Is Washington Recrafting NAFTA To Circumvent China?

Trade policy and U.S. market access have been continually employed by Washington in the past ten years to promote broader economic security objectives with its trade partners. A testament to this strategy is the Trump administration’s recent choice to not prolong the U.S.-Mexico-Canada Agreement after its obligatory six-year review on July 1.

Although the announcement from the U.S. trade representative highlighted concerns about trade deficits, the focus of ongoing discussions seems to shift towards limiting Chinese supply chain involvement. This is evident from industry sources and previous comments from the administration. The idea is to incorporate economic security guidelines in the continent’s trade structure, through provisions like investment screening, export controls, and technology policy.

Another critical aspect of Washington’s strategy is using the review process to create a recurring leverage mechanism. As per the U.S.-Mexico-Canada Agreement’s Article 34.7, six-year check-ins are a standing requirement. Washington has now initiated an annual review process which continues until all three governments agree to renew or until the agreement expires in 2036.

Through my discussions with trade associations in Washington, Chinese and U.S. companies, and consultants in Mexico, it is evident that this approach is already influencing government policies. Chinese investments in Mexico are reportedly being postponed or dropped until the review is completed. Meanwhile, Mexico appears to have increased tariffs on several Chinese imports under the pressure of sustained U.S. influence.

The demands from the White House are not a significant departure from previous U.S. policies. For nearly a decade, successive administrations have been working towards strengthening North America’s resilience against geopolitical shocks. This was reflected in industrial policies like theInflation Reduction Act under President Biden, which bolstered North American supply chains in sectors like electric vehicles and batteries.

While Biden focused more on industrial incentives and allied coordination, Trump emphasized tariffs and economic leverage. However, both administrations increasingly leveraged North American economic integration to accomplish broader U.S. economic security goals. The key question now is how far Canada and Mexico are willing and capable of going under the evolving economic security agenda of Washington.

Over the past decade, Canada has slowly synchronized many of its economic policies with those of Washington. After extensive bilateral coordination with the United States, Ottawa in 2024 implemented 100 percent tariffs on Chinese electric vehicles. The country has also joined or pledged support for U.S.-led supply chain resilience initiatives.

Mexico presents a major opportunity and challenge for Washington. Chinese investment in Mexico accelerated following the initial U.S.-China trade war in 2018. These developments strengthened North American manufacturing but also raised U.S. concerns that Chinese companies could use Mexico as an entry point into the American market.

But there is no guarantee of a North American economic security bloc emerging. Both Canada and Mexico continue to resist parts of Washington’s agenda. However, the United States, with its market leverage, tariffs and the agreement, is uniquely poised to encourage, or even force, its neighbors to align more closely with its economic security priorities.

The governments have strong reasons to maintain the agreement: Continental integration supports both the economic and national security objectives for all three. The challenge for Canada and Mexico will be to concede enough to maintain preferential access to the U.S. market without allowing Washington’s review leverage to make the agreement a permanent negotiation over China policy.