USMCA Renegotiation Risk Analysis: Impact on Canadian and Mexican Equities

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The United States-Mexico-Canada Agreement (USMCA), which governs approximately $1.8 trillion in annual trilateral trade, faces significant uncertainty as the Trump administration signals potential renegotiation or termination [1][2]. While formal withdrawal is legally complex, the “Zombie USMCA” scenario—where the agreement remains in force without meaningful updates—creates sustained uncertainty that materially impacts export-dependent sectors in Canada and Mexico. This analysis examines the market implications across North American equities, with particular focus on Canadian and Mexican export-exposed industries.

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According to Eurasia Group’s Top Risks 2026 analysis, the USMCA will not be formally renegotiated, extended, or terminated in 2026—it will “stagger on as a zombie, neither fully dead nor alive” [1]. Key characteristics include:

• Tariff exemptions remain for USMCA-compliant goods
  , keeping free trade nominally intact for compliant products
• Sectoral tariffs on autos, steel, and aluminum
  serve as leverage in ongoing negotiations
• Annual reviews beginning in 2027
  could damage investor confidence if at least one government refuses concessions

The formal USMCA review begins in July 2026, with the U.S. Trade Representative required to submit results to Congress by July 1, 2026 [2][3]. The CSIS analysis notes that what was once expected to be a routine procedural assessment has become a high-stakes negotiation platform [2].

• Concessions on long-standing trade disputes
• Migration and drug trafficking considerations
• Continental defense requirements
• Additional sectoral tariff negotiations

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Based on market data from July 2025 to January 2026 [0]:

Index/ETF	Period Return	Volatility (Ann.)	Beta (vs SPY)
Canada (EWC)	+19.35%	11.66%	1.09
Mexico (EWW)	+17.84%	20.80%	1.39
S&P 500 (SPY)	+12.20%	8.88%	1.00
Metals & Mining (XME)	+80.03%	31.49%	1.54
Consumer Discretionary (XLY)	+13.48%	13.81%	1.39
Industrials (XLI)	+10.78%	15.88%	—

• Canada and Mexico ETFs have outperformed the S&P 500
  despite trade uncertainty
• Mexican volatility (20.80%) is more than double Canada’s (11.66%)
  , reflecting greater uncertainty premium
• Higher betas (EWC: 1.09, EWW: 1.39)
  indicate elevated sensitivity to U.S. market movements

Rolling 20-day correlations with the S&P 500 [0]:

Market	Correlation	Interpretation
Canada (EWC)	0.700	High correlation, strong co-movement
Mexico (EWW)	0.381	Lower correlation, more independence
Metals & Mining (XME)	0.919	Very high commodity correlation

The correlation data reveals that while Canadian equities move closely with U.S. markets, Mexican equities maintain greater independence—potentially offering diversification benefits but also reflecting country-specific risk factors.

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The automotive industry faces the most significant direct exposure to USMCA disruption.

• Volkswagen has publicly stated that Trump’s 25% tariffs on Mexican and Canadian automotive goods “violate the binding USMCA side letters” negotiated during the first Trump administration [4]
• Mexican auto production fell 12.2% at Volkswagen, 16.6% at Mazda, and 18.4% at Honda in 2025 [5]
• Mercedes-Benz signaled plans to wind down Mexican production in May 2026 [5]
• Ford cut its earnings forecast by $1.5 billion due to tariff impacts [6]

• Mexico: 89% of vehicle parts exports go to the United States [7]
• Canada: Highly integrated with U.S. auto supply chains
• Mexico exports 354,723 vehicles to North America (GM alone, Jan-July 2024) [8]

Canadian energy companies show resilient performance despite trade tensions [0]:

• Market Cap: $95.80B | Price: $45.99
• P/E: 14.30x | ROE: 16.47%
• Analyst Consensus:
  BUY
  (75.7% Buy ratings)

• Market Cap: $80.68B | Price: $67.16
• P/E: 15.44x | ROE: 11.75%
• Analyst Consensus:
  BUY
  (74.2% Buy ratings)

• Energy exports benefit from geographic proximity but face potential pipeline and tariff risks
• Steel and aluminum tariffs already imposed disproportionately impact Canada (40% of U.S. steel imports) and Mexico [2]

The XME (Metals & Mining ETF) has experienced extraordinary returns (+80% since July 2025) but with

—the highest among analyzed sectors [0].

• After U.S. tariffs doubled by June 2025, Mexican steel exports to the U.S. fell
  60% in one month
  [6]
• Additional Section 232 investigations into timber, lumber, copper, and critical minerals are pending [2]

Both sectors show moderate sensitivity to trade policy:

• Industrials (XLI)
  : 15.88% volatility, integration with auto and aerospace supply chains
• Consumer Discretionary (XLY)
  : 13.81% volatility, potential pass-through of higher input costs

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Indicator	Value	Signal
Current Price	$55.13	—
Trend	UPTREND	Pending confirmation
MACD	No cross	Neutral
KDJ	K:80.6, D:73.2	Overbought warning
Support	$54.50	—
Resistance	$55.29	—
Next Target	$55.82	—

: EWC shows bullish momentum with a buy signal triggered on January 9, 2026. However, overbought conditions (KDJ at 80.6) suggest potential near-term consolidation [0].

Indicator	Value	Signal
Current Price	$72.03	—
Trend	UPTREND	Pending confirmation
MACD	No cross	Bullish
KDJ	K:79.8, D:69.8	Bullish
RSI	Overbought risk	Warning
Support	$70.46	—
Resistance	$72.46	—
Next Target	$73.64	—

: EWW exhibits stronger bullish momentum than EWC but with higher overbought risk. The elevated beta (1.39) indicates higher sensitivity to both positive and negative news flow [0].

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• Largest U.S. trading partner for energy and critical minerals
• 78% of Canadian exports go to the United States [9]
• Top 6 global FDI destination ($64 billion in 2024) [2]

1. Sectoral tariffs
   on autos, steel, aluminum as leverage
2. “Divide and conquer” strategy
   separating Canada from Mexico negotiations [1]
3. Annual reviews
   potentially lasting until 2029

• Stronger institutional framework and regulatory alignment
• Lower structural risk compared to Mexico
• Significant critical mineral resources for U.S. decarbonization

• 80% of Mexican exports go to the United States [9]
• Key beneficiary of nearshoring trend ($36 billion FDI in 2024) [2]
• Major auto and aerospace manufacturing hub

1. Expanded tariff coverage
   if regulatory practices aren’t revised
2. Production shifts
   to U.S. (already occurring—Mercedes-Benz, Honda, VW)
3. Labor provision conflicts
   with USMCA wage thresholds [2]

• De-escalation through dialogue rather than retaliation
• Focus on verifiable actions and diplomatic engagement
• Avoidance of direct confrontation with Washington [2]

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Sector	Risk Level	Return Potential	Recommendation
Canadian Energy	Medium	Moderate-High	Selective exposure
Mexican Auto	High	Uncertain	Underweight
Mexican Industrials	High	Moderate	Selective exposure
Canadian Materials	Medium-High	High	Tactical allocation
North American Industrials	Medium	Moderate	Neutral

• Mexican equities (EWW) maintain lower correlation (0.38) with U.S. markets than Canadian equities (0.70)
• However, this independence reflects higher country-specific risk

• Consider CAD and MXN currency exposure
• Sector rotation away from auto-dependent supply chains
• Increased allocation to U.S.-centric industrial names

• Both EWC and EWW show
  overbought conditions
  with pending trend confirmation
• Short-term consolidation possible before sustained moves
• Monitor support levels at $54.50 (EWC) and $70.46 (EWW) [0]

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Date	Event	Impact
July 1, 2026	USMCA review submission to Congress	High
Q2 2026	Section 232 investigations conclude	High
May 2026	Mercedes-Benz Mexico production wind-down	Medium
Ongoing	USTR automotive rules feedback	Medium

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The USMCA renegotiation risk creates a

for Canadian and Mexican equities rather than immediate catastrophic disruption. Key conclusions:

1. Market Resilience
   : Both EWC and EWW have outperformed the S&P 500 despite trade uncertainty, suggesting markets have partially priced in the “Zombie USMCA” scenario.

2. Sector Dispersion
   : Automotive sector faces the most acute risk, while energy and materials show mixed exposure with some defensive characteristics.

3. Mexico Higher Risk
   : Elevated volatility (20.80% vs 11.66%), lower U.S. correlation, and visible production withdrawal suggest Mexico faces greater near-term dislocation.

4. Strategic Positioning
   : The “divide and conquer” negotiating approach creates asymmetric risk between Canada and Mexico, potentially benefiting Canada if Mexico is isolated.

5. Investment Approach
   : Maintain selective exposure to Canadian energy and materials while reducing automotive-dependent Mexican industrial exposure. Monitor technical signals for entry points.

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[1] Eurasia Group - Top Risks 2026: Implications for Canada (https://www.eurasiagroup.net/issues/Top-Risks-2026-Implications-for-Canada)

[2] CSIS - USMCA Review 2026 (https://www.csis.org/analysis/usmca-review-2026)

[3] Grant Thornton - Trump Administration Sets Table for USMCA Rewrite in 2026 (https://www.grantthornton.com/insights/newsletters/tax/2025/hot-topics/dec-23/trump-administration-sets-table-for-usmca)

[4] Detroit News - VW Calls Out Trump Trade “Violation” as Autos Continue USMCA Pleas (https://www.detroitnews.com/story/business/autos/foreign/2026/01/09/vw-calls-out-trump-trade-violation-as-autos-continue-usmca-pleas/88088447007/)

[5] Mexico Business News - Mexico Auto Output Dips in 2025 as Exports Fall on Tariff Risks (https://mexicobusiness.news/automotive/news/mexico-auto-output-dips-2025-exports-fall-tariff-risks)

[6] Mexico Business News - How New US Tariffs Could Reshape Mexico’s 2026 Growth (https://mexicobusiness.news/entrepreneurs/news/how-new-us-tariffs-could-reshape-mexicos-2026-growth)

[7] IHS Markit - Canada’s Vehicle Parts Exports (https://www.ihs.com)

[8] Reuters Graphics - Light Vehicle Exports from Mexico to North America (https://www.reuters.com/graphics/USA-TRUMP/TARIFF-AUTOMAKERS/gkplbjbkypb/chart.png)

[9] BBC News - Impact of Trump Tariffs on Key Products (https://www.bbc.co.uk/news/articles/c4cc/live/024b1680-f88c-11ef-896e-d7e7fb1719a4)

[0] Jinling API Market Data