Late last month President-elect Trump issued a statement via social media that on inauguration day he would invoke Presidential authorities to “charge Mexico and Canada a 25% Tariff on ALL products coming into the United States.” According to President-elect Trump, the new tariffs would be a response to Canada’s and Mexico’s failures to address large numbers of persons and drugs unlawfully crossing the northern and southern borders of the United States. Commentators immediately questioned what such action might mean for the United States-Mexico-Canada Agreement (USMCA), and Mexican President Claudia Sheinbaum initially promised to retaliate by imposing 25% tariffs on imports from the United States. Since the President-elect’s social media post, he has had an in-person meeting with Canadian Prime Minister Justin Trudeau and a conversation with Mexican President Sheinbaum.
With the warning of tariffs on Canada and Mexico on “day one,” North American businesses should be aware of how such situations might be handled under the USMCA framework.
Legal Authority for President-elect Trump’s Tariff Threat
Given that the U.S. tariffs were characterized as being imposed on “day one” of the next administration and as a response to what President-elect Trump termed an “invasion,” the International Emergency Economic Powers Act (IEEPA) (50 U.S.C. §§ 1701-1709) appears to provide the most likely vehicle for action. As explained in a previous CLK Insight, although untested in practice and subject to certain limitations, IEEPA arguably empowers a President to impose tariffs to “deal with any unusual and extraordinary threat” to U.S. “national security, foreign policy, or economy” originating in substantial part outside the United States, with respect to which the President has declared a national emergency. However, past practice under analogous statutory authority has included various exceptions and carve-outs, rather than having “across-the-board” coverage in a strict literal sense. IEEPA’s procedural prerequisites to such action do not appear onerous and could, in theory, be satisfied quickly, if not literally on “day one,” then within a matter of days.
For its part, Article 2.4 of the USMCA states that “{u}nless otherwise provided in this Agreement, no Party shall increase any existing customs duty, or adopt any new customs duty, on an originating good,” and that tariff levels set forth in Annex 2-B will be applied. Separately, under Article 2.10, parties are obligated to accord most-favored nation duty treatment to certain named goods. On its face, applying an additional 25% tariff on all (or substantially all) products from Canada and/or Mexico USMCA party appears inconsistent with these obligations.
However, the USMCA also provides exceptions to the default rules summarized above. Pertinent here, Article 32.2 guarantees that nothing in the USMCA shall be construed to “preclude a Party from applying measures that it considers necessary for…the protection of its own essential security interests.” Were the 25% tariffs characterized as a security measure, the incoming Administration could argue that they were permitted by Article 32.2.
How Could Canada and Mexico Respond Under the Rules-Based Trading System?
Given the practical implications, Canada and Mexico would likely disagree with the use of Article 32.2 of the USMCA to impose tariffs. The USMCA provides three basic options. One would be to activate the USMCA’s dispute settlement provisions. The USMCA provides for consultations (75 days minimum), followed by litigation before a panel (about 180 days minimum), and ultimately the issuance of a panel report. In litigating analogous situations before the World Trade Organization, the United States has argued that multilateral panels lack authority to review a country’s national security actions. But national security is not among the exceptions expressly excluded from USMCA dispute settlement (e.g., certain tax measures). Were the USMCA panel report adverse to the United States, Article 31.19 would permit Canada and/or Mexico to suspend USMCA benefits for the United States after 45 days. The long timeline applicable to formal dispute settlement procedures under the USMCA would severely limit the practical utility and would be unlikely to be used.
A second option would be to withdraw from the USMCA. Article 34.6 permits any member state to do so, with or without cause. Such withdrawals are effective six months after providing written notice and could thus take effect well before the upcoming July 2026 “review” of the USMCA.
A final USMCA option would be to frame some form of retaliation as having been undertaken pursuant to a USMCA exception. Canada or Mexico might invoke national security, as the new Trump Administration appears poised to do; another exception permitted under Article XX of the 1994 General Agreement on Tariffs and Trade, which USMCA Article 32.1 incorporates by reference; or the USMCA’s exception for temporary safeguards measures under Article 32.4. Such actions on the part of Canada or Mexico would, in turn, be susceptible to the United States undertaking the first (dispute settlement) or second (withdrawal) response described above. Interestingly, because of the general trade imbalances between Canada and the United States and Mexico and the United States, it is mathematically unlikely that Canada and/or Mexico could offset sweeping 25% tariffs imposed by the U.S. on a 1:1 basis through retaliatory 25% tariffs on U.S. exports to those countries, meaning there is space for both countries to employ more draconian tariff levels.
Despite the Threat of Tariffs, Much Uncertainty Persists
It remains to be seen what form, if any, a new U.S. tariff action targeting Mexico and/or Canada might take. Then-President Trump threatened similar tariff action against Mexico in 2019, but ultimately did not follow through after Mexico undertook certain border measures. This article has surveyed the major rules-based options for responding under the USMCA, but the further outside of the USMCA framework any unilateral U.S. tariff falls, the less constrained Canada and/or Mexico may feel to hew to that framework when responding. Nevertheless, awareness of the options (and their limitations) for resolving such a dispute under the USMCA can help businesses better plan their supply chains and understand areas of risk. Indeed, given that tariffs of 100% on BRICS members (Brazil, Russia, India, the People’s Republic of China, South Africa, and other countries) were threatened by President-elect Trump less than a week after the proposal to levy tariffs on imports from Canada and Mexico (and additional 10% tariffs on China), and that likely tariff-making authority permits quick action by the President, these are worthwhile considerations for businesses’ contingency planning.
Cassidy Levy Kent has significant experience assisting clients to understand the U.S. trade policy landscape and structure operations building on supply chain mapping and tariff modeling. Contact us with any questions.