USMCA Enters Annual Review, U.S.-Mexico Trade Rules Face Renegotiation, and Nearshoring Investment Turns More Cautious

The institutional environment for North American nearshoring is changing. On July 1, 2026, the United States, Mexico, and Canada completed the first joint review of the United States-Mexico-Canada Agreement (USMCA), six years after it entered into force. Because the United States did not agree to extend the agreement directly for another 16 years under the existing provisions, the three countries will next enter annual joint reviews, while the United States and Mexico will continue addressing disputes involving automobiles, steel and aluminum, and economic security through bilateral negotiations.

The USMCA remains in effect, and Mexican goods that meet the rules of origin can continue to receive preferential tariff treatment under the agreement. What has truly changed is the predictability of long-term policy for businesses. U.S. imports of goods from Mexico have remained at elevated levels in recent years, reflecting the deep integration of U.S.-Mexico manufacturing and cross-border supply chains. In the past, multinational companies could assume that North American trade rules would remain stable for an extended period and use that assumption to build factories in Mexico, organize supplier networks, and plan production capacity. Now, automotive rules of origin, the use of Asian components, and restrictions on strategic products could all be renegotiated through the annual review process and U.S. negotiating demands, making companies more cautious about new factories and major capacity expansions.

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The USMCA Has Not Immediately Terminated, but Investment Faces the Risk of Annual Reviews

The USMCA officially entered into force on July 1, 2020, replacing the North American Free Trade Agreement (NAFTA). Under Article 34.7 of the agreement, the three countries conduct their first joint review six years after the agreement takes effect. If all three countries agree to an extension, the agreement’s term can be extended for another 16 years. If they fail to reach a consensus, joint reviews must be conducted annually during the remaining term. Under the agreement’s original timeline, the USMCA will remain in effect until July 1, 2036. Before then, the three countries can still extend the agreement’s term for another 16 years through written confirmation by their heads of government.

Annual joint reviews do not mean that companies must requalify for the agreement every year, and existing tariff preferences and rules of origin will not immediately become invalid because of the outcome of the first review. The problem is that the construction and payback periods for automobile, battery, electronics assembly, and component plants often extend over many years. When future rules-of-origin thresholds, tariff treatment, and restrictions on non-North American components remain uncertain, companies may apply a higher risk discount to investment projects and respond by expanding capacity in stages, reducing the initial scale of projects, or retaining backup production capacity in the United States.

The United States Proposes Raising “U.S. Content,” Making Automobiles and Strategic Manufacturing Core Issues

The third round of U.S.-Mexico bilateral negotiations began in Mexico City on July 21 and is proceeding in parallel with the USMCA trilateral joint review process. The bilateral negotiations mainly address specific trade disputes between the United States and Mexico. The current round covers steel and aluminum and their derivative products, automobiles, economic security, labor, agriculture, and electronic payment services. The first two rounds discussed automobiles, rules of origin for specific industrial products, steel and aluminum, economic security, agriculture, labor, the environment, and regulatory compatibility. The two sides are attempting to narrow their main differences, but changes involving USMCA provisions or common trilateral rules must still be further negotiated and agreed upon by the United States, Mexico, and Canada.

The USMCA currently requires at least 75% of the regional value of passenger vehicles and light trucks to originate in North America. It also includes rules covering core components, steel and aluminum sourcing, and labor value content. This framework primarily requires production to remain within North America, but the United States further hopes to increase the share of U.S. components in automobiles and tighten rules of origin for strategic products such as electronics and pharmaceuticals, preventing Chinese and other third-country components from obtaining USMCA benefits after being assembled in Mexico.

The United States may also use tariffs, quotas, or stricter source-verification rules to regulate steel, aluminum, and certain industrial products. If these requirements are implemented, companies will need to increase their use of North American suppliers, adjust the division of production capacity between the United States and Mexico, and establish more comprehensive certificates of origin and supplier-tracking systems. The automotive industry is a major pillar of Mexico’s manufacturing sector and export supply chain to the United States, while Mexico’s vehicle production also reflects the country’s mature vehicle and component manufacturing base. Automotive components, electronics, servers, and metal-processing industries that import large volumes of parts from Asia, assemble them in Mexico, and then export them to the United States will face relatively greater adjustment pressure.

Initial FDI Reached a Record First-Quarter Level, but Foreign Investment Still Consists Mainly of Reinvested Earnings

Preliminary statistics from Mexico’s Ministry of Economy show that foreign direct investment reached US$23.591 billion in the first quarter of 2026. Compared with the initially reported figure for the first quarter of 2025, this represented a year-on-year increase of 10.4% and marked a record high among initial first-quarter releases. However, because the figure for the same period in 2025 was subsequently revised upward, foreign direct investment in the first quarter of 2026 declined by 3.36% when calculated against the current revised figure. Overall foreign investment performance therefore still needs to be assessed through the sources and structure of investment before determining whether new investment momentum has improved.

From the perspective of investment structure, reinvested earnings reached US$22.222 billion in the first quarter of 2026, while new investment totaled US$1.705 billion and intercompany accounts recorded a net outflow of approximately US$336 million. New investment accounted for only about 7.2% of total FDI and declined by 26.6% from the revised figure for the same period in 2025, while reinvested earnings increased by 14.35%. Existing foreign companies are continuing to retain earnings in Mexico, but new capital investment remains relatively cautious.

Trade uncertainty is also beginning to affect Mexico’s economic outlook. The medium-term trend in Mexico’s real GDP indicates that the economy continues to expand, although growth momentum has become more moderate than in the previous period. A mid-July market survey lowered the median forecast for Mexico’s 2026 economic growth from 1.5% in the April survey to 1.1%, while the 2027 forecast was reduced from 1.9% to 1.8%. Mexican exports remain resilient, but industrial production is weak, and uncertainty over trade rules is making companies more inclined to postpone long-term capital expenditure. Automobiles and other export-oriented industries are particularly exposed to this effect.

Nearshoring Shifts from Rapid Expansion to More Precise Calculations

Mexico still benefits from its proximity to the United States, relatively low labor costs, well-developed manufacturing clusters, and mature cross-border logistics. The U.S.-Mexico supply chain also cannot be fully replaced in the short term. However, completing product assembly in Mexico does not necessarily mean that a product qualifies for USMCA treatment. Companies must still satisfy regional value-content requirements, tariff-shift rules, and origin-documentation requirements. If the United States further raises U.S.-content thresholds, a model that relies solely on Asian components and assembly in Mexico will become more difficult to sustain.

Nearshoring investment is therefore shifting from the previous phase of rapid factory construction to a second phase that places greater emphasis on compliance and the allocation of production capacity. Companies need to compare the costs of production capacity in Mexico, the United States, and Asia, while evaluating the feasibility of increasing North American sourcing, moving key production processes to the United States, or retaining capacity across multiple locations. Investment will not stop entirely, but decision-making periods will lengthen, and capital expenditure may be divided into phases to preserve flexibility.

For Taiwanese companies that already have operations in Mexico, the immediate priority is to reassess the rules-of-origin eligibility of their products, the share of Asian components, and supporting documentation, while modeling costs under different tariff and rules-of-origin scenarios. Companies preparing to establish factories in Mexico must also incorporate U.S. production capacity, customer locations, and supply-chain backup arrangements into their assessments, rather than relying only on wages and geographic proximity when making investment decisions.

The USMCA annual review has not yet undermined Mexico’s position as a North American manufacturing base, but it has raised the decision threshold for major new investments. The key issues going forward will be whether the United States formally advances U.S. value-content requirements for automobiles, whether strategic products are subject to stricter sourcing rules, and whether foreign investment in Mexico can gradually shift from reinvestment by existing companies toward a larger number of newly established factories. The core of future nearshoring competition will increasingly center on compliance with rules of origin, the share of North American suppliers, and the ability to allocate production capacity between the United States and Mexico.