With the U.S.-Canada-Mexico Agreement coming up for review, our
Head of Public Policy Research Ariana Salvatore unpacks whether
our 2025 call for deeper trade integration still holds.
Read more insights from Morgan Stanley.
----- Transcript -----
Ariana Salvatore: Welcome to Thoughts on
the Market. I'm Ariana Salvatore, Head of Public Policy Research
for Morgan Stanley.
Today I'll be talking about our expectations for the upcoming
USMCA review, and how the landscape has shifted from last
year.
It's Wednesday, February 11th at 4pm in London.
As we highlighted last fall, the US-Mexico-Canada Agreement is
approaching its first mandatory review in 2026. At the time, we
argued that the risks were skewed modestly to the upside.
Structural contingencies built into the agreement we think cap
downside risk and tilt most outcomes toward preserving and over
time deepening North American trade integration.
That framing, we think, remains broadly intact. But some
developments over the past few months suggest that the timing and
the structure of that deeper integration could end up looking a
little bit different than we initially expected. We still see a
scenario where negotiators resolve targeted frictions and make
limited updates, but we're increasingly mindful that some of the
more ambitious policy maker goals – for example, new chapters on
AI, critical minerals or more explicit guardrails on Chinese
investment in Mexico – may be harder to formalize ahead of the
mid-2026 deadline.
So, what does the base case as we framed it last year still look
like?
We continue to expect an outcome that preserves the agreement and
resolves several outstanding disputes – auto rules of origin,
labor enforcement procedures, and select digital trade
provisions.
On the China question, our view from last year also still holds.
We expect incremental steps by Mexico to reduce trans-shipment
risk and better align with U.S. trade priorities, though likely
without a fully institutionalized enforcement mechanism by
mid-2026. And remember, the USMCA’s 10-year escape clause keeps
the agreement enforced at least through 2036, meaning the
probability of a disruptive trade shock is structurally quite
low.
What may be shifting is not the direction of travel, but the pace
and the form. A more comprehensive agreement may ultimately come,
but possibly with a longer runway or through site agreements
rather than updates to the USMCA text itself. Of course, those
come with an enforcement risk just given the lack of
congressional backing.
We still expect the formal review to conclude around mid-2026,
albeit with a growing possibility that deeper institutional
alignment happens further out or via parallel frameworks. It also
is possible that into that deadline all three sides decide to
extend negotiations out further into the future, extending the
uncertainty for even longer.
So what does it all mean for macro and markets?
For Mexico, maintaining tariff free access to the U.S. continues
to be essential. The base case supports ongoing manufacturing
integration, especially in autos and electronics. But without the
newer, more strategic chapters that policymakers have discussed,
the agreement would leave Mexico in a position that it's
accustomed to – stable but short of a full nearshoring
acceleration. This aligns with our view from last year, but we
now see clearer near-term risks to the thesis of rapid
institutional, deeper trade integration.
For FX, the pace of benefit is from reduced uncertainty, but the
effect is likely gradual. The absence of tangible progress on
adding to the original deal suggests a more muted near-term
impulse. For Canada, the implications are similarly two-sided.
Near-term volatility around the review is likely underpriced, but
a limited agreement should eventually lead to medium term USD-CAD
downside.
On the economics front, last year, we argued that the review
would reinforce North America as a manufacturing block, even if
it didn't fully resolve supply chain diversification from China.
We think that remains true today, but with the added nuance that
some of the more ambitious integration pathways may be pushed
further out or structured outside of the formal USMCA
chapters.
So bottom line, our base case remains a measured, pragmatic
outcome that reduces uncertainty, but preserves the core benefits
of North American trade and supports growth across key asset
classes. But it also increasingly looks like an outcome that may
leave some strategic opportunities on the table for now, setting
the stage for deeper alignment later – on a slightly longer
horizon, or through a more flexible framework.
Thanks for listening. As a reminder, if you enjoy Thoughts on the
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