By Elmore Alexander
Dean Emeritus, Ricciardi School of Business
Bridgewater State University
Member, AIM Board of Economic Advisors

Editor’s Note: The following article will be published in the spring issue of the Bridgewater Review and is used with permission.

In April of 2018, I looked at the prospects for the North American Free Trade Agreement (NAFTA) one year into the first Trump presidency. Trump had campaigned on the premise that NAFTA was the worst trade agreement ever negotiated and vowed to eliminate it. In arguing the merits of a renegotiated NAFTA, I concluded that the net impact of NAFTA had been positive but that the safety net of training and assistance for displaced workers was insufficient to quell populist nationalistic sentiments. In the end, the Trump administration renegotiated NAFTA, creating USMCA (US-Mexico-Canada Trade Agreement) which is up for renegotiation in 2026.

Again, in this election cycle, both presidential candidates questioned trade policy. But unlike before, Trump threatened worldwide tariffs (10-20% worldwide and 100% on China) and day-one tariffs of 25% directed at Mexico and Canada. The situation is more volatile than it was in 2018–the America First agenda calls for broad worldwide tariffs, not just the renegotiation of trade agreements and tariffs that are focused on non-trade-related outcomes with allies.

In revisiting North American trade relationships, I will address three issues:

• A review of what has happened in the last six years
• President Trump’s trade perspective
• The implications of changes in US/Mexico/Canada trade policy

The Renegotiation of NAFTA

Despite the rhetoric of the first year of the last Trump administration, NAFTA was renegotiated into the USMCA. President Trump hailed the new agreement as “the fairest, most balanced and beneficial trade agreement” ever signed (Wiseman et al., June 28, 2023). Several significant changes to the tripartite trade relationship were negotiated (Takefman, January 17, 2023).

1. Automotive “rules of origin” (proportion of components that must be made in the three countries) for tariff exemption were increased:From 75% as opposed to 62.5%
   New requirement of 70% of steel and aluminum must come from the three countries.
   New requirement of 40-45% of auto content must come from workers making at least $16 per hour.

2. Canadian import barriers to US dairy producers were decreased.
3. New rules protecting intellectual property, patents, and copywrites were adopted, especially focused on pharmaceuticals, agricultural products, music, movies and books.
4. Small business rules made it easier to export to Canada and Mexico.
5. Digital flows of data and data storage became regulated.

In summary, USMCA modernized and improved NAFTA and was a significant accomplishment for the Trump administration. North American trade has flourished under USMCA (Rudman & Sands, July 18, 2023). North American trade hit $1.9 trillion in 2023 with double digit growth (27%) since the implementation of USMCA. Mexico and Canada are now the top US trade partners — 44% higher than China. The United States now accounts for 75% of Mexican and Canadian imports. The three countries together constitute one-third of global GDP. It is estimated that interregional trade supports 12 million American jobs annually (US Chamber of Commerce, July 15, 2020).

Interestingly, public support has also shifted. A recent Chicago Council on Global Affairs Survey found 80% support for the USMCA compared to 45% support for NAFTA in 2008 (Rudman & Sands, 2023). At the same time, however, the American public is worried about the loss of jobs due to globalization. The reasons for this perception are complicated, but job location in the US has shifted geographically and safety nets are still insufficient to allay fears.

The area of milk exports provides a good example of the functioning of USMCA. An important element of the new agreement was to provide increased access to Canadian markets for US milk producers. US exports of milk to Canada have risen to over $1 billion (a 50% increase in the past decade – USDA EBS, March 23, 2022). However, this has not been without controversy. The US claims that Canada continues to restrict milk imports more tightly than allowed by USMCA. These disputes are now being heard by a USMCA settlement panel. The outcomes have been mixed—both sides have prevailed at times. Importantly, however, there are now agreed-upon goals and a mediation structure to pursue resolutions to disagreements. US access to Canadian markets has improved and should continue to increase under USMCA. These issues are expected to be a significant focus of the upcoming USMCA renegotiation process.

Critically, it is important to realize that North America has become an integrated economy primed to compete effectively in world markets against China and the Asia Tigers (Singapore, South Korea, and Taiwan) and the up-and-coming countries of Southeast Asia. This is in large part because North America under NAFTA and now USMCA has the only trade agreement that combines developed and developing nations tapping large and diverse workforces, exemplary educational systems, vast natural resources and economic and governmental systems that support innovation and entrepreneurship. This complex agreement that includes tariff-free movement of goods in various stages of completion between the three countries, dispute resolution mechanisms to manage disagreements over trade policy, and labor rules that have significantly improved working conditions and wages in Mexico has created a stable North American economy. Mexico is actually engaged in significant market reforms (Weissman et al., December 28, 2024).

The degree of North American economic integration is best illustrated in the automotive industry. The components of a typical vehicle manufactured under USMCA rules cross the two borders eight times during production (Rediker, Dec 11, 2024). Since the USMCA increased the percentage of vehicle components that must be produced in the three countries and requires that 40% of vehicles must originate in countries where wages are at least $16 per hour, USMCA actually increases the incentives to produce vehicles in the US (Weismann et al., 2024). Exports of US auto parts to Mexico have increased by $8 billion, and employment by US auto parts manufacturers has increased by 90K, exceeding the expectations that were touted at USMCA signing by President Trump. In the first two years of the USMCA, US auto manufacturers imported fewer parts which boosted US employment and revenue (Lobosco, December 15, 2024). Auto manufacturing jobs in the US reached a 34-year peak of 308,000 in July 2024 (Busch, Aug 21, 2024).

All of these facts led Meltzer, Wayne, and Bitar (2023) of the Brookings Institution to conclude that “[t]he last three years show significant progress in expanding trade, investment, and jobs as well as ensuring USMCA delivers outcomes that are good for workers and broader groups of society across North America.”

What’s Ahead for US/Mexico/Canada Trade?

Tariffs were a cornerstone of Donald Trump’s presidential campaign. Immediately upon inauguration, he indicated that he would impose tariffs of 25% on goods from Canada and Mexico. It is likely that this will create major disruptions in trade and relations among the three countries. The impact of these tariffs will be felt across the entire spectrum of US manufacturing and service industries.

The US imports large amounts of energy (both oil and electricity) from Canada and a majority of automobiles and automobile parts from Mexico. Since the tariffs proposed by President Trump violate USMCA, these actions will throw the entire agreement into flux. The agreement governs many elements of North American business and economic relationships. Thus, the implications of the tariffs could reverberate well beyond just US imports from Mexico and Canada.

There is, however, a difference between rhetoric and action. The Trump style has always been one of extreme pronouncements followed by tamer actions. Some moderation can be seen in key economic advisor appointments. Treasury Secretary nominee, Scott Bessent, is seen as a “level headed, stable, congenial person” (Coy, December 8, 2024) whose Wall Street experience and connections are likely to moderate trade policy. Additionally, the exclusion of Robert Lighthizer, who implemented Trump’s tariff strategies in the first administration, “gives the voices from Wall Street a much stronger hand in the upcoming administration” (Bade, et al., December 8, 2024). Everyone from Wall Street investment bankers to trade unions is likely to oppose the disruptions that dramatic tariffs on Mexican and Canadian goods will cause.

A second factor to consider is the stated purpose of Trump’s call for across-the-board tariffs on Mexico and Canada. Trump’s stated purpose is to curtail the flow of immigrants and drugs across these borders. Tariffs are usually imposed in response to actions such as the dumping of low-cost goods into the marketplace or the violation of copyrights or intellectual property. Action by the Mexican and/or Canadian governments on immigration and drugs could alter the Trump administration’s strategy. Canada has announced strategies to increase border security to limit drug trafficking and illegal immigration (Scripps News, Dec 18, 2024). So has the Mexican government.

But retaliatory actions are also likely. Canadian premiers, for their part, have indicated that they would respond to US tariffs with tariffs of their own. Specifically, Canada is preparing to institute tariffs on US exports of ceramics, steel, furniture, alcoholic beverages including Jack Daniel’s, orange juice, and pet food. They are even considering tariffs on energy exports to the US (Newton & Egan, Jan 10, 2025).

Finally, there are indications that there is significant debate within the incoming Trump administration regarding tariff policy. As was the case with the H1-B visa program, these debates have led to conflicting policy statements to the press and may lead to policy changes.

On the other hand, President Trump has shown a willingness to take harsh actions in the past. Imposition of tariffs of 25% on Mexican and Canadian imports should not be a surprise. What would be their impact?

A North American trade war would unravel the closely integrated supply chains linking continental manufacturing, especially across a broad spectrum of American businesses. This would almost certainly lead to a loss of jobs and a decline in GDP. The nearly unanimous consensus of economists is that a tariff increase would be inflationary. The Peterson Center for International Economics estimated that tariffs would cost the average US household over $2,600 per year in increased prices (Goldman, November 26, 2024).

Suzanne Clark, president of the US Chamber of Commerce, has argued that “…tariffs worsen the cost-of-living crisis, forcing Americans to pay even more for daily essentials like groceries, gas, furniture, appliances and clothing, and retaliation by our trading partners will hit farmers and manufacturers hard…” (Swanson, Jan 19, 2025). One surprising area of impact is oil imports. Some US oil refineries are configured only to process Canadian oil. Canada on the other side does not have alternative refineries. The disruption will be felt on both sides of the border (Rediker, Dec 11, 2024).

Specifically for Massachusetts, the implications could be huge. Massachusetts-Canada trade totaled $42 billion in 2023 (NECBC, January 17, 2025), and 34,500 Massachusetts jobs are with Canadian companies (Mass Live, October 2024). Of particular significance is the importance of Canadian lumber to Massachusetts builders. A significant proportion of the lumber to build Massachusetts houses comes from Canada (Van Buskirk, Dec 23, 2024). Jessica Bettencourt, the owner of a long-term general store in rural Massachusetts, recently bemoaned “a huge tariff increase would potentially decimate us…cutting into our business’ already slim margins” (Swanson, January 21, 2025). Governor Healey characterized the impact of increased tariffs on Canadian goods as being “devastating” to the Massachusetts economy (Van Buskirk, 2024).

Conclusions

As this article is being written, we do not know what the trade policy of a second Trump administration will be. On the one hand, USMCA could remain in effect and the administration could begin preparing for a renegotiation conference in 2026, much like the case in 2018. President Trump did establish a commission on day one to conduct a comprehensive analysis of worldwide trade. On the other hand, we could be witnessing a global trade war involving not only Mexico and Canada, but also China, Asia, and the European Union. I suspect we will see something in between.

My concern is for the stability and economic power that has come to North America through NAFTA and USMCA. These trade agreements resulted in a truly integrated North American economy. It is an economy that competes effectively across the world and is well positioned to compete against both China and the emerging economies of Southeast Asia.

As I argued six years ago, we have not done enough to transition and retrain US workers who are displaced by the impact of globalization; but similarly, we are not doing enough to anticipate and to transition workers who will be displaced by AI. And even before AI crashed into our lives, automation accounted for more job losses than did globalization. Those losses are only going to increase with the substantial investments in AI that President Trump announced on day one. Economic growth depends on stability and predictability in markets. If we face the disruption of a global trade war, then a new round of stagflation unlike anything the US has seen since the 1980s is on the horizon.