The North American economic landscape, defined by the collaboration of the US, Canada, and Mexico, faces challenges from a rising trade war and policy uncertainty that’s impacting growth and stability in the region
Key insights:
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The North American economic bloc facing significant challenges — Due to escalating trade tensions and policy uncertainties, the trading bloc comprised of the US, Canada, and Mexico is currently facing significant challenges that have the potential to undermine economic growth and stability across the region.
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Customized trading strategies needed — Given each country’s unique economic outlook, policymakers will need to work on tailored strategies to address each nation’s specific issues.
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Communication & collaboration are key — The future of North American economic cooperation hinges on sustained dialogue and cooperation among the member countries. For continued and shared economic prosperity in the region, the three nations must work together.
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For many years, the North American economic landscape has been defined by robust collaboration among the United States, Canada, and Mexico. Policymakers strategically leveraged the region’s unique geographical advantages and opportunities to foster prosperity, leading to the creation of one of the world’s most powerful trading blocs. After the North American Free Trade Agreement (NAFTA) was supplanted by the United States-Mexico-Canada Agreement (USMCA) in 2020, it became the world’s second-largest trade agreement, with the combined imports among the three nations amounting to nearly $2 trillion in 2023 alone.
Despite this success, the bloc’s partnership is now precarious. Escalating trade tensions now pose considerable challenges not only for the three participating nations but for the global economy as a whole now and in the future.
The United States
The Trump administration activities around tariffsand ensuing policy uncertainty has led to significant concerns among businesses throughout North America. These concerns are expected to deter private investment, while consumer spending may also decelerate due to higher unemployment and persistent inflation.
In fact, economists foresee weaker growth in the US economy. Even though real US GDP grew 2.8% in 2024, the International Monetary Fund’s (IMF’s) forecast shows that it may decelerate to 1.8% in 2025. According to the IMF, unemployment will stand at 4.2% this year, further signaling a soft labor market.
Tariffs also will result in price increases for consumers on imported goods, likely leading to additional pressure on overall price levels. Indeed, consumer prices rose 2.7% in June compared to the previous year, potentially indicating the beginning effects of Trump’s tariff policy on inflation.
This likely will contribute to inflation remaining persistent, with estimates throughout 2025 of 3.0%, one percentage point above the Fed’s 2.0% target. At the same time, retaliatory tariffs from other countries are expected to lessen demand for US exports. In addition to trade and policy instability, Trump’s immigration agenda could continue to impact various sectors of the economy, such as construction and agriculture, where labor supply and demand may be affected.
In this environment, a slowing US economy is likely to lead to reduced tax collection, subsequently decreasing government revenue even further. An increase in government debt is anticipated, with general government gross debt as a percentage of GDP projected to rise to 122.5% in 2025.
As for 2026, real GDP growth is expected to slow further to 1.7%. Economists also project that inflation will continue to ease, reaching 2.5%, while unemployment is likely to remain stable at 4.2%. Although these figures suggest a relatively steady outlook, there are more notable downside risks than upside ones. Persistent, or even worse, increasing trade, policy, and geopolitical uncertainties could undermine economic performance and threaten the country’s stability.
Canada
In 2024, Canada’s economy saw moderate growth, with real GDP increasing by 1.5%; however, the country’s economic outlook for 2025 has weakened. Rising trade tensions with the US have contributed to a deterioration in both business and consumer sentiment, while policy uncertainty has increased. As a result, the IMF foresees the Canadian economy growing 1.4%, and the unemployment rate rising to 6.6% in 2025.
Unlike the two other countries in the region, inflation in Canada is expected to ease to its 2% target in 2025. However, the Bank of Canada will likely face a challenging environment in the coming months, as upward pressure from higher import prices due to tariffs and downward pressure from falling demand could infringe upon price stability.
Looking ahead, economists project a modest recovery in macroeconomic conditions for Canada in 2026. With projected real GDP growth of 1.6%, inflation at 2.1%, and unemployment at 6.5%, the economy is expected to demonstrate enhanced resilience.
Further, the Organisation for Economic Co-operation and Development (OECD) made some recommendations for the Canadian economy to help it weather these uncertain times, including seeking diversification of trading partners, strengthening innovation to boost productivity and competition, and increasing government investment in infrastructure.
Mexico
As of the midway point of 2025, Mexico’s economy is facing a challenging outlook. In 2024, the country’s real GDP grew by 1.5%; however, the IMF projects a reversal in 2025, with an anticipated contraction of 0.3%. This downturn is attributed to weakened exports resulting from tariffs, as well as restrained public consumption and investment.
The IMF’s forecasts also suggest that private consumption may be supported by moderate unemployment (3.8%) and declining inflation (3.5%) in 2025. Still, while unemployment is anticipated to remain at relatively low levels, this figure represents an increase from last year’s level. Also, while investment is aided by lower interest rates it is expected to recover only gradually amid persistent concerns that include geopolitical tensions and domestic uncertainty from policy changes and reforms.
Further out, a recovery for the Mexican economy is anticipated in 2026, with real GDP projected to grow by 1.4% after the previous year’s contraction. The labor market is forecasted to hold stable, with the unemployment rate standing at 3.8% in the same period. However, inflation is likely to persist at 3.2%, remaining above its target level.
The OECD has outlined several recommendations for Mexico as well, including improving property tax collection and digitalizing tax administration to grow government revenue. Conducting cost-benefit analyses could improve the efficiency of public spending; and creating regulations that encourage private investment in renewable energy could allow the country to leverage its natural resources and gain competitive advantage.
The future of the North America trading bloc
The economic performance of North America in 2025 is increasingly clouded by rising policy uncertainty and commercial tensions between the three member countries. Real GDP growth for the overall region is projected to slow to 1.6% in 2025 — a percentage point lower than in 2024 — as each country contends with unique challenges and the broader consequences of escalating trade disputes.
The imposition of new tariffs by the Trump administration has reverberated across the North American region, straining longstanding trade relationships and introducing additional volatility for businesses and individuals. These developments risk undermining the progress achieved under trade agreements such as NAFTA and its successor, the USMCA, which were designed to foster regional integration and collective growth. With the coming renegotiation of the USMCA in July 2026, the future of North American economic cooperation hangs in the balance.
By 2026, the IMF projects sustained growth of 1.7% for the entire North American region. However, this outlook is contingent upon the resolution of the ongoing tariff disputes and successful renegotiation of the USMCA. Achieving agreements that address the United States’ trade deficit with each respective country remains a key priority for President Trump, as does advancing other significant agenda items, such as enhancing collaboration on immigration — particularly along the US/Mexican border — and increasing efforts to combat drug cartels in Mexico.
While it is very hard to predict what will happen in the coming months (let alone the next year) for North America, what is certain is that sustained dialogue and cooperation among the three countries will be essential to preserving the benefits of regional integration, restoring investor confidence, and promoting shared prosperity in the months and years ahead.
For more on the current trading environment, check out the Thomson Reuters Institute’s 2025 Tariff Survey here
