Manufacturing Industry Outlook Ahead of the USMCA Review in 2026

With the upcoming USMCA (United States-Mexico-Canada Agreement) review scheduled for 2026, various factors could shape the trade landscape for manufacturers operating in North America. Political shifts in the United States, particularly the return of Donald Trump to office, could bring significant changes in trade policy, investment flows, and regional supply chains.

Based on previous statements and policies, several key issues could emerge as points of contention in the lead-up to the renegotiation.

Trade and Tariffs

Potential Tariff Increases

A more protectionist approach in the U.S. could lead to new tariffs on goods imported from Mexico, either as a strategy to support domestic jobs or as leverage in broader negotiations on issues such as immigration and trade imbalances. The industries most likely to be affected include:

• Automotive: Higher tariffs on vehicles and auto parts could increase production costs and disrupt supply chains.
• Electronics and Appliances: Companies that rely on integrated North American manufacturing could face new cost pressures.
• Agriculture: Mexican exports of products such as avocados, tequila, and fresh produce may encounter trade barriers.

For manufacturers, the main challenges would be:

• Increased costs and uncertainty
• Potential disruptions to supply chains
• Long-term risks to competitiveness if tariffs remain in place

If tariffs become a sustained policy, the manufacturing sector in Mexico could face long-term challenges in maintaining cost advantages and attracting new investments.

USMCA Review and Possible Revisions

Despite being renegotiated during Trump's first term, the USMCA could face additional scrutiny. The agreement’s rules on automotive content, labor rights, and investment policies may be key topics in a review process. Some potential points of friction include:

• Automotive sector: Stricter rules of origin (ROO) and concerns over Chinese investments in Mexico.
• Energy sector: U.S. objections to Mexico's constitutional reforms affecting energy policy.
• Agriculture: Disputes over genetically modified crops, sugar, and tomato exports.
• Labor provisions: Ongoing cases under the Rapid Response Labor Mechanism.
• Legal certainty: Potential concerns over judicial and regulatory reforms in Mexico.

Possible Scenarios for the USMCA Review

Several outcomes are possible when the agreement is reviewed, each with different levels of impact:

Scenario: Limited Review

Given these possibilities, businesses should prepare for potential adjustments and ensure contingency plans are in place.

Reshoring and Investment Relocation

One possible policy shift could involve stronger incentives for U.S. companies to relocate production back to the United States or discourage expansion into Mexico.

This could result in:

• Reduced foreign direct investment (FDI) in Mexico’s manufacturing sector.
• Weaker regional supply chain integration between Mexico and the U.S.
• Stricter scrutiny of Chinese investments in Mexico, potentially adding compliance challenges for companies with ties to China.

Immigration and Labor Market Restrictions

Stricter immigration policies could have indirect effects on Mexico’s manufacturing sector, particularly for industries that depend on cross-border workforce mobility.

Potential Measures

• Border Closures: Large-scale migrant movements could lead to temporary shutdowns at key border crossings, causing trade disruptions.
• Workforce Challenges: Tighter visa requirements for skilled Mexican workers (e.g., engineers, technicians) may limit talent availability for binational projects.
• Policy Reinforcement: Programs like "Remain in Mexico" could create additional social and logistical challenges along the border.

Security and Trade Risks

Security concerns have been a topic of discussion in U.S.-Mexico relations, and potential policy shifts could include:

• Designation of Cartels as Terrorist Organizations: This is already in process, and could lead to greater scrutiny of Mexican businesses, potential financial restrictions, and impacts on trade facilitation programs such as CTPAT.
• Increased Border Inspections: Tighter security measures could lead to longer customs processing times, affecting supply chain efficiency.
• Stronger Financial Regulations: Stricter financial compliance requirements could impact business operations with U.S. partners, and put banks in a position of increased pressure to block certain transactions.

Diplomatic and Economic Stability

Trade tensions and policy uncertainty may impact economic conditions in Mexico:

• Currency Volatility: Escalating tensions could weaken the peso, making imports more expensive but potentially making Mexico more attractive for foreign investors.
• Reduced Government Cooperation: Disruptions in government collaboration (e.g., between Mexican and U.S. customs agencies) could create inefficiencies in cross-border trade.

Potential Opportunities: Nearshoring

Despite these challenges, Mexico may also benefit from protectionist policies if companies look to relocate production closer to the U.S. rather than risk tariffs on goods from Asia. Key advantages include:

• Alternative to China: Companies looking to avoid tariffs on Chinese goods may shift production to Mexico.
• Expansion of Industrial Zones: If Mexico maintains competitive labor costs and infrastructure improvements, it could attract new investment.
• Exchange Rate Benefits: A weaker peso could make Mexico an even more cost-effective manufacturing hub.

Preparing for 2026: Strategic Considerations for Businesses

Given the potential policy shifts ahead of the USMCA renegotiation, companies should consider proactive strategies to mitigate risks and capitalize on emerging opportunities:

• Diversify supply chains to reduce dependency on specific markets or trade routes.
• Monitor political developments in the U.S. to anticipate potential trade policy changes.
• Strengthen legal and regulatory compliance to prepare for potential new trade restrictions.
• Develop contingency plans for possible border disruptions or tariff increases.
• Evaluate nearshoring opportunities to attract investment amid shifting global trade dynamics.

Conclusion

The lead-up to the USMCA review in 2026 presents both challenges and opportunities for Mexico’s manufacturing sector. While potential policy changes in the U.S. could introduce uncertainty—particularly regarding tariffs, investment policies, and security measures—Mexico also stands to gain if it strengthens its position as a nearshoring destination.

Manufacturers operating in Mexico should remain vigilant, prepare for possible disruptions, and leverage Mexico’s competitive advantages to attract investment and sustain long-term growth.

Key Points:

1. Potential Revisions to Rules of Origin (ROO) in the Automotive Sector

The automotive industry may face stricter rules of origin requirements, which determine the percentage of a vehicle's components that must originate within North America to qualify for tariff-free status. Such changes could impact supply chains and production costs for manufacturers across the region.

2. Addressing Trade Disputes and Compliance with Dispute Settlement Mechanisms

Ongoing trade disputes, particularly concerning labor rights, environmental standards, and agricultural trade, underscore the importance of robust dispute resolution mechanisms. Ensuring compliance with these mechanisms is vital for maintaining trust and stability among USMCA partners.

3. Evaluating the Impact of the Sunset Clause on Long-Term Trade Relations

The USMCA includes a sunset clause that mandates a review every six years to decide on the agreement's extension. The upcoming 2026 review will be the first test of this provision, with significant implications for the continuity of trade relations and investor confidence in the region.

By proactively engaging with these key issues, stakeholders can better prepare for the outcomes of the 2026 USMCA review and strategically position themselves in the evolving North American manufacturing landscape.