Big bluff: The real reason behind Trump’s 25% Mexico-Canada tariff push

I believe that recent leaks have revealed why Trump is threatening 25% tariffs on Mexico and Canada and what he really wants in return.

He wants to renegotiate the USMCA agreement sooner.

The agreement — which he negotiated in his first term — is up for review on July 1, 2026. If any party wants to leave on that date, they must give six months notice. That means the earliest Trump could unilaterally leave the agreement is January 1, 2027.

The problem with that six-month window is that it falls right within the 2026 US mid-terms on November 3. That would be an unwise time for Trump to start a trade war as Canada and Mexico would hit back, potentially swinging House control back to Democrats and neutering the final two years of Trump’s term. It’s not an ideal time for the US to embark in tough negotiations, or at least it limits leverage.

So Trump is threatening harsh tariffs on flimsy national security grounds (especially against Canada) and causing considerable angst around the world. At the 11th hour, Trump’s team will offer a way to avoid the tariffs: open up USMCA negotiations early. This report gave it away.

On the surface, that should be an easy thing for Canada and Mexico to agree to and my base case is that they will.

However, I think that’s not a certainty. Leaders in Mexico and Canada — particularly after the Colombia episode — may conclude that Trump is bluffing and if they threaten massive retaliation, then Trump will back down. That leverage around the timing of USMCA is valuable and they may not want to give that up, particularly against a hollow threat.

The stakes are also high:

Trump is particularly focused on using the threat of tariffs to change automotive rules under the continental trade pact, forcing car plants to move from Canada and Mexico back to the U.S., according to people familiar with his thinking. That has sent major automakers rushing to find ways to satisfy Trump without “blowing up the North American auto supply chain” that extends throughout the three nations, according to one auto-industry executive.

The complicating factor is that Trump on Feb 1 can announce tariffs or start some kind of clock on tariffs to keep the pressure on, that uncertainty is an economic drag. Given Trump’s rhetoric — where he highlighted progress with Mexico — I think that Mexican President Claudia Sheinbaum has shown openness to an earlier renegotiation.

That Trump has gone easier on Mexico in public comments when his ‘demands’ were cutting off drugs and immigrants was always puzzling but his recently make much more sense if it’s about USMCA.

Moreover, I can see why Mexico would be more open to renegotiating autos — they have much more leverage. US auto manufacturers love building in Mexico and have invested in many new plants there. Moreover, if they pull out then Chinese automakers are ready to step in, which could mean cheaper cars for Mexicans.

In contrast, Canada feels as though it has little to gain from a renegotiation and the relentless uncertainty around access to the US economy is a big drag on investment. Standing up to Trump also plays well domestically, and with an election is coming within the next four months, this becomes a major consideration.

Within the agreement, a single party can halt the deal from being renegotiated but it could lead to an awkward situation where the other two parties work on a bi-lateral side deal without them. There are mixed indications on whether Canada and Mexico can be a united front.

Ultimately, I think Trump gets what he wants in an earlier renegotiation — probably starting this summer — along with some token commitments on the border from Mexico and perhaps some NATO spending from Canada. However it’s difficult to predict how highly Canada and Mexico value stretching the clock, particularly if they’re convinced Trump is bluffing.

This article was written by Adam Button at www.forexlive.com.