A New Chapter for North American Trade

Summary

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Podcast Summary: Thoughts on the Market

Episode: A New Chapter for North American Trade

Host: Ariana Salvatore, Head of US Public Policy, Morgan Stanley Research
Date Recorded: July 10, 2026

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Episode Overview

In this episode, Ariana Salvatore unpacks the recent developments surrounding the United States-Mexico-Canada Agreement (USMCA) six-year review. She explains the implications of the U.S. decision not to extend the agreement for another 16-year term, what this means for the future of North American trade relations, and how investors should interpret the ongoing uncertainty.

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Key Discussion Points & Insights

1. USMCA Review and Its Immediate Outcome

• Background:
  • The six-year review deadline for USMCA passed on July 1, 2026.
  • The U.S. declined to extend the agreement for a further 16 years, citing trade deficits and perceived shortcomings.
    • "US Trade Representative Greer stated that the US did not agree to renew the USMCA in its current form, pointing to shortcomings and trade deficits with both Canada and Mexico..." (Ariana Salvatore, 00:40)
• Triggering the Annual Review:
  • The decision starts a process of annual reviews, which could extend until the USMCA's expiration in 2036.
  • The current agreement and its provisions (tariffs, rules of origin, investment protections, dispute settlement) remain fully in force during this period.
  • "Importantly, the agreement itself remains fully enforced during this period... that’s actually in line with the expectation that we laid out earlier this year." (Ariana Salvatore, 01:48)

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2. Strategic Implications of the Review Outcome

• Shift from Rules-Based to Discretionary Trade:

  • North American trade is moving away from a comprehensive rules-based system to a more flexible, sector-specific approach, often dictated by industrial policy.
    • "North American trade is being reshaped by a transition from a rules based framework... toward a more discretionary, sector specific approach tied to industrial policy objectives." (Ariana Salvatore, 02:13)
  • This transition raises uncertainty for corporate investment and industry exemptions.

• Potential for Bilateral Deals:

  • Despite a trilateral framework remaining the base case, substantive negotiations are progressing more quickly with Mexico than Canada.
  • Third round of US-Mexico talks is scheduled for the week of July 20; US-Canada talks have yet to begin.
    • "Negotiations are progressing much more substantively with Mexico than with Canada. A third round of U.S.-Mexico negotiations is scheduled for the week of July 20th." (Ariana Salvatore, 02:50)
  • Ongoing issues, such as Canada's dairy market quotas, remain unresolved and may slow bilateral progress.

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3. Divergence between Mexico and Canada

• Diverging Trade Structures:
  • Canada’s export base (manufacturing, autos, metals, machinery, energy, transportation equipment) overlaps with sectors deemed strategic by the U.S. and subject to trade protection measures (e.g., Section 232 tariffs).
  • Canada has a minimal role in U.S. high-tech imports (computers, semiconductors, advanced electronics).
  • Mexico, conversely, is deeply integrated with the U.S. in electronics assembly and re-exports, especially in IT hardware and servers linked to AI adoption and nearshoring trends.
    • "Mexico now supplies roughly 35% of U.S. IT hardware imports and nearly 50% of U.S. server imports." (Ariana Salvatore, 03:40)
    • "The north in particular has emerged as a vital interconnection hub between Latin America and the US..." (Ariana Salvatore, 03:47)
• Implications:
  • The distinct trade patterns mean that future US bilateral discussions with Mexico versus Canada are likely to pursue different objectives and address divergent issues.

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4. Investor Takeaways and Risks

• Continued Uncertainty Expected:
  • With the move to annual reviews, North American trade policy becomes a recurring negotiation rather than a stable, long-term arrangement.
  • The key risk is not immediate collapse but the drag of continued uncertainty, particularly regarding specific sector regulations and enforceable tariffs (e.g., Section 232).
    • "The USMCA is still intact, but the annual review process means North American trade policy is now a recurring negotiation, not yet a settled framework." (Ariana Salvatore, 04:09)
    • "The primary risk, in our view, stems less from the possibility of a full USMCA collapse and more from the prolonged uncertainty..." (Ariana Salvatore, 04:18)

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Notable Quotes & Memorable Moments

• "US Trade Representative Greer stated that the US did not agree to renew the USMCA in its current form, pointing to shortcomings and trade deficits with both Canada and Mexico..." (Ariana Salvatore, 00:40)
• "North American trade is being reshaped by a transition from a rules based framework... toward a more discretionary, sector specific approach tied to industrial policy objectives." (Ariana Salvatore, 02:13)
• "Mexico now supplies roughly 35% of U.S. IT hardware imports and nearly 50% of U.S. server imports." (Ariana Salvatore, 03:40)
• "The USMCA is still intact, but the annual review process means North American trade policy is now a recurring negotiation, not yet a settled framework." (Ariana Salvatore, 04:09)

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Important Timestamps

• 00:00: Introduction & overview of USMCA review outcome
• 01:48: Current enforcement and expectations for ongoing negotiations
• 02:13: Shift toward sector-specific, discretionary trade approaches
• 02:50: State of bilateral talks with Mexico and Canada
• 03:20: Structural divergence and sector integration discussion
• 04:09: Investor implications and primary risks

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Conclusion

Ariana Salvatore lays out a clear, measured analysis of the evolving North American trade landscape in light of the USMCA review. While the trade agreement remains in force, policy is set to be shaped by annual negotiations rather than long-term certainty, leading to cyclical uncertainty that impacts investment decisions and strategic planning for corporates operating across North America.

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Transcript

[A]

Welcome to Thoughts on the Market. I'm Ariana Salvatore, head of US Public Policy at Morgan Stanley Research. Today I'll be talking about the USMCA review, what happened on July 1, what it means for North American trade, and how investors should be thinking about the road ahead. It's Friday, July 10, at 10am in New York. Last week, the six year review deadline for the USMCA came and went and as we'd anticipated, the US declined to extend the agreement for another 16 year term. US Trade Representative Greer stated that the US did not agree to renew the USMCA in its current form, pointing to shortcomings and trade deficits with both Canada and Mexico, much of which echoed his testimony in front of Congress in December of last year. So what happens next? This decision triggers an annual review process that could continue until the agreement's scheduled expiration in 2036. So that means, effectively, the new deadline for negotiations is now July of 2027. And if we get to that point and see a similar outcome, this procedure repeats until the deal is terminated in 2036. Now, importantly, the agreement itself remains fully enforced during this period. The current tariff regime, rules of origin, investment protections and dispute settlement mechanisms are all unaffected. For now, that's actually in line with the expectation that we laid out earlier this year. In short, we anticipated an outcome in which negotiations stall and the deal moves to annual reviews. We thought that was becoming more likely than an ambitious expansion of the agreement in its current form. That being said, there are some important implications of this outcome. First, we think North American trade is being reshaped by a transition from a rules based framework where tariff schedules and preferential access anchored trade decisions toward a more discretionary, sector specific approach tied to industrial policy objectives. That of course, increases uncertainty around exemptions such as sector treatment and consequently investment decisions for corporates. Second, we think two bilateral deals may not be off the table. While it's still our base case that the trilateral framework remains intact, reporting seems to suggest that negotiations are progressing much more substantively with Mexico than with Canada. A third round of U S. Mexico negotiations is scheduled for the week of July 20th. While substantive text based negotiations between Canada and the US have not yet begun. That asymmetry could mean that bilateral issues between the US And Mexico are resolved more easily, while outstanding frictions like Canada's dairy market quota system could prove to be an overhang in those bilateral talks. Third, the structural divergence between Mexico and Canada is accelerating, which is something my colleagues have highlighted in their recent work. If we think about Canada's manufacturing, export base, autos, metals, machinery, energy and transportation equipment that actually overlaps with the areas that the US Government is increasingly defining as strategic and therefore necessitating more government involvement through in things like section 232 tariffs. Canada accounts for only a negligible share of U.S. imports across computers, semiconductors, communications equipment and advanced electronics. Those are actually the sectors where Mexico has become deeply integrated, particularly through assembly and re export activity linked to AI servers, electronics and industrial hardware. Mexico now supplies roughly 35% of U.S. iT hardware imports and nearly 50% of U.S. server imports. And the north in particular has emerged as a vital interconnection hub between Latin America and the US that's been driven by nearshoring trends, AI adoption and multi cloud strategies. As my colleagues Nick Lippmann and Fernando Sedano highlight. That means the scope and the objectives of the bilateral talks between the US and Mexico and and the US and Canada may diverge even more from here. So where does that leave us? The USMCA is still intact, but the annual review process means North American trade policy is now a recurring negotiation, not yet a settled framework. And that will likely remain the case if policymakers agree next July to punt the issue yet another year. The primary risk, in our view, stems less from the possibility of a full USMCA collapse and more from the prolonged uncertainty around implementation details, sector specific trade measures and Section 232 tariffs. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share thoughts on the market with a friend or colleague today.

[B]

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