The USMCA faces rising risks from trade tensions, tariff threats, and water disputes — factors that could reshape the legal, regulatory, and tax framework for North American trade
Key points:
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USMCA at risk — Rising tariffs, political friction, and the potential 2026 review are creating uncertainty around rules of origin, market access, labor obligations, and dispute‑resolution mechanisms — areas that are central to legal and tax planning.
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Economic impact — Mexico depends on USMCA for exports, investment, and employment; and any disruption would be problematic.
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Water as a strategic resource — The conflict over the 1944 Treaty and the new law reflect the critical importance of water usage and water rights in the bilateral agenda.
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For almost 25 years before the United State-Mexico-Canada Agreement (USMCA), it was the North American Free Trade Agreement (NAFTA) that defined the region’s economic relationship. Enacted in 1994, NAFTA removed most tariffs, encouraged foreign investment, and integrated supply chains across North America, especially in manufacturing, automotive production, and agriculture. This integration helped transform Mexico into a major export platform and contributed to North America’s emergence as a competitive economic bloc.
Over time, however, NAFTA drew criticism, particularly in the US, where concerns grew about trade imbalances, worsening labor conditions, and the agreement’s ability to address modern challenges such as digital trade and more complex rules of origin. These political pressures set the stage for renegotiation and ultimately produced the USMCA, a more modern but also more politically sensitive framework.
The current chaotic environment around tariffs and trade suggests that these rules in North America may again be subject to revision. Understanding how tariffs, political dynamics, and resource‑related tensions interact is essential for organizations and corporations as they try to plan for the legal and tax implications that may arise as the 2026 review approaches.
A year of trade tensions
From the beginnings of Donald Trump’s second administration in January 2025, tariffs were imposed on Mexican exports, marking the start of a more protectionist trade policy.
In March, some of those tariffs were exempted for products that comply with USMCA provisions. However, in December, President Trump declared that the US would allow the treaty to expire or seek to renegotiate it in 2026, alleging that Canada and Mexico have gained advantages to the detriment of US interests.
Not surprisingly, diplomatic tensions between Mexico and the US intensified throughout 2025 and saw President Trump accuse Mexico of failing to comply with the 1944 Water Treaty, a historic agreement that regulates the distribution of water resources from the Bravo, Colorado, and Tijuana rivers. According to the US government, Mexico had not delivered the agreed-upon volumes, generating friction amid a political context already marked by trade disputes.
Mexico argued that prolonged droughts between 2020 and 2025 made compliance with the treaty difficult, affecting water availability in its own agricultural and urban regions. However, President Trump warned that if water flow to the US did not increase, he would impose a 5% tariff on Mexican exports, adding pressure to the bilateral relationship. Finally, after negotiations, an agreement was reached: Mexico must supply the remaining amount before 2030, which represents a significant challenge for the country’s water management.
In this context, the Mexican government promoted a structural reform to ensure compliance with the treaty and guarantee efficient resource management. On December 11, 2025, the National Water Law was published in the Official Gazette of the Federation and came into force the following day. This regulation establishes a new legal framework with three fundamental pillars:
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- comprehensive state responsibility for water management;
- exclusive powers for Conagua in the allocation, supervision, modification, and revocation of concessions; and
- prohibition of concession transfers between private parties, preventing speculation and resource hoarding.
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The law directly impacts strategic sectors such as agriculture, livestock, industry, and rural communities, as well as domestic services. Beyond its internal scope, this reform is interpreted as a mechanism to guarantee compliance with the Water Treaty, reduce the risk of trade sanctions, and strengthen Mexico’s position in future international negotiations.
Economic impacts and projections
For Mexico, the USMCA is not merely a trade agreement; it represents a strategic pillar for the country’s economic stability and sustained growth. Since its entry into the USMCA, Mexico has become a reliable partner in the North American region, guaranteeing its preferential access to two of the largest markets in the world. This advantage has driven foreign direct investment into the country, especially in sectors such as automotive, advanced manufacturing, agribusiness, and emerging technologies.
The importance of USMCA lies in the fact that more than 80% of Mexican exports go to the US and Canada. Without this legal framework, Mexico would face an adverse scenario because the imposition of significant tariffs would reduce the competitiveness of national products, increase supply chain costs, and directly affect job creation. The automotive sector, for example — which accounts for about 4% of national GDP and about 30% of manufacturing GDP in Q3 of 2025 alone and employs more than 1 million people — would be one of the hardest hit by the loss of these preferential conditions.
In addition, USMCA offers legal certainty for investors. Clear rules on intellectual property, digital trade, and dispute resolution reduce risks and encourage the arrival of foreign capital. Without this treaty, Mexico could experience an outflow of investments to other countries with more stable agreements, which would negatively impact job creation and projected economic growth.
The coming USMCA review
The possible renegotiation of USMCA, scheduled for later this year, generates uncertainty. This review process presents several possible paths for Mexico, each with distinct economic, political, and diplomatic implications. If the USMCA is successfully extended without substantial modifications, Mexico would preserve its preferential access to the US and Canadian markets, maintaining the commercial stability that supports most of its exports. This continuity would reinforce investor confidence, support job creation and stabilize diplomatic relations.
However, if no agreement is reached to extend the treaty, this absence of clarity would create uncertainty for businesses operating throughout North America. Investment decisions could be delayed, expansion plans postponed, and operating costs could rise due to increased scrutiny and customs enforcement. Further, diplomatic tensions could begin again, particularly if unilateral measures such as large tariffs are threatened again. In this environment, Mexico would need to adopt a cautious strategy focused on strengthening legal frameworks and offering targeted economic incentives to maintain its own competitiveness.
Another scenario in which the parties fail to reach consensus would activate the formal pathway toward the treaty’s expiration in 2030. While trade flows would continue in the short term, markets would begin adjusting to the anticipated end of the USMCA. This expectation could trigger a gradual relocation of investments and restructuring of supply chains, particularly in industries heavily integrated with US production networks, such as automotive manufacturing and advanced industrial sectors. Pressure on the peso, slower GDP growth, rising import costs, and early job losses would likely follow; and even if diplomatic efforts emerge to prevent severe disruption, the economic effects for Mexico would become progressively more adverse.
However, the most severe scenario involves one country withdrawing from the USMCA, which would cause the agreement to collapse for all three members. For example, if the US were to withdraw, Mexico would immediately face World Trade Organization tariffs, dramatically increasing export costs for manufactured goods and agricultural products and severely disrupting supply chains.
Clearly, any of these scenarios highlight how critical this year will be for Mexico. While a successful extension of the USMCA would support stability, attract investment, and sustain long‑term growth, a failure to reach agreements — or the withdrawal of a partner country — could reshape Mexico’s economic landscape for years to come.
You can find more of our coverage of the USMCA here
