The Trump administration’s approach to North American trade has differed sharply from the old NAFTA model. Rather than one trilateral agreement for the U.S., Canada, and Mexico, President Donald Trump and his advisers (Wilbur Ross and Robert Lighthizer) signaled as early as 2017 that they preferred two separate bilateral agreements – one with Mexico and one with Canada. This stance is rooted in the fundamental differences between Canada and Mexico in their relationships with the U.S. Below, we examine the key reasons behind this strategy, from defense alliances to economic structure, and why the White House views a one-size-fits-all deal as suboptimal.
NATO Alliance and Defense Spending
One major distinction is Canada’s status as a NATO ally (unlike Mexico) and its lagging defense spending. President Trump repeatedly pressed NATO partners to meet the alliance’s target of 2% of GDP on defense. Canada, however, has been one of the “laggards,” spending only about 1.37% of GDP on defense, ranking 27th out of 31 NATO countries as of 2024. By NATO’s estimates, Canada would need to boost defense outlays by roughly C$15–20 billion over the next several years to hit the 2% goal – a steep increase that Canadian officials have indicated is politically and fiscally difficult. (Reaching 2% immediately would mean finding on the order of $15 billion extra per year, a near-impossible lift in Canada’s current $2+ trillion economy.) It’s reported that Prime Minister Justin Trudeau told President Trump such a jump was “impossible” given Canada’s domestic constraints.
From President Trump’s perspective, linking trade incentives to defense commitments is a strategic carrot-and-stick. In talks with allies (including Canada and European nations), Trump signaled that favorable trade terms or tariff relief could be used as leverage to encourage NATO members to spend more on their own defense. The rationale is straightforward: if partners like Canada contribute more to NATO, the U.S. can reduce its own defense burden and save taxpayer money. In this view, a bilateral U.S.–Canada trade deal could be tailored to press Canada on its NATO obligations in a way a three-party deal cannot. Trump even quipped to Trudeau that it would be unfair to chastise European NATO under-spenders without noting Canada as “one of the worst offenders” in meeting the 2% target. This defense aspect does not apply to Mexico, making Canada’s situation unique and better handled in a separate negotiation.
Industrial Base: Canada’s Deindustrialization vs. Mexico’s Manufacturing
Another core difference is the state of each country’s industrial base. Over the past 30–40 years, Canada’s economy has significantly deindustrialized, especially relative to Mexico. As Canadian policymakers pursued environmental and “green economy” goals, heavy industry and resource extraction were curtailed or shifted overseas. The contribution of manufacturing to Canada’s GDP has steadily shrunk – today it stands at only about 10% of GDP, down from ~16% in 2000 and far below mid-20th-century levels. In practice, Canada has phased out much “dirty” industrial capacity: for example, coal mining and metal ore smelting now operate at a much smaller scale than decades ago, and Canada lacks sufficient oil refining capacity to process its own crude output (some 81% of Canadian crude oil is exported, mostly to U.S. refineries). Heavy manufacturing sectors such as steel and machinery have likewise atrophied. Canada often imports forged and rolled steel components from abroad (notably from China) for assembly, rather than producing them domestically. Government data show Canada imported over $16 billion in steel in 2024 (nearly half from the U.S. and about 10% from China), underscoring its reliance on foreign industrial inputs.
Mexico, by contrast, has not undergone the same kind of deindustrialization. Mexico still maintains a robust manufacturing sector – from automobiles and auto parts to appliances and electronics – supported by a large workforce and significant foreign investment. While Canada pivoted toward a service and resource-based economy, Mexico continued building factories. This means Mexico can more readily fulfill U.S. trade demands for manufactured goods, whereas Canada would struggle to meet strict “local content” requirements in many sectors because it simply lacks the domestic factories or skilled labor in place. In recent trade talks, Canadian officials (including Trudeau) have reportedly acknowledged that Canada “no longer has the capability” to easily comply with certain U.S. demands due to its eroded industrial capacity. Rebuilding heavy industry would require time and concerted efforts – including national apprenticeship and training programs to replenish the skilled trades. This disparity helps explain why U.S. negotiators see a joint agreement with both countries as unwieldy: Mexico and Canada are on very different footing when it comes to manufacturing. A bilateral U.S.–Canada deal could incorporate provisions accounting for Canada’s greener, service-oriented economy (and perhaps push Canada to reindustrialize in strategic areas), without diluting provisions meant for Mexico’s industrial exports, and vice versa.
Trade Profiles: Energy and Commodities vs. Autos and Agriculture
The composition of trade flows with the U.S. also differs greatly between Canada and Mexico. Canada’s exports to the U.S. are dominated by natural resources and basic commodities, whereas Mexico mainly sends manufactured goods and produce. For instance, Canada’s top exports to America include energy products (oil, natural gas, electricity), lumber and wood products, minerals and metals, along with some vehicles and agricultural products. Oil and gas alone make up a huge share – in 2023 the U.S. imported over $130 billion in mineral fuels and oil from Canada. Canada is essentially America’s biggest foreign energy supplier and also ships significant volumes of lumber, aluminum, paper, and other raw or semi-processed materials. Mexico, on the other hand, has become a manufacturing powerhouse tied into U.S. supply chains. The **top U.S. imports from Mexico are finished industrial goods – notably cars and trucks, auto parts, computers and electronics, appliances, and agricultural produce. In 2024, for example, the U.S. bought about $45 billion worth of passenger cars and $35 billion in auto parts from Mexico, as well as tens of billions in electronics and machinery. Mexico also supplies a large share of America’s seasonal fruits, vegetables, and beer.
There are, of course, areas of overlap – both countries export vehicles to the U.S. (Canada’s auto industry is integrated with U.S. assembly lines, though it’s smaller than Mexico’s), and both export some agricultural goods (Canada sells wheat, meat, processed foods, etc., to the U.S., albeit Canada’s food exports are smaller than Mexico’s). But by and large, the U.S.–Canada trade is resource-heavy while U.S.–Mexico trade is manufacturing-heavy. This has implications for trade policy: issues like oil pipelines, mining, and lumber tariffs loom large in U.S.–Canada discussions, whereas labor costs, factory safety, and produce inspections are bigger topics with Mexico. A single trilateral deal like NAFTA or USMCA attempts to cover all these sectors, but often the provisions end up watered down or full of exceptions to accommodate differences. U.S. trade negotiators under Trump believed a pair of bilateral deals could address the “big differences” in import/export profiles more directly. For example, a U.S.–Mexico pact could zero in on automotive rules of origin, produce seasonality, and manufacturing wage standards (as USMCA did to some extent), while a U.S.–Canada pact could focus on energy infrastructure, softwood lumber disputes, and dairy quotas – all issues somewhat unique to Canada-U.S. trade.
Market Access and Regulatory Restrictions
The business environments in Canada and Mexico also diverge in ways that affect U.S. firms. Under NAFTA-era reforms, Mexico liberalized sectors like banking and telecommunications, allowing U.S. and other foreign companies to operate more freely. Major U.S. banks and financial firms now have a presence in Mexico, and American media and tech companies face relatively few barriers in broadcasting or providing services there. Canada’s market, however, remains more closed in certain areas due to domestic regulations and cultural protections. For example, Canada tightly regulates its banking sector and limits foreign takeovers of major banks. While it’s a myth that “U.S. banks aren’t allowed in Canada” – in fact, 16 U.S.-owned banks operate in Canada, managing over $113 billion in assets – these institutions usually must set up local subsidiaries and abide by stricter capital rules. No U.S. bank has a large retail branch network in Canada, in part because Canada’s “Big Six” banks are so dominant and protected by regulators. In Mexico, by contrast, giants like Citigroup, Bank of America, and BBVA (Spain) have been able to acquire or establish local banks serving millions of customers, significantly opening Mexico’s financial market to foreign competition after the 1990s.
Media and telecommunications is another contrast. U.S. media companies (TV networks, streaming services, etc.) can directly beam content into Mexico or invest there with relative ease. In Canada, the government maintains ownership caps and content requirements to preserve Canadian cultural industries. Foreign ownership of Canadian TV broadcasters is effectively capped at 20% (direct investment) by law, and even foreign streaming platforms now face “Canadian content” obligations. In 2023, Canada passed the Online Streaming Act (Bill C-11), empowering regulators to require streaming services like Netflix or Spotify to contribute funding for Canadian-produced content. This kind of regulation is essentially unheard of in Mexico. U.S. lawmakers have criticized these rules as “discriminatory” barriers to digital trade. Similarly, Canada’s strict IP and data privacy laws can pose hurdles for U.S. tech and media firms that don’t exist to the same degree in Mexico.
These examples illustrate that Canada’s market has unique sensitivities and “strong regulations and restrictions on information and intellectual property”, to quote one analysis. Any trade negotiation with Canada thus must grapple with issues like cultural exemptions (a longstanding feature of Canada-U.S. trade accords) and financial sector protections. Mexico’s trade talks, meanwhile, center more on market access in energy, agriculture, and manufacturing, without the overlay of NATO or cultural policies. The Trump administration’s view was that trying to reconcile all these issues in a single trilateral deal led to unsatisfactory compromises. Separate agreements could allow the U.S. to negotiate harder on, say, telecom and banking access in Canada (where those remain restricted) without simultaneously needing to accommodate Mexico on unrelated issues. In short, “NAFTA and USMCA just don’t work out for the USA” when treated as one blanket framework, because the U.S. faces very different barriers in each neighboring country.
The China Factor: Supply Chains and Geopolitics
Perhaps the most consequential difference – and one growing in importance – is each country’s relationship with China and global supply chains. Over recent decades, as Canada scaled back domestic manufacturing, it increased imports of cheap Chinese components and goods. Canadian companies import a vast array of Chinese-made parts (from electronics to steel inputs) which are then assembled or incorporated into products exported to the U.S. This has effectively made parts of Canada’s economy a “passthrough” for Chinese products destined for the American market. Mexico is far less dependent on China for intermediate goods; its factories source more from the U.S. or within North America (partly thanks to NAFTA rules encouraging regional content). As a result, if the U.S. imposes broad tariffs or restrictions on Chinese imports, Canada stands to be hit much harder than Mexico. Canadian-made finished goods could face tariffs at the U.S. border if they contain substantial Chinese-origin content. Indeed, trade experts note that U.S. tariffs on China essentially penalize Canadian assemblers, since the origin of goods (and key components) determines U.S. tariff treatment. During Trump’s first term tariff measures, many companies responded by “near-shoring” production from China to Mexico, boosting Mexico–U.S. trade. Canada, however, did not see a similar manufacturing resurgence and instead risks collateral damage if U.S.–China tensions escalate.
There is also a political dimension. Canada’s deeper economic ties with China have translated into concerns about Chinese influence in Canadian politics. In 2019 and 2021, Trudeau’s Liberal Party won re-election amid allegations (later supported by Canadian intelligence reports) that the Chinese government had interfered covertly to favor Liberal candidates seen as friendlier to Beijing. A public inquiry in 2024 heard that China “clandestinely and deceptively interfered” in those elections – targeting politicians deemed sympathetic or at least not tough on China. While Trudeau insists the outcomes were not determined by foreign meddling, the pattern of Chinese covert support for the Liberals suggests Beijing was invested in maintaining the status quo. When Trudeau (who was in power for a decade) stepped down and former banker Mark Carney led the Liberals to victory in 2025, some observers bluntly concluded that “China is the big victor in the Canadian elections” washingtonexaminer.com. Under Liberal governance, Canada has generally pursued closer economic ties with China (until very recently), and Chinese state firms have significant investments in Canadian natural resources and technology sectors. In contrast, Mexico – while it trades with China – has not seen the same level of political entanglement or security concerns vis-à-vis Beijing.
All this means the U.S. may want the flexibility to address China-related issues distinctly with each country. A U.S.–Canada trade agreement could include provisions aimed at countering Chinese transshipment or protecting critical supply chains from Chinese control – measures tailored to Canada’s situation as an “assembly economy” enmeshed with China. Likewise, the U.S. might leverage a deal to nudge Canada away from dependence on Chinese components (for example, by encouraging more North American content requirements beyond what USMCA did). With Mexico, China is a less urgent bilateral trade issue, and the focus might instead be on migration or border security tie-ins. Indeed, Trump has explicitly linked a possible U.S.–Mexico trade deal with cooperation on border security and immigration, while a U.S.–Canada deal could be linked to NATO security commitments, reflecting each country’s different leverage points.
Conclusion
The push to split NAFTA/USMCA into two bilateral deals comes down to customizing trade terms to very different partners. Canada and Mexico may share a free trade agreement, but their economic profiles and U.S. policy frictions are worlds apart. Canada is a wealthy NATO ally with a small population, heavily reliant on natural resources, and grappling with post-industrial challenges – and one where U.S. grievances include defense spending shortfalls and restrictive market policies. Mexico is a developing, highly industrialized neighbor with a young labor force and deep manufacturing integration – where U.S. concerns center on factory wages, immigration, and drug trade spillovers. Trying to address all these facets in one trilateral framework inevitably leads to compromises that, in President Trump’s view, “don’t serve [U.S.] purposes anymore”. This is why, as the six-year review of USMCA approaches, Trump has hinted he “doesn’t know if it serves a purpose anymore” and is inclined to let it expire and negotiate one-on-one with Ottawa and Mexico City.
Whether this strategy will ultimately materialize is uncertain and depends on political developments (including U.S. elections and the stances of Canada and Mexico). Proponents argue that bespoke bilateral agreements could achieve better outcomes: for example, a U.S.–Canada deal could trade tariff relief for higher Canadian defense spending or stricter limits on Chinese tech, while a U.S.–Mexico deal could tie favorable market access to stronger cooperation on stopping illegal migration and drug trafficking. Critics counter that an integrated North American pact is more efficient for businesses and that breaking it apart could sow uncertainty. What is clear is that the rationale for separate deals is rooted in real asymmetries – in military alliance obligations, in industrial capacity, in trade goods, and in foreign policy orientation. Understanding these differences helps explain why the Trump administration viewed NAFTA (and even its updated version, USMCA) as an imperfect solution, and why the idea of “resetting” trade relations with individual deals continues to gain attention in Washington.
Sources: The analysis above incorporates information from policy experts, trade data, and news reports. Key data on defense spending and NATO rankings are from RBC Economics and Reuters. Observations on Canada’s industrial decline and reliance on imports draw on Canadian economic studies. U.S. trade statistics with Canada and Mexico are sourced from the U.S. Trade Representative and other trade analyses. Regulatory differences (banking and media) are highlighted by University of Waterloo and industry sources. Details on Chinese influence in Canada and its political implications are reported by Reuters and the Washington Examiner. Each of these factors illustrates why U.S. officials argue that two bilateral agreements could better account for the unique “Canadian conundrum” and the distinct U.S.–Mexico dynamic. The coming years will test whether this bilateral approach can be realized and at what cost to the existing North American trade framework.