Introducing Focus On USMCA: Rupture, Renegotiation, and Repositioning. With this publication, we have launched an investigative series into the renegotiation dynamics of the United States-Mexico-Canada Agreement (USMCA) that governs the bulk of North American trade taking place in the world’s largest trading bloc. Our analysis examines the fundamental and strategic questions of whether the agreement results in: renewal with adjustments; continued uncertainty with annual reviews; or withdrawal from one or more parties and retaliatory tariffs.
What happens to USMCA amid an assertive America First agenda? The Trump administration continues to redefine the post-World War II geopolitical and geoeconomic order in a manner characterized by Canada’s Prime Minister Mark Carney as a “rupture” rather than a transition. A revitalized Monroe Doctrine fuels an expansive view of western hemispheric U.S. hegemony, tariffs seek to right trade imbalances globally with reshored industrial capacity, and security considerations have drawn the country into military operations from Venezuela to Iran. Economic (and security) recalibration to an America First agenda through trade terms may require concessions; for example, government expenditure as a percent of GDP in Canada is 44.7%, whereas the United States is 37.9% and Mexico is 30.3%. In this report, we provide foundation and framework to help evaluate whether a “North America First” outcome may be achieved.
Macro scenario analysis. Scotiabank Economics provides unique insights into macroeconomic considerations through its integrated U.S.-Canada macro model. Three outcomes are considered:
- Baseline assumes USMCA is extended with adjustments immaterial to macroeconomic trajectory.
- Scenario 1 assumes a 10% tariff applied by the United States to currently exempt USMCA goods, where GDP falls 0.6% but is manageable.
- Scenario 2 is a genuine macro shock with 35% tariffs implemented by the United States (energy and potash remain at 10%), and results in a recession with a -1.9% GDP hit to the Canadian economy a year out from a collapse in negotiations.
Sectoral exposure analysis. Scotiabank GBM contextualizes the composition of Canada’s GDP, Canada-U.S. import-export dynamics, and sectoral exposures. The degree of reliance of the United States on imports from Canada’s various sectors is contrasted with how much Canada, in turn, relies on exports to the United States. This comparative process illuminates the continuum in which economic segments of Canada are either more or less vulnerable to USMCA renegotiations. Canadian oil and gas and potash are prime examples of exports the U.S. economy is reliant upon, which is why these exports were subject to lower tariffs by the United States than other areas of the economy. Conversely, examples of more exposed sectors include manufacturing, machinery, chemicals, and transportation parts, all areas of the economy more at risk to U.S. tariffs. Dairy supply management is also a trade irritant example in the food sector. We have further highlighted from an equity market perspective the degree to which S&P/TSX Composite sector and sub-sector revenues are derived from the United States (there are some caveats in this latter process, as discrete corporate complexities require further analyses).
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