There Will be No Deal By July 1
Takeaways from the first USMCA negotiating round in Mexico City and the latest from Canada
In Washington, you still cannot get a whiff of World Cup fever. The city is consumed by tariff headlines and scaffolding going up for UFC fights on the White House South Lawn. Then I landed in Mexico City last week and the contrast was immediate. Fútbol everywhere. A country setting up a las prisas (in a rush) to host the biggest sporting event on the planet for the third time. That energy temporarily coloured my read of where North American affairs stand.
“Two steps forward, one step back” is a phrase Lenin used to describe a revolution in retreat. In diplomacy it describes progress that is real but incomplete, momentum that coexists with resistance. That is the frame I use for the USMCA review. It is moving; not cleanly, not without serious risk on both sides, and not on the timeline anyone originally envisioned. Here is what I observed and what I make of it.
Mexico: Two Steps Forward
The negotiations now have a clear calendar. U.S. and Mexican negotiators held their first round of USMCA extension talks the week of May 25 in Mexico City, with a second round set for June 16-17 in Washington and a third for the week of July 20, back in Mexico City.
That third date confirms there will be no agreed extension by July 1. The date remains the decision node under Article 34.7, when the three governments must signal their intent on extending the agreement for another 16 years. But the parties are planning well beyond it. A forthcoming piece will update my scenario probabilities in full; the short version is that a protracted negotiation stretching into late 2026 or mid-2027 is my base case.
On substance, what I heard in Mexico City is broadly consistent with what Reuters, the WSJ, and major outlets have reported. U.S. demands on rules of origin appear significant: a 50 percent minimum U.S.-content requirement in autos, and an increase in regional value content from the current 75 percent to somewhere between 80 and 85 percent, figures consistent with some of former U.S. Trade Representative Robert Lighthizer’s original proposals during the first USMCA negotiation. The overall U.S.-Mexico negotiation looks narrow: China-related supply chain disciplines, rules of origin, and labor. The June round will add agriculture into the mix.
Mexico: One Step Back
The step back arrived in layers, and it is harder to look away from than the progress.
President Sheinbaum’s response to U.S. pressure to apprehend the sitting governor of Sinaloa has put under severe pressure a bilateral relationship whose operating logic, until recently, was this: Sheinbaum delivering sustained results on security, record fentanyl seizures, sending cartel leadership to face justice in the U.S., and increased intelligence sharing, all to keep trade talks from stagnating, while absorbing Washington’s pressure quietly. That logic has not collapsed. But it is under severe strain. If you want the full argument on why security cooperation from Mexico is the price of admission to this negotiation, that piece is here.
What concerns me more than the specific incident is the political logic behind it. Speaking before 130,000 people at the Monument to the Revolution, Sheinbaum asked “Who decides in Mexico, foreign agencies or the people?” León Krauze identified the underlying calculus: Morena’s coalition went from 4 state governorships to 24 in six years but now faces serious stress ahead of the 2027 midterms, with Moody’s having downgraded Mexico to Baa3 and S&P revising its outlook to negative on 1 percent growth forecasts, explicitly citing the USMCA review as an investor concern. In the absence of economic results, converting Washington’s pressure into a narrative of patriotic defiance is more politically useful than managing it quietly. The risk is that the narrative becomes a poison pill, freezing the security cooperation the trade track depends on at precisely the wrong moment.
According to a Los Angeles Times report published this week, the U.S. has revoked the visas of the governors of Sonora, Alfonso Durazo, and Tamaulipas, Américo Villarreal Anaya, amid criminal investigations. Both are Morena members. Washington is expanding its pressure campaign against high-level Mexican officials suspected of cartel ties, in the middle of a trade negotiation that depends on sustained bilateral trust on the security track. Paid subscribers will recall I flagged Sonora’s governor as a potential U.S. target in an earlier issue of North America Compass.
Canada: Two Steps Forward
Mexico and Canada each sent separate letters to their USMCA partners signaling their desire to extend the agreement for another 16 years. Mexico has more than eight million jobs tied to North American trade. Canada has roughly three million directly tied to the agreement. Neither country was going to defend anything other than continuity. The letters were never in doubt. What matters is everything happening alongside them.
In the most significant formal engagement between Canada and the United States in the context of the CUSMA extension, Minister for Canada-U.S. Trade Dominic LeBlanc met directly with Ambassador Greer in Washington on June 2. LeBlanc’s own framing: trade talks are “unfrozen.” That word is notable precisely because it acknowledges what came before it: talks that had stalled, an atmosphere of sustained hostility, and an engagement that is now active but has yet to produce binding outcomes.
LeBlanc may be reading something others have missed: that Washington is beginning to separate its broader disputes over tariffs, security, and sovereignty from the narrower question of whether the USMCA itself should be renewed. If that compartmentalization is real, it creates political space for renewal that did not exist a month ago. Canada can look past the rhetorical hostility and engage on extension, which is precisely what LeBlanc appears to be doing.
More consequential for Mexico is what LeBlanc is explicitly signaling on substance: certain issues, rules of origin in the automotive sector foremost among them, will require trilateral negotiation. That is Canada saying clearly that North American production architecture cannot be renegotiated bilaterally without consequences for all three parties. For Mexico, this is the most promising trilateral signal in months. If Mexico and Canada coordinate common red lines on rules of origin, they arrive at the trilateral table with a shared position on the issues that matter most, and the most effective hedge against Washington’s strategy of extracting concessions from each party in separate rooms.
Canada: One Step Back
The economic context for Canada deteriorated sharply this quarter.
Statistics Canada confirmed that GDP fell 0.1 percent on an annualized basis in Q1 2026, following a revised one percent annualized decline in Q4 2025. Two consecutive quarters of contraction: a technical recession by the most widely accepted definition, the only one in the G7 and the only one in North America.
The recession pulls in two directions. It strengthens Canada’s incentive to reduce uncertainty and get a deal done. It also weakens Carney’s domestic position heading into a negotiation that will require concessions he cannot easily sell at home. “Elbows up“ was a useful slogan; it is a considerably more complicated governing posture when the economy is contracting.
The other step back is institutional. The Permanent Joint Board on Defense has been paused, a body established in 1940 that has served as the principal standing mechanism for U.S.-Canada defense cooperation through the Cold War, 9/11, and multiple cycles of bilateral tension. Its suspension reflects a deliberate U.S. decision to downgrade the institutional relationship that has underpinned continental security for 85 years. What Mexico has learned on the security track, Canada is now learning on the defense track: in North America, no bilateral relationship with Washington stays contained in its own lane for long.
Three things from Mexico City that did not make the wires: a personnel departure that could change the negotiation’s character, a coordination problem inside that is structural rather than tactical, and a private sector that is arriving at the table already divided. That is what follows, for paid subscribers.