Canada is deepening its economic relationship with Mexico to mitigate the impact of a 35% tariff imposed by the United States on Canadian products that do not meet USMCA requirements. The tariffs, implemented in early August 2025, followed a disagreement between the US and Canadian governments regarding the trade pact. This strategic pivot by Canada, under Prime Minister Mark Carney, aims to navigate the new trade landscape.
Fitch Ratings indicates a significant improvement in Canadian export compliance, with 81% of goods exported to the US now meeting USMCA criteria, up from 56% in May. This suggests widespread adaptation by Canadian businesses to their supply chains to avoid the tariffs. While most sectors have adjusted, the steel, aluminum, and automotive industries continue to face difficulties. Fitch forecasts Canada's compliance rate could reach 89% in the coming months.
Mexico has become a vital partner for Canadian producers looking to circumvent US tariffs. Despite its own trade uncertainties with the US, Mexico, led by President Claudia Sheinbaum, secured a 90-day extension on its current tariff regime from the US on August 1st, enabling new agreement negotiations. Historically, Canada and Mexico have been rivals for the US market, particularly in automotive manufacturing and energy supply, but this dynamic is shifting towards greater integration.
A product manufactured in Canada using components from Mexico now qualifies for USMCA exemption, thereby avoiding US tariffs. This opens opportunities for Mexico to supply inputs to Canada, potentially displacing goods from countries like China and India. This evolving situation is fostering a new commercial alliance, highlighted by Prime Minister Mark Carney's planned visit to Mexico on September 18th. Since his election, Carney has emphasized broadening Canada's trade relations beyond the US, with his ministers of Foreign Affairs and Finance recently completing preparatory diplomatic visits.
The success of this growing commercial relationship depends on two key factors: President Trump's continued adherence to exempting USMCA-compliant products from tariffs, which allows for complementary supply chains between Mexico and Canada, and the upcoming mid-next-year review of the USMCA treaty. These negotiations could significantly alter the trade landscape. Douglas Porter, Chief Economist at BMO, notes that the President has partially disregarded the USMCA with tariffs and threats, suggesting Canada and Mexico may need to make concessions to preserve the agreement.
Concurrently, Canada continues its diplomatic efforts with the White House. On August 21st, Prime Minister Carney's office announced a call between himself and President Trump. The leaders discussed current trade challenges, shared opportunities, and priorities within the evolving economic and security relationship between Canada and the US, also addressing the use of US leadership to support peace in Ukraine.