Economic Implications of Excluding Mexico from the USMCA: A Canada-USA Perspective

The economic relationship between Canada, the United States, and Mexico has long been underpinned by the North American Free Trade Agreement (NAFTA) and its successor, the United States-Mexico-Canada Agreement (USMCA). The USMCA, which came into effect in 2020, has cemented the trilateral trade framework that binds these three countries. However, recent remarks by Doug Ford, Premier of Ontario, suggesting that Mexico could be excluded from the agreement over tariff issues related to Chinese goods, have sparked a significant response. Marcelo Ebrard, Mexico’s Secretary of Economy, quickly warned against the idea, arguing that removing Mexico from the USMCA would have negative consequences not just for Mexico, but also for Canada and the United States.

The Trilateral Trade Advantage

At the heart of the debate is the economic interdependence that exists among Canada, the U.S., and Mexico. As Ebrard pointed out, the sheer size of the U.S. economy makes it beneficial for both Canada and Mexico to maintain a trilateral relationship. The USMCA, with its comprehensive approach to trade and investment, has created a tightly integrated market that promotes cooperation, reduces trade barriers, and enhances supply chain efficiencies. Excluding one of the three partners would likely disrupt this balance, causing significant economic repercussions.

Canada's Economic Ties with Mexico

For Canada, Mexico represents an important trade partner. While the U.S. remains Canada’s largest trading partner, Mexico is the second-largest in Latin America. In 2022, bilateral trade between Canada and Mexico exceeded $50 billion. Canada's trade relationship with Mexico is particularly significant in sectors such as automotive manufacturing, agriculture, and energy. Many Canadian companies, including those in Ontario, have substantial operations in Mexico, where they benefit from the country's competitive labor costs and its strategic location as a gateway to Latin American markets.

If Mexico were to be removed from the USMCA, Canadian businesses that rely on the agreement’s preferential tariffs and reduced trade barriers would face increased costs and potentially disrupted supply chains. Canadian companies with operations in Mexico, such as the energy giant TransCanada, could find themselves at a disadvantage, forced to navigate more complex regulatory frameworks and higher tariffs. This could erode Canada's economic advantage in sectors where cross-border cooperation with Mexico has been key.

The Impact on U.S.-Canada Relations

From the U.S. perspective, the USMCA has also been designed to support its interests in a highly integrated North American market. For example, U.S. manufacturers benefit from access to low-cost production in Mexico, while Canadian companies also capitalize on the integrated supply chain across the three countries. The idea of a U.S.-Canada-only trade deal, as proposed by Ford, could potentially limit the scope of trade between Canada and the U.S., as well as restrict market access for Canadian firms operating in Mexico.

Moreover, removing Mexico from the equation could invite greater economic fragmentation. As the U.S. seeks to address the challenges posed by China, particularly concerning trade imbalances and tariffs, excluding Mexico from the USMCA would undermine the collective leverage North America holds in global trade negotiations. A fragmented North America would be less competitive on the global stage, particularly in sectors like technology, automotive, and agriculture.

Mexican Economic Position and Regional Impact

For Mexico, being excluded from the USMCA would be a severe blow, potentially curtailing its access to the U.S. and Canadian markets. Given the U.S.'s status as Mexico’s largest trading partner, with over 75% of Mexican exports flowing northward, any disruption in trade relations would have ripple effects throughout the Mexican economy. In addition, U.S. and Canadian firms operating in Mexico would likely reconsider their investment strategies, which could hurt Mexico’s economic growth prospects.

The removal of Mexico from the USMCA could also lead to a shift in trade patterns, as Mexican businesses may seek alternative markets, potentially including China. This shift could diminish Canada’s and the U.S.'s influence in Mexico, which could have long-term strategic consequences. For instance, China has been aggressively expanding its influence in Latin America, and any destabilization of North American trade relationships could play into China’s hands, giving it more room to assert its economic presence in the region.

The Benefits of a Unified North American Market

Ebrard’s statement underscores the advantages of maintaining a unified North American market. The USMCA has facilitated deeper economic integration, encouraging Canadian and U.S. companies to set up operations in Mexico, thus benefiting from cheaper labor and favorable trade terms. This integrated market model has been particularly important in sectors such as the automotive industry, where supply chains stretch across borders. For instance, a U.S.-Canada only trade deal would not only disrupt these supply chains but could also lead to higher production costs, affecting everything from vehicle prices to the availability of critical components.

The importance of the USMCA for Canadian companies with operations in Mexico cannot be overstated. As Ebrard pointed out, Canadian companies such as TransCanada would likely resist any effort to sever trade ties between Canada and Mexico. These businesses rely on the free flow of goods and services across the three countries to remain competitive. A unilateral move to exclude Mexico could result in Canadian companies facing higher costs, as well as a less efficient and less predictable trading environment.

Conclusion: The Case for Maintaining the USMCA’s Trilateral Framework

Marcelo Ebrard’s warning that excluding Mexico from the USMCA would be detrimental to both Canada and the U.S. is grounded in economic realities. The benefits of a unified North American market are clear: integrated supply chains, enhanced competitiveness, and greater regional influence in global trade. For Canada, maintaining strong ties with both the U.S. and Mexico under the USMCA is crucial for its economic growth, particularly in key sectors like manufacturing, agriculture, and energy. Disrupting this framework would not only harm Canada's businesses but could also diminish the collective strength of North America in the global marketplace.

In light of this, it is clear that the economic costs of excluding Mexico from the USMCA would far outweigh any perceived benefits. A united North America, with all three countries working together within the framework of the USMCA, remains the most advantageous option for both Canada and the U.S. as they navigate the complexities of a rapidly changing global economy.