With the US-Mexico-Canada Agreement (USMCA) heading into review this year, North American manufacturing is operating in a completely different environment from when the agreement first entered into force in 2020.

The review is already the defining issue for 2026 in this space, and President Donald Trump's second term is magnifying every pressure point.

Across inbound investors, original equipment manufacturers, tier-one suppliers and logistics operators, a single theme dominates conversations: The rules and expectations that structured Mexico's competitiveness are shifting, in some cases significantly.

The USMCA process remains formally a "review," but the US' negotiating posture has effectively shifted it toward a de-facto renegotiation—one with potentially major structural consequences for integrated North American supply chains.

Stricter rules of origin: The core pressure point

The automotive sector sits at the center of the US agenda. Washington's focus remains on two concerns: the volume of production taking place outside the US, and the perception that Asian—particularly Chinese—automotive inputs are entering the US through Mexico and Canada.

The USMCA's existing rules of origin already require 75 percent regional content, and this requirement is widely recognized across the industry as both difficult and expensive to meet. Even today, manufacturers are struggling with compliance, and supply chains are under visible strain.

Furthermore, the USMCA sets out a "labor value content" requirement in which at least 40 percent of a passenger vehicle's value and 45 percent of a light truck's value must be produced by workers earning at least US$16 per hour. There are also specific steel and aluminum requirements—beyond the regional content requirements—that must be met.

Any attempt to tighten those requirements further would create additional pressure in a market where regional suppliers are already struggling.

In practical terms, companies are already restructuring sourcing strategies. This trend is likely to continue, as in mid-December Mexico's lower house aligned with President Trump by voting to increase tariffs on imports from Chinese and other Asian countries by up to 50 percent.

Some US producers are reportedly considering returning to their home turf to avoid tariffs. If companies don't have certainty about market access, then shifting their operations makes sense, though it's not clear that it would benefit these producers, or their customers, in the long run.

Uncertainty remains significant: After the US Supreme Court's recent decision against Trump's tariffs, a new 10 percent global tariff has already been introduced under Section 122 of the US Trade Act of 1974, with public speculation that this rate could rise to 15 percent, while further investigations under other statutory provisions may expand tariffs to additional products and sectors. It therefore remains to be seen what broader impact the high court's decision to strike down the International Emergency Economic Powers Act (IEEPA) tariffs will ultimately have.

The well-known cross-border movement of components—often multiple times per vehicle, sometimes up to eight—compounds these pressures and raises the risk of operational delays.

While the Trump administration clearly wants to see automakers relocating back to the US, it may have a more open-minded approach to auto parts.

Labor as leverage

The Trump administration is also turning to labor provisions as a key negotiating lever. Mexico's historical shortcomings in protecting labor rights have created an opening for the US to demand more intrusive monitoring and enforcement. For Mexico-based manufacturers, this raises the prospect of higher compliance costs and greater scrutiny of supply-chain labor conditions.

More than 40 enforcement cases have been conducted against Mexican facilities under the USMCA Rapid Response Mechanism, most of them related to the auto industry.

More broadly, labor is being used strategically to encourage reshoring. Even incremental adjustments can influence how manufacturers allocate production across the three USMCA countries.

Investment anxiety: Capital flows slowly and risks rise

Investment flows into Mexico's manufacturing, transport, logistics and infrastructure sectors have slowed during the past year. Analysts say a slowdown in the manufacturing and construction sectors were the main drivers of a year-on-year decline in economic activity of 0.6 percent in the third quarter of 2025.

While overall foreign direct investment for 2025 is up versus the previous year, the automotive industry saw a 20.1 percent decline in the first three quarters of last year.

Asian capital—once a growing presence—is expected to cool significantly under US pressure to prevent Mexico and Canada from becoming a platform for Chinese-origin goods entering the US market. There are already signs of this: Hit by tariffs and a broader fall in sales, Japanese automaker Nissan said last July that it would stop production at its Civac plant in Mexico, which has been operational since 1966.

At the same time, long-term investors from the US and Europe have become more cautious due to Mexico's domestic policy environment. Judicial reforms that have weakened institutional independence, coupled with aggressive regulatory measures in the energy and telecommunications sectors, have shaken confidence.

Companies in those sectors have openly contemplated exit scenarios. The result is a convergence of pressures: weaker inbound investment from Asia, hesitancy from historic transatlantic partners, and a domestic legal landscape that continues to generate questions about predictability and the rule of law.

It has not all been bad. In April 2025, Swedish auto manufacturer Volvo said it would increase its investment in its Nuevo León truck factory to US$1 billion.

Mexico's position: Strengths, vulnerabilities and the path forward

Claudia Sheinbaum's government has engaged positively with the Trump administration, and Mexico appears to be in a stronger position than Canada in its relations with Washington. Mexico's ability to maintain that manufacturing relationship, however, sits uneasily with the Trump administration's explicit intent to pull more manufacturing capacity back to US soil.

Mexico's success in the USMCA review will depend on its ability to offer credible assurances across several areas:

• Ensuring that Mexico remains a reliable ally on supply chain security

  The USMCA review is unfolding in parallel with the broader US-China trade confrontation. Mexico has been placed in a difficult position, with the US leveraging not only trade questions but also migration and security topics—such as fentanyl interdiction—to influence concessions. Mexico's response must balance its own industrial interests with these geopolitical dynamics.

• Avoiding harsher rules of origin

  Further tightening of automotive origin rules would create immediate and significant disruptions for the sector. Mexican negotiators will likely aim to hold the existing thresholds, recognizing both the operational realities and the mutual interdependence of the industry.

• Rule of law commitments in energy and telecom

  The US and Canada are expected to push hard on these chapters after years of seeing their investors disadvantaged by domestic measures. Addressing these concerns—or at least signaling a credible pathway to greater certainty—will be critical.

• Labor compliance

  Mexico has already increased controls over manufacturing programs to ensure better oversight of origin and labor compliance, for instance via its IMMEX program or the government's "denunciation" mechanism for imports produced with forced labor. Demonstrating consistent enforcement will be essential to maintaining market access.

Canada and Mexico: A shared interest in stability

One dynamic not widely discussed yet, but increasingly evident in professional circles, is the alignment between Canada and Mexico. Both countries require a stable, predictable USMCA, and both are wary of a shift toward annual reviews, which would dramatically undermine long-term investment planning.

With approximately 75 percent of its total manufacturing exports going south, Canada's export dependence on the US is as strong as Mexico's, which sends more than 80 percent of its exports north. As such, Canada also has strong incentives to keep the treaty intact. Mexico would benefit from presenting a united front with Canada, though it is clear that US priorities will dominate.

That said, while the USMCA is expected to remain trilateral overall, Mexico and Canada each have different relationships to the US, with different tensions. Parts of the talks could take place on a bilateral basis.

The scenarios ahead

Three possible outcomes are broadly foreseeable:

• A limited or "light" review

  This would be most consistent with the agreement's original design and is the only scenario that preserves stability. It would involve adopting unilateral measures to ensure compliance with existing obligations, and marginal adjustments, but not fundamental rewrites.

• A hard renegotiation

  If the US insists on treating the review as a full reopening, the agreement's architecture could change. Annual reviews could become mandatory, significantly reducing certainty for manufacturers, investors and financiers.

• No agreement

  This scenario is unlikely, but the past year has shown that anything is possible. This would see the agreement reverting to its existing terms, but credibility and stability would suffer, and the diplomatic fallout would be severe.

Beyond the review

Despite the current tensions, the integrated North American manufacturing ecosystem remains one of the most competitive in the world. The automotive industry in particular has demonstrated decades of resilience and adaptability. In a successful scenario, the region should emerge with:

• A reinforced, rather than diminished, continental supply chain
• Improved investor protection mechanisms
• Clearer enforcement on labor and origin issues
• A more realistic balance between regional sourcing and global inputs

For now, manufacturers should prepare for sustained uncertainty. Compliance planning, supplier diversification and closer monitoring of regulatory developments will be essential throughout 2026 and beyond. The review is already set to be the central theme of the year, and it will remain the defining issue for Mexico's industrial landscape well into the next decade.

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