Toward a Cleaner, Smarter USMCA

By July 1, 2026, the parties to the United States–Mexico–Canada Agreement (USMCA) must confirm in writing whether they wish to extend its term. Otherwise, a clock will start to tick toward the termination of USMCA at the end of its original sixteen-year term in 2036.

U.S. President-elect Donald Trump already has said he plans to push for changes to USMCA, and given his recent, pre-inauguration threats to impose new tariffs on Mexico and Canada, it’s likely talks between the three North American countries will begin early in 2025. While much of the negotiators’ time no doubt will be spent relitigating historic trade grievances, the renegotiation also offers opportunities to strengthen the North American industrial base. The renewal deadline approaches at a time when the governments of all three USMCA countries are concerned about the strength and resiliency of supply chains, particularly with respect to the minerals and products that are needed to pursue “all of the above” strategies that will boost both renewable and traditional technologies for U.S. energy, transportation, and manufacturing. If these concerns can be channeled into shared negotiating objectives, the USMCA renewal could offer an opportunity to enhance North America’s competitiveness—and to do so on a fast timeline.

Few challenges haunt trade negotiators more than a lack of meaningful deadlines. This has been especially true for agreements that lie at the intersection of trade and environmental policy. Defenders of the status quo have a good record of killing such agreements by running out the clock. Negotiations over the plurilateral Environmental Goods Agreement petered out after multiple rounds of talks. In 2022, members of the World Trade Organization completed an agreement on subsidies for ocean-depleting fisheries after years of negotiations, but only after the United States and other subsidy critics conceded that some of the most problematic subsidies could remain in place. There were high hopes for negotiations between the United States and the European Union (EU) regarding an agreement on low-carbon steel and aluminum during President Joe Biden’s administration, but when negotiators missed an aspirational deadline, they punted the talks indefinitely into the future.

USMCA’s pending renewal deadline offers policymakers a rare opportunity to change the typical negotiating dynamics. The governments of the United States, Mexico, and Canada should seize it to align on efforts to strengthen the North American industrial base by developing proposals to reshore the continent’s rare earth and critical minerals supply chain, adopt common rules and standards for carbon-intensive products, and increase clean power generation and grid capacity. They might also use this occasion to recruit other partner and allied governments to this cause by expanding membership in USMCA. If this effort is successful, the result could be a more competitive, resilient, and cleaner North American economy. If it fails, the best—and perhaps only—chance in this decade for the United States to use trade policy to advance sustainability and industrial policy goals will have been lost.

The Mechanics and Politics of Renewal

The renewal or “sunset” provision of USMCA was one of the more novel (and controversial) provisions in the agreement. The agreement, which entered into force on July 1, 2020, has a sixteen-year term. At the six-year anniversary of its entry into force—July 1, 2026—the parties have the option to renew the term for another sixteen years. If any party declines to renew, the agreement does not terminate immediately. But a ten-year clock starts to tick toward eventual termination unless the parties agree on an extension in the interim.

The purpose of the renewal provision, which the United States had never before included in a trade agreement, was not to hasten the demise of USMCA. Instead, it was intended to force policymakers to periodically assess how the agreement was working and make affirmative decisions about how and whether to update it. USMCA’s predecessor, the North American Free Trade Agreement (NAFTA), was badly out of date by the time it was replaced in 2020, in large part because there was no natural mechanism—short of one party threatening withdrawal—to force a renegotiation. During his presidency, Barack Obama’s administration attempted to update NAFTA as part of the negotiations over the Trans-Pacific Partnership (TPP) through trilateral annexes with Mexico and Canada. But when political support for the TPP collapsed—both presidential candidates in the 2016 election opposed it—so did efforts to update NAFTA. Only Trump’s dramatic—and relationship-straining—threats to withdraw from the agreement during his first term in office forced Canada and Mexico to the table, sparking a year of tense negotiations that often seemed to be veering toward collapse.

The renewal provision in USMCA was designed to give the United States leverage to force changes in its most important trade agreement without the blunt threat of withdrawal. Still, the decision that will be made by the second Trump administration in 2026 is one of consequence. While USMCA is important to the United States—and critical to its auto sector—the agreement is of existential importance to Mexico and Canada, both of whose economies are heavily dependent on trade and send two-thirds of their exports to the United States. All three countries have strong interests in avoiding the decade of uncertainty that would follow if the parties were unable to agree on terms of renewal in the summer of 2026.

The United States will have a lengthy list of items to negotiate next year and in the first half of 2026 before agreeing to USMCA’s renewal. U.S. officials will likely want to revisit dispute settlement cases the Biden administration lost related to auto parts in Mexico and Canada’s dairy sector. U.S. companies invested in Mexico will push for better treatment for their energy investments and assurances that Mexico’s recent changes to its judicial system will not result in unfair treatment. Political factors will come into play as well: Trump has already threatened tariffs on Mexico out of concern over cross-border crime, migration, and Mexico’s rising trade surplus with the United States.

It would be a mistake, however, for the second Trump administration to view the renewal negotiations simply as a forum for resolving existing trade irritants. There is an opportunity for the United States to play offense as well as defense by putting forward provisions to strengthen the North American industrial base. In particular, the renegotiated agreement could be a vehicle for the three governments to coalesce around strategies to make North American energy supply chains more resilient and competitive, reshore production of key components, and boost the mining and processing of critical minerals.

While Trump is committed to an “all of the above” energy strategy that includes increased U.S. oil and gas production, that does not mean the United States must cede the opportunity to lead in the development and deployment of clean energy technologies. Americans will benefit from more choice, more competition, and more resilient energy supplies if the country continues to invest in electric vehicles (EVs), advanced batteries, solar power, and other clean energy technologies such as nuclear and advanced geothermal.

Including provisions designed to promote these technologies in a revised USMCA would, in turn, bolster domestic political support for renewal, including in the United States. Trade-focused Democrats in Congress are likely to support both decarbonization and relocation of clean energy supply chains to North America given the party’s interest in reducing global greenhouse gas emissions and in creating U.S. manufacturing jobs and promoting the interests of organized labor. And it would serve the new Trump administration well for a revised USMCA to attract the same type of bipartisan support the original deal did. Many congressional Republicans, while generally less enthusiastic about clean energy, are keenly focused on China-related trade exposure and improving the health of the U.S. industrial base, particularly in defense and defense-adjacent sectors. Many of these members also represent Sunbelt districts that have benefited enormously from the influx of investment in EV and battery plants. As a result, proposals to use USMCA to shore up North American clean energy supply chains while reducing dependency on China would likely have bipartisan appeal.

Setting the Negotiating Agenda

Naturally, any discussion over the objectives for the renewal negotiations should account for major geopolitical and economic developments that have taken place since the last USMCA negotiation. Two of the most significant relate to energy technology supply chains.

One is the huge influx of investment into the North American clean energy supply chain. There has been $166 billion in announced investments in EV and battery facilities in the United States alone since 2018. This helped push total investment in U.S. manufacturing plants up by 217 percent during roughly the same period. USMCA’s stringent regional content requirements, the CHIPS and Science Act, and the Inflation Reduction Act all contributed to this trend, as have persistent U.S. trade tensions with China and a concomitant desire by U.S. corporations to reduce supply chain risk by bringing more production closer to home.   

A second key development is the rise of China as a major player in the global market for automobiles, including EVs. China’s auto exports have grown fivefold since 2019, with EVs accounting for much of the spike.  And while stiff U.S. tariffs (first imposed by the Trump administration and then increased by the Biden administration) have kept Chinese EVs and gasoline-fueled cars out of the United States in large numbers, Chinese exports of auto parts to Mexico have surged threefold since 2019. Chinese foreign direct investment in Mexico was up 126 percent from 2018 to 2022. This creates potential for China to use Mexico as an entrée into the U.S. market, effectively circumventing the tariffs both the Trump and Biden administrations have used to reduce America’s reliance on China across a range of critical products.

These two developments make discussion of energy technology supply chains during the USMCA renewal negotiations almost unavoidable. Even outside of the auto sector (which accounts for roughly half of North American trade), clean energy technology seems poised to play a large role in the future of the global economy. Every major developed country is currently funding the research, development, and production of clean energy technology products, including projects that touch on the battery, critical mineral, solar, wind, hydrogen, and nuclear sectors. North America ought not be left behind or left dependent on other regions for key technologies, inputs, or components. Moreover, now that the continent has achieved energy independence in recent years with the expansion of oil and gas production, the three countries have a compelling interest in ensuring they maintain that comparative advantage as the world looks to new sources of energy to reduce carbon emissions.

Tools and Strategies

Energy security, sustainability, and reshoring have not historically been the focus of trade agreements. And the traditional trade policy tool kit may be of little utility in this context. An obvious tool to consider are product rules of origin, which require that a certain percentage of a good be made in a country or region to qualify for duty-free treatment. For example, for a car to qualify for duty-free treatment under USMCA, 75 percent of the car’s parts must have been produced in a USMCA country. The USMCA auto rules of origin (which represent a material increase from the 62.5 percent that was required under NAFTA) were designed to bolster the North American auto supply chain by ensuring that car manufacturers cannot simply import most of a car’s parts from Asia, assemble the parts in Mexico, and then sell the car tariff-free in the United States or Canada.

But there are limits to how much more the parties could tighten the USMCA rules of origin to further promote EV and other automotive manufacturing in North America. The United States—where most of the vehicles manufactured in North America are sold—currently maintains a tariff of just 2.5 percent on imports of passenger cars from countries with which the United States does not have a free trade agreement.¹ If the parties were to further raise the regional content requirement, car companies could decide it’s cheaper to simply import many of the parts from abroad and pay the 2.5 percent tariff. The same is true for most other high-value-added products manufactured in the region.

In theory, the parties might further tighten rules of origin if they were willing to raise tariffs across the board. Increasing auto tariffs to 10 or 20 percent might provide sufficient incentives for car companies to source more regional content. This would violate all three countries’ tariff commitments under the rules of the World Trade Organization (WTO) and other free trade agreements, however, and likely spark retaliation from trading partners outside North America. That might not dissuade the Trump administration from proposing continent-wide tariff hikes. But whether Mexico and Canada would go along is uncertain at best.

There are at least four other strategies the USMCA parties might explore to bolster the continental industry base, including the clean energy supply chain. Writing climate-related rules in the North American context could also help the United States begin to push back against alternative climate and trade rules being written in the EU, which are often disadvantageous to U.S. companies. Even Trump officials and congressional Republicans skeptical of aggressive policies to limit carbon emissions should be able to agree that Washington, and not Brussels, should be setting the foundation for future rules.

First, the three countries might agree to common measures to decarbonize specific highly polluting sectors, like steel. The Biden administration proposed a Global Arrangement on Sustainable Steel and Aluminum (GSA) with the EU, designed to eventually replace the global tariffs Trump had established in order to ensure adequate U.S. domestic steel production. Under the GSA, the United States and the EU both would have imposed common steel duties based on the amount of carbon used to produce imported steel, with lower-carbon steel tariffed at a lower rate. The proposal built on bipartisan legislation introduced in Congress and might have been the start of a “carbon club” of like-minded countries designed to incentivize decarbonization in the sector. Those negotiations foundered, however, over Brussels’s concerns about WTO compliance, differences on carbon accounting and pricing, and the absence of a deadline to force the sides to agree. The path forward on steel with the EU after this year’s U.S. presidential election is unclear.

The USMCA renewal offers an opportunity to revive the GSA in a North American context. U.S. trade negotiators likely will find more flexible partners in Canada and Mexico—both of whom would have an interest in a common arrangement that eliminates the threat of future U.S. tariffs on steel imported from either country.  All three countries have enacted higher duties targeting steel imports in recent years—Canada announced a new 25 percent tariff on Chinese steel just this summer. Uniform duties based on the carbon content of steel imported into North America could offer a way to harmonize the three countries’ approach to this issue. The concept might be extended to other carbon-intensive import sectors as well.

Whatever the scope, an agreement on uniform carbon duties would require complex, technical negotiations over the standards for measuring how much carbon was used to create a good. Congressional action likely would be required in the United States, and as a practical matter the parties might need to wait to fill in all the details until after the renewal deadline passes. But the idea is worth exploring. A North American carbon duty might be a politically viable alternative to the EU’s preferred carbon border adjustment mechanism, which is based on a domestic carbon-pricing scheme the United States is unlikely to adopt. In addition to rewarding low-emission producers in North America, a trilateral carbon arrangement could set the stage for a broader U.S.-led carbon club of industrialized nations with high environmental standards and declining emissions profiles.

Second, the three countries might make commitments related to rare earth and critical minerals like copper, nickel, and graphite. Demand for these commodities, among others, is surging because of both the energy and digital expansions. Presently much of that demand is being met by China. The Biden administration has struck several minerals deals in recent years with allies and partners that have aimed at coordinating policy in this area and reducing dependence on China. But, for the most part, these deals have focused on mapping of supply chains and information-sharing. The USMCA renewal could be an opportunity for the United States, Mexico, and Canada to take more concrete steps to reshore rare earth and critical mineral production and processing. The parties might, for example, make commitments on targeted subsidies for expansion of mining and processing facilities, streamlining and expediting permitting for minerals projects, stockpiling, purchasing, and coordinated action to stabilize prices to incentivize long-term investment in this sector.

North American cooperation could be particularly beneficial in developing a viable alternative to Chinese mineral processing. Chinese dominance in this space is owed to several factors, including technology, access to raw materials, low labor costs, subsidies, and relatively lax environmental standards. U.S. technology, Canadian and Mexican mining, and Mexican labor might be the right ingredients for a competitive substitute. Any negotiations on this front would need to overcome historic Mexican sensitivities about outside influence over extractive industries. But when it comes to rare earth and critical minerals, the Mexican government seems most concerned at present about China’s influence in this sector, as evidenced by its recent nationalization of lithium mining concessions operated by a Chinese firm. Under the circumstances, a trilateral minerals arrangement in which Mexico is a full partner might be welcomed, even by a nationalist Morena government.  

Third, USMCA negotiations provide an opportunity to align on a strategy for building clean power generation and transmission capacity in North America. There already is robust trade in hydroelectric power between Canada and the United States and both countries are making progress in expanding and building a cleaner energy grid. But cross-border transmission between the United States and Mexico remains relatively low. And efforts by former Mexican president Andrés Manuel López-Obrador’s administration to preference Mexican energy providers have chilled foreign investment in the country’s renewable energy sector and sparked a dispute settlement case filed by the Biden administration on behalf of U.S. investors. It’s difficult to imagine the next U.S. administration agreeing to a renewal of USMCA until that matter is resolved. But the election of Claudia Sheinbaum—a former climate scientist—as Mexico’s new president may have opened the door not only to a resolution of this dispute but also to greater cooperation with Mexico’s northern neighbors on energy policy generally. The United States, meanwhile, could commit to speeding up permitting for clean energy generation and cross-border transmission projects.

Finally, the negotiation could provide a jumping-off point for the parties to expand cooperation on clean energy supply chains beyond North America, perhaps by offering the carrot of USMCA membership. Two possible candidates would be Australia and the United Kingdom. Australia already has free trade agreements with all three North American countries. It is rich in critical mineral deposits but in need of partners who will help shield its mining industry from price competition caused by Chinese overcapacity. The UK has free trade agreements with Mexico and Canada, and its new Labour government apparently is keen to restart trade negotiations with the United States. While its supply chain linkages with North America are less clear than Australia’s, the UK remains an important market for clean energy goods. Another option, which has been proposed by the bipartisan Americas Act in the Senate, would be to open discussions with one or more Latin American countries, such as Argentina or Chile, that could play a role in critical mineral processing and mining.

Expansion of USMCA would raise the importance of the trading bloc in the global economy and provide a larger forum for collective action on subsidies, stockpiling of critical minerals, and other clean energy topics. In time, the enlarged group might use its combined leverage in negotiations with other major trading partners like Japan and the EU.

Conclusion

In outlining a menu of possibilities for how the USMCA renewal negotiation could be used to strengthen clean energy supply chains, this article is not meant to suggest any of this would be easy. Domestic political sensitivities in all three countries would be difficult to overcome under the best of circumstances. Plus, there’s no existing playbook for using trade agreements to achieve the objectives outlined above. Trade agreements traditionally have been used to lower tariffs and eliminate subsidies and other market-distorting policies. A joint North American effort to strengthen and relocate supply chains likely would require using some of those previously disfavored tools in pursuit of a continent-wide industrial policy.

But if the United States wishes to unite allies and partners behind a strategy for building a stronger, more resilient clean energy supply chain, the USMCA renewal negotiations offer the best, and perhaps only, way of achieving that objective in the short-to-medium term. If successful, the renewal negotiations could not only advance decarbonization goals but do so in a way that distributes transition costs, strengthens the North American industrial base, and creates economic opportunity for citizens in all three USMCA countries. A focus on supply chains might also provide political upside necessary to ensure a successful negotiation and a longer life for USMCA.

Notes