Wednesday Morning Rant

The United States, Canada and Mexico ratified the trilateral free trade agreement NAFTA in 1992. Ross Perot decried the development, famously describing the "giant sucking sound" that would be heard as the American economy was hollowed out in favor of outsourcing to Mexico. He was partially correct. I think there is a strong argument that giving Red China most-favored-nation status in 1998 and elevating her into the WTO was more important, but NAFTA was not great agreement. During his first term, Trump ended it, replacing it with a new trilateral agreement - the USMCA.

Unlike NAFTA, the USMCA has various additional provisions but perhaps the most important distinction is its transience. USMCA is not a permanent treaty as it has a sunset provision. Valid for 16 years, it must be reviewed after six years and all parties must mutually agree to renewal to push it another 16 years. Failing that, the parties must attempt renegotiation every year for the balance of the 16 years. If they cannot reach an agreement, the treaty is not renewed. After that first six years, the treaty can be terminated by any party with six months' notice. It went into effect in 2020. Thanks to Trump's non-consecutive terms, his administration is also handling the first extension checkpoint. The United States did not renew the agreement, and is moving toward bilateral negotiations with each of Mexico and Canada.

USMCA remains in effect, but it is likely the beginning of the end for a trilateral North American trading bloc. This is, in part, because the USMCA did not serve one of its intended purposes, which is defense against Red China. Also a part of it is strained diplomatic ties between the two most important partners - the United States and Canada. Red China is a part of that issue, as well. The objectives of the USMCA of non-parasitic cooperation among the North American powers and containment of major foreign economic threats have not been met. One reason they have not been met is Canada's behavior, particularly under Carney.

It is not exactly a secret that Canada/US relations have been strained. There was often tension during Trudeau's administration, and that has accelerated markedly under Carney. Carney is openly hostile to the United States and has shifted Canadian policy not toward cooperation at home but to courting opportunities abroad. Specifically, Carney is aggressively pursuing the one thing that the USMCA was supposed to disincentivize: closer relations with Red China. In January of this year, Carney visited Beijing and Canada and Red China announced the Canada-China Economic and Trade Cooperation Roadmap, including such items as preferring existing WTO rules and frameworks, encouraging "personnel exchanges," easing financial transactions between the countries, etc. The USMCA died not on its July 1, 2026 renewal deadline but with that January 16, 2026 joint announcement.

What comes next is unclear. It is unlikely that any of the three parties will simply void the agreement and exit in the immediate future, but it probably won't be renewed during the annual reviews to come. There is now a clock running. On July 1, 2036, the agreement will expire and I don't expect it to make it to the final deadline. With Carney moving Canada into Red China's orbit as quickly as possible, there is no way to reconcile the disagreement. This is not an argument over some fine point like a tariff rate or national origin requirements, this is a disagreement over who is the preferred partner of a crucially important member state. The ball is in Canada's court, and she would rather play with Red China.

This is by no means a sure positive for Canada, given some of her other economic partners. One of the benefits of the USMCA for the three countries' trading partners has been that the bloc provides a predictable operating environment. As that environment breaks apart, it is going to ripple in other economies. A major country to watch as this unfolds is Japan. Japan has taken full advantage of the trading bloc and has factories and other business operations throughout the continent. Over three quarters of Canada's auto manufacturing industry is thanks to Japanese automakers. The Japan Business Federation came out in support of extending the USMCA (with a wishlist of Japan-friendly recommendations for change, of course). So what will Japan do as the USMCA winds down and is ultimately replaced? Is Toyota's movement of some production from Mexico to Texas a sign of things to come?

Unless something changes, the intermediate-term effects of this breakdown will go well beyond mere trading economics. For generations, Canada and the United States have been vitally important partners to each other. We have been two distinct countries with compatible cultures, economic integration, deep diplomatic ties, stalwart military alliance and general friendliness at the micro and the macro. That is fracturing in real time as Ottawa pursues ever-tighter coupling with Beijing. The obvious distaste Canada's ruling class has for the United States in general and Donald Trump in particular is secondary, but serves to add yet more strain to an already strained relationship.

This strain has likely ended the USMCA. Whether it is also the beginning of the end for generally good US/Canada relations remains to be seen.

posted by Joe Mannix at 11:00 AM

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