Source: IndustryWeek
Date: 7th February 2025

Dispute resolution mechanisms and a looming review in 2026 may shape the future of North American trade.

With dizzying speed, the Trump administration earlier this month announced and then paused broad-based 25% tariffs on top U.S. trading partners Canada and Mexico, leaving both manufacturers and cross-border supply chains in a state of high anxiety. How the world will look at the end of the 30-day reprieve is anyone’s guess.

Seemingly lost in the furor of activity is the USMCA, or U.S.-Mexico-Canada Agreement. The USMCA updated NAFTA, the long-standing North American Free Trade Agreement, and took effect in 2020 during the U.S. President’s first time in office. The U.S. President had been highly critical of NAFTA and made renegotiating the North American trade pact a priority in his first presidency.

Given the existence of the USMCA, shouldn’t it play a role in preventing a unilateral trade action by a partner to the pact? Is it a meaningless treaty in the face of these types of actions? Or is its role somewhere in between?

The short answers:

• Trump is sidestepping the deal on “security” grounds.
• Canada and Mexico can challenge Trump in court, but that could take years.
• The deal is up for review next year anyway, so this could be a preview of things to come.

The U.S. President points out that in imposing the tariffs on Mexico and Canada. The U.S. President cited the “extraordinary threat imposed by illegal aliens and drugs” as a national emergency under the International Emergency Economic Powers Act.

Mechanisms to Resolve Disputes
Dispute resolution mechanisms are built into free trade agreements, including the USMCA. Canada or Mexico, or both, likely would have initiated the dispute resolution mechanism had the tariffs been imposed, International tax services principal at Crowe wrote. (Side note: China, on which 10% additional duties were imposed—and not paused—has initiated a dispute complaint with the World Trade Organization.)

However, while free trade agreements like the USMCA include dispute mechanisms, the processes are slow, “especially taking into account the possibility of appeals,” said the partner at Foley & Lardner LLP, in emailed comments.

“Even if there is an adverse ruling and appellate ruling against the United States, it may be necessary for the foreign government to go to U.S. court to have the rulings followed, as happened when the United States lost a dispute involving antidumping and countervailing duties imposed on softwood lumber from Canada,” Foley & Lardner LLP said. “Add it all up, and it easily can take years to reverse even executive actions that blatantly violate the USMCA.”

USMCA: ‘Meaningless and Beyond Repair’
The USMCA comes up for a legislated six-year review in 2026, with preparations by the three countries assuredly beginning in advance of that event. The Woodrow Wilson International Center for Scholars suggests this review provision could be the answer to avoiding an all-out trade war.

In a Feb. 1 article posted to the think tank’s website, the director of the Wilson Center’s Canada Institute, proposed that the countries start the USMCA review process early and address the Trump administration’s concerns around security. “Adding border security commitments to a revised USMCA would break new ground but not be unprecedented in principle,” The Woodrow Wilson International Center wrote.

The Woodrow Wilson International Center added a significant caveat to his position: It requires a cease-fire.

“Canada and Mexico should not agree to review or renegotiate the USMCA early or ever unless the Trump administration sets aside the 25 percent tariff threat,” the article states. “It will require resolve and a united front by leaders in Canada and Mexico to hold to this precondition. But without it, the USMCA in its current form is meaningless and beyond repair.”

Foley & Lardner says all three countries have good reasons to keep the USMCA in effect: “The question is in what form?”

The USMCA won’t be ignored, Foley & Lardner says, particularly by Canada and Mexico, which have the “most incentive to preserve it as a governing international trade instrument.”

That said, “all three countries have a shared interest in being strong competitors to Chinese companies.”

Foley & Lardner also pointed out that Canada and Mexico could decide individual bilateral agreements with the United States are the future, as dispute resolution may be simpler one-on-one. Canada and the U.S. had a bilateral free trade agreement before NAFTA.