Trump's Tariff Threats Could Open the Door to China

By Dr. Orit Frenkel

As printed in The Hill on December 5, 2024

The renewal of the U.S.-Mexico-Canada Agreement was never going to be a cakewalk. But President-elect Trump’s announcement last week that he will issue executive orders imposing 25 percent tariffs on all imported goods from Mexico and Canada threatens the agreement that is the guiding framework for free trade and economic growth in North America.

Signed in 2020, the USMCA is up for renewal in 2026, with negotiations among the three nations likely to begin early next year. The incoming administration has a history of using tariffs as a weapon, but walking away from or undermining USMCA would be devastating for Americans, the U.S. economy, and our allies in Canada and Mexico.

Trump might be using the tariffs as a questionable tactic toward a better deal, rather than a club with which to beat our neighbors and undercut the vital USMCA. To do the latter would weaken the United States, alienate America’s two largest trading partners and provide an opening for an encroaching China.

The president-elect has said the tariffs, which he would deploy as one of his first acts on Inauguration Day, are aimed at halting an “invasion” of drugs and migrants into the United States and will remain in place until these flows stop. However, using this tool — which is a violation of USMCA — to address what is ultimately a domestic challenge is a questionable approach, at best.  

Mexico has provided additional reasons for concern. This fall, it enacted a sweeping judicial overhaul, which includes a constitutional amendment to overhaul its judiciary — most notably requiring popular elections for judges at all levels of the Mexican court system. 

These changes, most of which will begin to take effect in 2025, threaten to politicize and destabilize the judiciary and undermine judicial independence. If Mexico’s courts are unreliable, it’s fair to wonder whether the rule of law there can continue to guarantee equal legal treatment for partners and international investors. 

There are also thorny issues between the U.S. and Canada. In June, Canada enacted a 3 percent digital services tax, which led the U.S. to file a complaint under USMCA, arguing that the tax unfairly discriminates against U.S. companies. 

Given that the Biden administration is now in its last weeks, it is not clear whether the U.S. trade representative will escalate the dispute or leave it to the Trump administration to resolve. Trump has already stated his clear opposition to digital taxes. 

Canadian officials, for their part, have expressed concern regarding both Trump’s proposed tariffs and Mexico’s judicial reform but have focused on the strong ties between all three countries. 

Meanwhile, Mexican President Claudia Sheinbaum warned last week that if President Trump imposes tariffs, Mexico will retaliate with its own tariffs on U.S. goods, pointing out that the economic tit-for-tat will ultimately serve no one and harm everyone.

When USMCA was signed into law in 2020, it contained a novel provision regarding its review and extension. All three governments will participate in a review six years after USMCA begins. 

That being the case, the U.S., Canada and Mexico must soon decide whether they want to extend the deal for another 16 years. A congressional vote on USMCA’s renewal must occur before July 2026, which is why negotiations should start in early 2025. 

Amid all of this back-and-forth, the elephant in the room is China, the other nation Trump has vowed to hit with tariffs. The U.S. and Canada have expressed concern that Chinese exports to Mexico were making their way into both countries and that USMCA rules needed to be tightened to address this issue. 

With Trump likely to impose new tariffs on China-made goods, U.S. officials believe China is likely developing other avenues into the U.S. market that will allow its products to evade heavy duties — including setting up manufacturing operations to finish goods made with Chinese input.

This comes as China has been increasing trade and influence in Mexico. Although in 2023, Mexico replaced China as America’s largest trading partner, Mexico’s trade with China has ramped up over the same period.

Freight analytics showed that China-to-Mexico container trade grew by more than 26 percent between January and July of this year; that’s after growing by 33 percent in 2023. Negotiations to renew the USMCA are an opportunity to update the rules and address this transshipment of Chinese products to the U.S. through Mexico.

Finally, the U.S. needs a strong North American trade agreement to keep the momentum of bringing manufacturing and jobs back stateside. 

After the supply side shocks of the pandemic, and the increased political pressure to move sourcing out of China, some American companies have considered moving sourcing closer to home. U.S. companies have or are planning to nearshore their sourcing to Mexico and integrate them into a coherent North American supply chain. That approach is now in jeopardy. 

It would be hard to overestimate the importance of USMCA to all three countries. For the U.S., the relationship is paramount. As noted, Mexico is now America’s top trading partner, with Canada second. Together they account for about $1.6 trillion in U.S. trade. Letting the agreement expire would without question harm the U.S. economy. 

While several difficult issues hang over USMCA renewal, all three countries have strong incentives to renew it. In his first term, Trump threatened to withdraw the U.S. from NAFTA, USMCA’s predecessor but ultimately negotiated a strong new agreement. Hopefully, he will once again walk back from the brink, and all three countries will revitalize and reaffirm the agreement that has become the economic glue, and fuel, for North America. 

Dr. Orit Frenkel is co-founder and CEO of the American Leadership Initiative. She is a former senior executive at the General Electric Company and served as director for trade in high-technology products at the Office of the U.S. Trade Representative. Follow her on Twitter @OritFrenkel and @AmerLeadInt.