What could be the outcome of next year’s USMCA review?

U.S.-Canada trade negotiations abruptly terminated after President Trump cited a controversial Ontario government ad, leading him to announce an additional 10% tariff increase on Canadian steel and aluminum, compounding existing levies. This breakdown introduces significant uncertainty ahead of the crucial USMCA review, which Morgan Stanley analysts anticipate will yield a narrow revision clarifying future supply chains and tariff levels. They project medium-term downward pressure on the USD/CAD pair and constructive sentiment for the Mexican peso.

Analysis

President Trump abruptly terminated U.S.-Canada trade negotiations following a controversial Ontario government advertisement, subsequently announcing an additional 10% tariff increase on Canadian steel and aluminum, compounding existing 50% levies. This escalation, triggered by perceived interference, has effectively dashed hopes for a near-term détente in bilateral trade relations. The move introduces heightened uncertainty into an already deeply interconnected trading relationship.

This trade friction precedes the critical USMCA review, set to commence on July 1 next year, which will significantly influence North American trading activity. The U.S. government has initiated the review process, soliciting public comments on regional security, competitiveness, investment backdrop, and compliance. The outcome of this review is crucial for future supply chain clarity.

Morgan Stanley analysts, including Ariana Salvatore and Michael Zezas, anticipate a "narrow revision" to the USMCA, focusing on existing frictions rather than substantial new chapters, with alternate scenarios including deeper integration or a status quo outcome. They highlight the review's importance in clarifying manufacturing borders and tariff levels for U.S. supply chains, noting that while Mexico aligns with U.S. tariff border efforts, diverting supply chains from China remains challenging. Consequently, they project medium-term downward pressure on the USD/CAD pair and constructive sentiment for the Mexican peso.

Key Decisions for Investors

• Monitor developments in U.S.-Canada trade relations and the USMCA review closely, as increased tariffs and political rhetoric introduce significant policy risk for North American supply chains.
• Evaluate exposure to Canadian steel and aluminum sectors, considering the immediate impact of the additional 10% tariffs on profitability and competitive positioning.
• Assess potential currency implications, particularly the projected medium-term downward pressure on USD/CAD, and consider hedging strategies or opportunities in the Mexican peso given constructive sentiment.
• Scrutinize company supply chain resilience and diversification strategies, especially for firms with significant North American manufacturing or reliance on China, in anticipation of potential USMCA revisions affecting tariff levels and manufacturing borders.