Birch Lake Insights: Why Renewing USMCA Makes Sense Despite Trade Headwinds

By Jack Walsh

The English writer John Heywood is known for his idiom “people lose the forest for the trees,” describing someone who is too involved in the details of a problem to look at the whole situation. I think sometimes it can work the other way, too, when it’s hard to see the trees for the forest – where we focus on the big picture and miss the real story that the facts are telling us.

Consider the noise recently about the U.S.-Mexico-Canada Agreement (the cornerstone of North American trade, an updated agreement that replaced NAFTA in 2020). At Birch Lake, we have been thinking about how an uncertain future for USMCA factors into long-term investment considerations.

With USMCA’s scheduled joint review less than a year away (July 1, 2026, to be specific), we might be on the cusp of the unraveling of preferential trade among North America’s three powerful trading partners. (This won’t happen overnight. Missing the deadline triggers a 10-year clock toward potential expiration in 2036 unless renewed.) The expiration of USMCA – and perhaps even the threat of its unwinding – will likely have a dramatic effect on many North American businesses, affecting their attractiveness as investment opportunities.

Without a doubt, a compelling novel could be written on the current state of international trade and tariffs and its effect on investing. However, this is not a novel, and the purpose of this Birch Lake perspective is to focus on North American trade and identify the outlines of a positive path forward despite the rhetoric.

Several things make USMCA unique and increase the likelihood that it will be renewed. It is subject to negotiation, of course, and there are plenty of places to refine and improve its terms, so expect a roller coaster of messaging while changes are being hammered out. But what USCMA delivers in terms of supply chain stability, U.S. jobs and economic upside is simply too valuable to cast aside lightly. If anything, the looming threat of the anti-trade “forest” may even be helpful in securing more favorable terms for many businesses based in North America.

Reasons to be Optimistic About USMCA Renewal: Increased Trade, Exports, Investment

In our estimation, the biggest reason that negotiators will find a way to renew the USCMA is that free trade has undeniably benefited all parties.

Looking back over the history of NAFTA, we can see that trade between the U.S. and the other partners grew substantially from 1993 to 2018 – trade with Canada tripled during that time, and trade with Mexico increased tenfold. USMCA is not identical to NAFTA, but it offers many of the same benefits, creating a compelling argument for renewal.

Digging deeper, we see particular benefits for U.S. small businesses as exporters. The Office of the U.S. Trade Representative itself notes, “In 2016 (latest data available), 82,000 U.S. small and medium sized businesses exported $51.2 billion in goods to Canada, and 53,000 U.S. small and medium businesses exported $76.2 billion in goods to Mexico.” To the extent that U.S. policy aims to support small businesses, maintaining an open channel to the top two destinations for U.S. small and medium business exports should be reason enough to support renewal.

USMCA also attracts foreign direct investment. It helped spur a 16 percent rise across North America, with the lions share ($278 billion in 2024) flowing into the U.S. We should not ignore USMCA’s entrenched role as a formalized and reliable way to strengthen the U.S. supply chain by promoting more trade with countries the U.S. generally has positive relations (the occasional spat making news headlines notwithstanding) and shortening supply lines.

The events of recent years have shown us that supply chains are vulnerable in ways we can’t always predict, and the effects of disruption can be long-lasting and painful. Through this lens, renewing USMCA is an investment in U.S. resilience, focusing more business activity within and along our immediate borders. Canada and Mexico already account for 31 percent of total U.S. trade – strengthening that bond helps the U.S. get the goods it needs, even in a seemingly more divided world.

Room for Improvement in Labor and Security

There is always room for improvement. Looking at the discussions around the USMCA renewal, it seems likely that negotiations will focus on labor and enforcement reforms, such as requiring a $15 per hour minimum wage in Mexico to meet the Labor Value Content provision of USMCA. This will reduce pressure on U.S. employers to move jobs to Mexico, fulfilling at least one stated U.S. objective.

Another topic will be promoting more balanced trade  between the countries, including “new market access, and alignment on economic security with Mexico and Canada,” as the USTR commented in seeking public comment on the renewal.

But these are achievable points of negotiation and can even provide a win for U.S. businesses. For all these reasons, it seems more likely than not that the USMCA agreement is on track for renewal.

Exactly what it will look like remains to be seen – but a bet on North American business even during these uncertain times is a good one.

Jack Walsh joined Birch Lake in 2023 from Antares Capital, a leader in middle-market direct lending, where he monitored and restructured some of the firm’s more stressed accounts. At Birch Lake, Jack’s deep credit underwriting and restructuring experience adds value to initiating and evaluating investment opportunities, conducting transactional due diligence, and advising management teams in stressed situations to optimize outcomes and drive value creation.