USMCA scenarios: North American trade at a crossroads

The outcome of the upcoming USMCA review could permanently restructure North American trade and materially alter economic prospects for years to come.

To gauge risks around our baseline, we’ve used our Global Economic Model to analyze plausible USMCA scenarios. Our scenarios center around assumptions about US effective tariff rates since that’s proven to be the Trump administration’s preferred trade policy tool. However, like the initial USMCA negotiations in 2017-2018, the upcoming USMCA review will likely also feature several nontariff-related issues.

• Baseline (50% probability): The USMCA is renegotiated promptly after the July 1 review date and a new deal is reached in Q3. Most US tariffs on Mexico and Canada are removed, with smaller 10% targeted tariffs remaining in place for Canadian steel, aluminium, and dairy products. Canada lowers its counter tariffs on US steel and aluminum to 10% from 25%. There aren’t counter tariffs for Mexico to lower because it instead opted to concede to US demands on border security.
• Status Quo Scenario (35% probability): One or more parties don’t confirm their desire to extend the USMCA in its current form, triggering mandatory annual joint reviews and a potentially lengthy negotiation process. The USMCA survives, but current US tariffs remain in place permanently for Canada and Mexico, with Canadian retaliatory tariffs also remaining. Elevated trade policy uncertainty persists.
• Worst–Case Scenario (10% probability): One or more parties don’t confirm their desire to extend the USMCA in its current form, and instead back out of the agreement altogether. US effective tariff rates on Canada and Mexico rise noticeably higher as the USMCA exemptions are completely removed. Trade policy uncertainty spikes in Q3 and remains permanently higher. While Mexico isn’t expected to retaliate, Canada would reimpose counter tariffs on US goods.
• Better-Case Scenario (5% probability): All three parties agree to extend the USMCA in its current form on the July 1 review date. Tariffs on Canada and Mexico are immediately reduced to pre-Trump, 2024 levels of nearly zero, and trade policy uncertainty in Canada and Mexico rapidly dissipates. Canada also immediately removes all counter tariffs on US goods. Importantly, this scenario assumes only Canada and Mexico get lower tariffs, with US tariffs on other countries still in place. Albeit an extremely low likelihood, this scenario would effectively create a “Fortress North America” open trade bloc.

Download the full report to find out our scenario modelling results.