Economic Security in North America

Executive Summary

In its request for comment, the Office of the U.S. Trade Representative (USTR) solicits comments on and recommendations for “specific actions [to promote] alignment on economic security with Mexico and Canada” as well as strategies to strengthen “cooperation on issues related to non-market policies and practices of other countries.” These comments are offered in support of these objectives and in furtherance of advancing U.S. economic and national security interests through the inclusion of economic security commitments in an updated U.S.-Mexico-Canada Agreement (USMCA).

These comments include model text to provide specific, actionable guidance to negotiators on integrating economic security into USMCA, striking a balance between the opportunity of using USMCA as a vehicle to strengthen economic security alignment and the need for each government to maintain autonomy to take action under their own domestic economic security authorities. Recognizing the various concepts of economic security, we define economic security as the protection against national security risks that arise out of otherwise ordinary commercial interactions in the global economy.

These comments include analysis and recommendations on the following topics:

• The rationale for targeted updates to USMCA to strengthen North American economic security: Deep supply chain integration means that economic security vulnerabilities in any of the three countries could pose risks to the other two USMCA partners. Economic security alignment can build trust in integrated markets within North America, avoid unduly restricting regional trade and investment flows that pose minimal national security risks, and enable more effective common approaches to shared challenges from strategic competitors.
• Investment security: USMCA partners should commit to establish, maintain, and resource high-standard domestic investment screening authorities, enhance information sharing among relevant authorities, and establish fast track investment reviews for intra-USMCA investments.
• Coordinated trade protection measures: USMCA partners should establish a process to align domestic trade protection measures to address unfair trade practices of non-market economies. Where countries agree to implement coordinated protection measures on non-USMCA countries, they should exempt one another from such measures. USMCA partners should consider establishing a fund for trade enforcement and related capacity building, using funds generated from the new tariffs imposed.
• Trade and trustworthy technologies: USMCA partners should commit to establish, maintain, and resource high-standard domestic export control and trusted technology authorities, enhance information sharing among relevant authorities, and facilitate secure integration of North American technology stacks.
• Dispute settlement, enforcement, and consultations: USMCA partners should establish a new Economic Security Committee to oversee implementation of the agreement’s economic security commitments, resolve disputes related to certain institutional commitments included in the agreement, and facilitate consultations in the event of diverging views on specific economic security actions (such as the decision to allow or block a particular foreign investment).
• Managing retaliation risk: USMCA partners should anticipate and proactively plan for retaliation from the People’s Republic of China (PRC) or other third parties in response to joint economic security actions. While an overly ambitious obligation to jointly respond to retaliation could backfire, USMCA partners should include some signaling language to demonstrate their resolve to coordinate responses to any retaliation, including by tasking the Economic Security Committee with managing retaliation risks

Overall Recommendations

• Maintain and uphold existing USMCA commitments; and
• Negotiate targeted updates to USMCA to address emerging economic security concerns and enhance North American alignment on economic security policies.

USMCA underpins the integrated North American market. Canada and Mexico both send around 75% of their exports to the United States, revealing the stake of their dependencies on this economic relationship. Likewise, Canada and Mexico are consistently the United States’ top two export markets. Moreover, North American trade increasingly consists of not only finished goods but rather reflects supply chain integration across borders – an automobile, for instance, may cross borders multiple times in the production process, and incorporate inputs from all three countries. These sophisticated regional value chains allow for deeper specialization and efficiency.

Supply chain integration, however, requires that trade and investment flows are secure, resilient, and trustworthy. Deep supply chain integration means that economic security vulnerabilities in any of the three countries could pose risks to the other two trade partners. To preserve a highly integrated North American market, then, effective coordination on economic security policies is necessary.

The current geopolitical climate requires an approach to the USMCA review that integrates trade, investment, and economic security objectives. The uses of economic security tools, including export controls, investment restrictions, and tariffs, are at all-time highs. U.S. policy and strategy have moved decisively away from the non-discriminatory approach central to the old trade and investment architecture, as it seeks to manage the rise of the PRC as a strategic competitor (among other objectives). Many U.S. trading partners are also building their economic statecraft toolkit, raising the potential for an increasingly fragmented global economy.

Economic security alignment can build trust in integrated markets within North America, avoid unduly restricting regional trade and investment flows that pose minimal national security risks, and enable more effective common approaches to shared challenges from strategic competitors. Crucially, this approach requires a pivot away from global rules and institutions such as the World Trade Organization (WTO) and towards a new rules-based system among close partners that advances economic security goals alongside traditional economic objectives. The USMCA review provides an important opportunity to create a new economic security, trade, and investment regime in North America with these goals in mind.

USMCA, negotiated successfully by the first Trump administration, represents a gold standard trade agreement. It made critical updates to its outdated predecessor agreement, including in areas such as rules of origin, labor enforcement, and digital trade. The USMCA review presents an opportunity for the second Trump administration to build on this progress by updating the agreement to reflect its economic security priorities.

Political Context for a Successful USMCA Update

The political context of a USMCA review raises three challenges for the U.S. administration: 1) how to manage deep skepticism about the credibility of U.S. trade commitments in the wake of recent tariff actions; 2) the urgent need to anticipate PRC retaliation in response to further alignment on economic security policies; and 3) the difficulty in pushing USMCA partners to advance derisking policies amidst uncertainty concerning the U.S. approach to managing the economic and technology relationship with the PRC.

First, the USMCA review will be colored by the ongoing trade disputes triggered by the Trump administration’s heavy use of tariffs against Canada and Mexico. This includes imposed tariffs to address concerns around drug trafficking, imposed and pending tariffs under Section 232 national security authorities, and the potential for additional tariffs or tariff threats for unanticipated reasons. The rapidly changing nature of the U.S. tariffs has introduced significant uncertainty about whether the Trump administration views USMCA as a binding constraint on its trade policy. This concern is raised acutely by the Section 232 actions, which were contemplated in the first USMCA negotiation and resulted in a series of side letters in which the United States made commitments to Canada and Mexico regarding relief from future Section 232 actions.

These comments do not directly propose a holistic fix to this lack of trust in U.S. commitments. However, we note that affirmative signaling to Canada and Mexico about U.S intentions to maintain the integrity of existing USMCA commitments would be important to secure any new commitments on economic security priorities. Confidence-building measures—such as a limited set of targeted exemptions for high-profile products currently subject to Section 232 tariffs and/or pausing Section 232 tariffs during the USMCA review period contingent on ongoing progress in negotiations—would be useful in creating political will and momentum in Mexico and Canada towards a successful review and update of USMCA.

Second, all three USMCA partners must contend with the risk that any further economic security alignment or actions will likely prompt retaliation from the PRC. Each country has recently been subject to retaliation from the PRC, and all three are facing the challenge of the PRC’s iron grip over global rare earths and critical minerals capabilities. Retaliation should be expected and proactively planned for, rather than addressed in an ad hoc, reactive manner. The Economic Security Committee proposed in these comments offers one mechanism to do so.

Over the long term, the most effective and sustainable strategy for minimizing retaliation costs and countering economic coercion is to reduce critical dependencies on China, which create exposure that can be weaponized. Such derisking is a central objective of incorporating economic security commitments in an updated USMCA.

Third, economic security discussions within the USMCA review would benefit from clarity on U.S. objectives related to China. Signals to date from the administration have been mixed – with the administration at times appearing intent on advancing an assertive derisking agenda, and at other times suggesting it is open to rolling back technology restrictions, including controls on advanced AI chips, for a more accommodationist approach.

Based on our engagement with stakeholders in Canada and Mexico, our assessment is that both countries would make meaningful and far-reaching economic security commitments to align with the United States on a joint agenda to derisk responsibly from China. But, neither country wants to be left isolated (and subject to PRC retaliation) if the U.S. posture softens. The Trump administration has a unique opportunity to make transformational progress in advancing a secure and resilient North American market, including one that has stronger defenses against PRC economic coercion. Indeed, in many ways this would represent a continuation of the progress made in the first Trump administration, which expanded the use of tariffs and export controls in novel ways to manage the strategic competition with the PRC. But the Trump administration must affirmatively choose this vision and maintain a consistent posture vis-à-vis the PRC or this opportunity will be lost.