When President Donald Trump introduced his “Liberation Day” tariffs in April, many economists predicted that Americans would soon experience large price increases. While inflation has risen over the past eight months, it has not come close to the level initially estimated.
One big reason: Everything from cars to toilet paper produced by Mexico and Canada, America’s top two trading partners, are exempt from tariffs if the goods comply with the terms of a trilateral free trade agreement known as the United States-Mexico-Canada Agreement (USMCA), which Trump signed during his first term.
But the deal, which replaced the North American Free Trade Agreement, is scheduled for review in July, and already Trump is signaling he wants out. If that happens, it’s likely to bring a floodgate of higher prices that Americans have so far been spared.
“We’re either going to let it expire or we’re going to make another deal with Mexico and Canada,” Trump said Wednesday. U.S. Trade Representative James Greer also said in a POLITICO interview, “The reason we built a review period into the USMCA was that we needed to amend it, review it or get out.”
The president’s stance could change between now and July, the White House told CNN. “Discussions about what hypothetical trade deals that have not yet been negotiated are meaningless speculation,” spokesman Kush Desai said.
Before Trump’s second term, goods from Mexico and Canada entered the U.S. duty-free even though they were not necessarily USMCA compliant because there were no tariffs. But Trump imposed tariffs of 25% on non-USMCA-compliant products from Mexico and 35% from Canada.
Unlike those two countries, every other nation’s exports to the United States have been subject to higher tariffs over the past year, except for exemptions for some items. Those rates at one point reached 145% in the case of China.
Before Trump’s second term, goods from Mexico and Canada entered the U.S. duty-free even though they were not necessarily USMCA compliant because there were no tariffs. That helps explain why 38% of imports from Canada and 49% of imports from Mexico last year were USMCA compliant, according to U.S. Commerce Department data. But as of August this year, those shares rose to about 86% of imports from Canada and 87% of imports from Mexico.
“Increased compliance with the USMCA has protected billions of dollars in imports from new tariffs,” said Erica York, vice president of federal tax policy at the conservative-leaning Tax Foundation.
If the USMCA exemptions were not in place, “Americans would face much higher prices,” she said. “It makes American workers poorer and American businesses less competitive, and for no good reason.”
Consumer electronics and cars are among the goods most vulnerable to price increases, as the United States has become increasingly dependent on its neighbors for such goods.
In addition, supply chains in all three countries are more connected, with components often crossing the US border multiple times during the assembly process. This means that cars and electronics, as well as other domestically manufactured goods, could be affected by potentially higher tariffs on Canadian and Mexican goods and passed on to consumers.
“The USMCA is a cornerstone of North America’s electronics manufacturing ecosystem. Ending it would disrupt the manufacturing systems that US manufacturers rely on, leading to longer lead times and higher input costs,” said Chris Mitchell, vice president for global government relations at the Global Electronics Association. “Those pressures will ultimately translate into higher prices for automotive, consumer and medical electronics.”
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