexico were hit with an extra 25 percent tariff—similar to rates previously signaled under the International Emergency Economic Powers Act before USMCA exemptions—it would add roughly $70 billion in new tariffs. Even without higher Section 301 rates, existing Section 232 duties have already strained ties, with Ottawa and Mexico City prioritizing the removal of steel and aluminum tariffs. Any further 232 actions would heighten tensions and raise input costs for firms.

Canada and Mexico could respond with their own retaliatory tariffs, though it is uncertain whether they would do so. To date, both have tended to accommodate US pressure to safeguard market access and relative stability. If the pressure intensifies, they may instead accelerate efforts to diversify trade relationships and reduce reliance on the US market.

As this drags on, external trade agreements would gain importance. The trilateral structure could gradually give way to separate bilateral deals. Trump has long favored bilateral arrangements and could pursue a standalone pact with Mexico, which has managed recent frictions with Washington somewhat better than Canada. Meanwhile, Canada and Mexico could deepen their own cooperation, building on their 2025–2028 action plan to craft a bilateral agreement. Still, any bilateral configuration would be weaker than a unified trilateral framework, likely pushing all three to look more actively to other partners. Canada is already broadening trade talks globally, and Mexico has advanced negotiations with the European Union and Brazil.

In such a fragmented scenario, China would likely benefit significantly. Canada has already strengthened its economic ties with China, including ongoing talks to expand Canadian exports and reduce tariffs. Mexico, under US pressure, has cut back on Chinese imports, but without strong incentives to maintain that stance, it would have more reason to turn again to China for components, investment, and low-cost products. The absence of a cohesive North American front would also give Beijing more room to reroute exports and circumvent rules of origin.

After a few years, the economic fallout would become more visible. The auto industry—North America’s largest traded sector—illustrates the risk. It has already seen tariffs jump by nearly 625 percent due to Section 232 measures, contributing to a 10 percent decline in imports and a 19 percent drop in exports in the year after Liberation Day compared with the prior year. Even with high USMCA utilization, the sector is weakened and would be highly exposed if the underlying free trade framework erodes.

Even without further tariff hikes, prolonged negotiations carry their own costs. Supply chains are typically planned on a thirty-year horizon, not five, and persistent uncertainty can deter capital expenditure and expansion. At the same time, energy spent on arguing over whether to keep the agreement would crowd out essential discussions on technology development, competition with Chinese electric vehicles, and broader competitiveness. A destabilized USMCA would send shockwaves through the wider economy, weighing on growth and employment across industries.

Over the longer term, uncertainty could become entrenched. By the end of the Trump administration, the US, Canadian, and Mexican economies could be weakened by repeated negotiation rounds, tariff cycles, and offshoring. Trilateral coordination on key global trade issues might erode, with the region stuck in a loop of renewal talks. The next US administration would then face a choice: continue the same pattern or commit to forging a new, more durable arrangement.

From this disruption, a new trilateral framework or a set of bilateral deals could eventually emerge. That outcome is not inherently negative. North America might ultimately design an agreement better aligned with current realities—capable of addressing China, artificial intelligence, labor and environmental standards, and supply chain shocks. But there is also the risk that years spent merely keeping the existing pact alive, rather than improving it, will be wasted. In that case, the three economies could be left limping along under an outdated agreement that no longer reflects economic realities.

These phases resemble the classic five stages of grief after a breakup. First is denial, as policymakers tell themselves the relationship can continue unchanged. Then comes anger, manifested through tariffs and countermeasures. Bargaining follows, with governments seeking side deals and firms diversifying their operations. Eventually, the mounting economic costs become impossible to ignore. Finally, a decision must be made: accept a more difficult new status quo or rebuild a stronger partnership.

North America’s free trade area is not disappearing, but it is likely evolving. The precise end state is uncertain, yet two points are clear: ongoing negotiations will bring their own economic strain, and the relationship will almost certainly be transformed. Some partnerships survive prolonged uncertainty, but very few emerge from it without change.

Madeline Chalecki is an assistant director at the Atlantic Council’s GeoEconomics Center, where she oversees work on trade policy, tariffs, and supply chains, including the Trump Tariff Tracker.