Once Again, USMCA is no Match for U.S. Protectionism
Failure to Reach a Deal
Despite intensive negotiations from August 19-21, 2026, Canada and the United States failed to reach an agreement that would have suspended the 50% tariffs the U.S. threatened a month ago on $20 billion worth of Canadian exports to the U.S. (The list includes hockey equipment, cement, alcoholic beverages, paper pulp, and many others.) Those tariffs, covering roughly 5% of total Canadian exports to the U.S., are significant in part because they are the first large group of USMCA-compliant goods that have been subject to prohibitively high (50%) U.S. tariffs, reflecting another flagrant U.S. violation of the USMCA. (New US Tariffs) (The previous U.S. tariffs on USMCA-compliant goods were on goods in specific sectors, pursuant to investigations under Section 232.)
It emerged Saturday morning, August 22, that several major new demands by the United States had contributed to Prime Minister Carney's decision to suspend the negotiations, even though it meant imposition by the U.S. of the 50% tariffs. According to Carney, "the U.S. introduced at the last hours efforts to restrict our ability to have other trade deals." (Carney August 21 Speech) Canada in recent years has concluded various trade deals along with economic and security partnerships, including major free trade agreements with the EU, the UK, India, South Korea, and members of the Comprehensive and Progressive Agreement for Transpacific Partnership. A major element of Carney's economic policy since he took office in 2025 has been to seek to double Canada's non-U.S. trade from 20% to 40% of the total over the next decade, to be achieved in significant part by concluding new or expanded trading arrangements. (Trade Diversification) Given that Ambassador Greer, Commerce Secretary Lutnick, and other U.S. officials knew that trade diversification through an expanded network of trade agreements is a hallmark of Carney's economic policy, it is reasonable to ask whether this apparently last-minute demand was a deliberate (and successful) effort to scuttle the negotiations.
Other ‘red lines” for Canada reportedly included a refusal to reduce tariffs on medium and heavy trucks, which was considered essential to preserve the Canadian automotive industry, and pressure to curtail the use of French in streaming services and French content requirements in Quebec and elsewhere. (Red lines) The U.S. reportedly also sought “exclusive access” to Canada’s critical minerals. (Critical mineral access) (Bloomberg reported that U.S. negotiators had been willing to eliminate a lumber tariff, a decades-long irritant in bilateral relations, but no details were provided.)
While I have no inside information, reliable public reports last week (before the alleged last-minute U.S. demands) suggested that Prime Minister Carney was willing to remove retaliatory tariffs on Canadian imports of U.S. automotive products, steel and aluminum; improve to at least a limited degree U.S. access to Canada's dairy market; and pressure the premiers of eight Canadian provinces to discontinue the boycott of American wine and distilled spirits in provincial liquor stores. (These were three of the major U.S. complaints that generated the July threat of tariffs.) (Settlement Proposals) Ultimately, what Carney was reluctant to accept, presumably for the longer-term, were lower but still prohibitively high tariffs on three mainstays of the Canadian industrial economy, steel and aluminum (50% to 25%) and autos (25% to 15% on the non-US content). According to some published reports the 25% steel tariff (but not the lower aluminum tariff) would only have applied to the first four million tons, with additional exports reverting to 50%. (Steel quota) Derivative steel and aluminum products were to be subject to varying rates.
It also seems evident Canada had concluded, based on their own and other countries' experience with the constantly varying levels of Trump's tariffs over the past 18 months, that any deal concluded at this time could never be regarded as final, as it might be changed in the future based on Trump's whims. As Carney suggested in his August 22 speech to the nation, U.S. trade agreements are “signed in pencil.” (Written in Pencil)
Implications
The failure to conclude the deal is a defeat for many stakeholders throughout North America, with the ongoing uncertainties continuing to retard both foreign and domestic investment and job creation now and for the foreseeable future. Some of the smaller Canadian producers of the goods subject to the new 50% tariffs, and their U.S. customers, may not survive. Canadian exporters and U.S. buyers of steel, aluminum and autos will continue to face higher prices. American wine producers will continue the emasculation of their largest export market. (US wine exports)
The tariffs on aluminum seem particularly unwise since the U.S. is not a leading producer due to prohibitively high electricity costs and local opposition to new based on adverse environmental impacts. (Oklahoma Smelter Opposition) Nor is it in the U.S. national interest to become more dependent on leading foreign producers Russia and China--where "national security" concerns are not bogus– for U.S. aluminum needs. (Aluminum shipments from the UAE may be welcome at 50% tariffs but have been disrupted by the Iran war.) Petroleum interests in Alberta, which for the first time in a decade saw the possibility of a revival of the XL pipeline project (an objective shared by Trump), are no doubt disappointed, as are refineries throughout the U.S.
The U.S. attempt to restrict Canada’s agreements with third countries, the latest escalation of the Trump/Greer trade war with Canada and potentially all other U.S. trading partners, is deeply troubling for reasons that go well beyond additional fracturing of what until January 2025 was the United States' premier political and military as well as economic relationship. Significantly, the United States is attacking trade agreements that are consistent with Article XXIV of the GATT, which has authorized limited discrimination under certain conditions in favor of FTA partners since 1947 (as with the USMCA among the U.S., Canada, and Mexico, which Trump championed). It is one affront to provide in USMCA Article 32.10 that Canada and Mexico may not conclude new trade agreements with non-market economies (e.g., China). These broader restrictions on third country trade agreements are a challenge to sovereignty that neither Canada nor most other U.S. trading partners are prepared to accept, even when many have already tentatively concluded one-sided trade "deals" with the United States.
This latest iteration of the trade “war” (Carney’s term) is far from over. Carney, with strong backing from l provincial leaders and many Canadian businesses, has promised “dollar for dollar” retaliation, which will almost certainly result in counterretaliation by the United States, as Ambassador Greer has promised. (U.S. Counterretaliation) Whether and when bilateral negotiations will resume is uncertain. One likely result of the impasse is that even more Canadian citizens will continue to boycott U.S. wine, distilled spirits and other products and avoid vacation travel to the United States.
Impact on Mexico
If anyone sees a silver lining to this cloud it could be Mexican President Sheinbaum. Had the deal with Canada gone forward, her cordial relationship with Trump compared to Carney's frostier one could have attracted broad criticism in Mexico, despite recent friction over Trump’s demand that the U.S. be permitted to send troops into Mexico to fight drug cartels. (US Troops to Mexico). Formal USMCA negotiations between the U.S. and Mexico that began months ago are scheduled to continue in September. (Next US-Mexico Talks) At present, Mexico has little to show from them other than Trump and Greer's kind words.
Moreover, Mexico is apparently still facing US demands for 50% U.S. content to qualify for (unspecified) reduced auto tariff access to the U.S. It also seems likely that the U.S. will be reluctant to offer Mexico a better deal than the 25%-25%-15% (steel, aluminum, autos) reduced tariffs offered to (and rejected by) Canada. Unlike Canada, Mexico is benefitting from greatly increased AI computer server exports to the U.S. which for the most part enter duty-free. (Mexico recently passed Taiwan to become the number one U.S. source.) (Mexican Server Exports) Unfortunately, with a Mexican value added estimated at only 5%-7%, the server boom helps the export numbers (with the increasing trade surplus a risk), but it will do little to stem unemployment in the automotive sector.
The new U.S. demand relating to Canada’s third-country trade agreements is also a wake-up call for Mexico, which currently has free trade agreements with the UK, the EU, the European Free Trade Association, Japan, the Transpacific Partnership members, the members of Latin America's Pacific Alliance, and dozens of other countries. (Mexico's free trade agreements) Those agreements are designed to be consistent with GATT Article XXIV or the 1979 GATT Enabling Clause (which permits FTAs among developing countries under more flexible rules than GATT article XXIV). (Enabling Clause) If Canada is being challenged because of its third-country trade agreements, Mexico has no assurance that it will not be next on the list.
David A. Gantz
Will Clayton Fellow for Trade and Int’l Economics,
Baker Institute for Public Policy