With future of US-Mexico-Canada trade in limbo, Texas businesses navigate choppy waters

From Houston Public Media:

It’s hard to overstate just how much Texas has riding on a successful renegotiation of the United States-Mexico-Canada Agreement, or USMCA. Mexico and Canada are Texas’ No. 1 and No. 2 trading partners, respectively, just as they are for the U.S. as a whole. And that doesn’t take into account direct investment in Texas by Mexican and Canadian companies.

All that trade and investment means that thousands of Texas jobs depend on the smooth flow of goods and services between the U.S. and its southern and northern neighbors. So, too, does the competitiveness of North America in the world economy as a whole.

Since July 1, when the Trump administration announced it would not renew the USMCA and instead put the agreement under annual review, the U.S. has held bilateral trade talks with Mexico but not with Canada. In the meantime, ratcheting up the pressure, President Donald Trump has announced a new 10% tariff on a fraction of Mexican imports and 50% tariffs on a range of Canadian imports, including cars and trucks.

“The problem is not for Washington or Mexico City or Ottawa,” said Tony Payan, director of the Claudio X. Gonzalez Center for the U.S. and Mexico at Rice University’s Baker Institute. “The problem is for businesses, because a lot of these companies — manufacturers, energy companies — they’ve got long-term plans. They have to plan ahead 5, 10 years. And now they have to learn to live with the uncertainty of investments that may not be covered by the agreement whenever that is ratified, if it all.”

‘It’d be tough’

In 2024, two-way trade between Texas and Mexico came to $281.2 billion, while trade between Texas and Canada came to $69.2 billion. Taken together, that’s equivalent to 12% of the state’s economy. Texas’ main exports to Mexico and Canada are oil and natural gas products – but its manufacturing, particularly of vehicles, depends heavily on parts imported from both countries. Texas’ and Mexico’s economies have been historically integrated, but that doesn’t mean they wouldn’t suffer if the USMCA dies. That’s even more the case with Texas’ ties with Canada.

Air Tractor, Inc. is a prime example of a company that has thrived thanks to USMCA. Based in the small North Texas city of Olney, the company makes aircraft for farming and aerial firefighting. It sells to customers throughout the U.S. and in more than 50 countries across the world.

“The USMCA and the old NAFTA in particular help facilitate a relationship with our engine supplier, Pratt & Whitney Canada,” said Air Tractor’s president and CEO, Jim Hirsch. “Our engines that come from Pratt & Whitney in Canada potentially could be subject to a 25% tariff. The engine in our airplanes represents approximately half the value of the airplane.”

The USMCA pact means Air Tractor can import engines from Canada without paying that tariff. So, when Trump publicly said the U.S. would be better off without USMCA, Hirsch was understandably concerned. He said if USMCA were terminated, the return of the tariff on Canadian aircraft engines would force him to increase the price of his planes by 12%.

“It’d be tough. It would take deep cuts in staff and supply,” Hirsch said. “We know the order book would just decline sharply. We don’t know how sharply. Is it 50% loss in orders or greater? We just don’t know, but we know it would be significant. Whether we could survive it or not, not quite sure.”

The company employs more than 400 people across North Texas. Those jobs, and many more, hang in the balance.

‘We can’t afford the risk’

Payan said Trump is likely pushing for maximum leverage rather than aiming to kill the USMCA. Even if Trump were to announce he intends to terminate the agreement, which he has not done, the agreement would remain in force for another 10 years, while trade negotiations would continue on an annual basis.

“He’s got other issues with Canada, he’s got other issues with Mexico City, and so there is no incentive for him at this minute to actually ratify the agreement,” Payan said.

Among other goals, Trump wants to bring more manufacturing back to the U.S. He’s had some success on that front as Toyota recently announced it was shifting 2,000 jobs from Tijuana to San Antonio.

“Some of these companies are taking this very seriously and saying, ‘You know what? We’re going to assemble back in the States. We can’t afford the tariffs or the duties, and we can’t afford the risk regardless of how USMCA shakes out,'” said Brett Preston, managing partner of the El Paso commercial real estate firm Cushman & Wakefield PIRES.

But so far, Toyota’s move has been the exception, not the rule.

“One of the reasons or one of the issues behind Trump’s economic program is, of course, to attract manufacturing, to sort of occasion some sort of manufacturing renaissance in the United States,” Payan said. “A year-and-a-half, moving into well into his second year, that has not happened. In fact, the U.S. has lost manufacturing jobs. Companies are withholding their investment.”

That’s especially visible in the so-called Borderplex, an economic triangle linking West Texas, southern New Mexico and the Mexican state of Chihuahua. Jerry Pacheco is president of the Border Industrial Association of Santa Teresa, New Mexico, based just over the New Mexico-Texas state line from El Paso.

“For the past year or so, we’ve had projects put on hold, companies that would have come here but they’re not coming because of the uncertainty over what would happen with USMCA and because of the kind of knee-jerk tariff imposition,” Pacheco said. “We recruited an auto …component manufacturer from Taiwan that bought 30 acres to do a campus to supply Tesla with some components, and they have not pulled the trigger.”

‘They’re hurting domestic companies’

That Tesla supplier’s decision could be more indicative of how the auto and auto parts industry is responding to the uncertainty in North American trade than what Toyota has planned.

“Probably, in Texas, the sector that’s going to notice it the most is going to be the automobile sector, because a lot of transportation equipment is processed on both sides of the border in a symbiotic manner,” said Tom Fullerton, professor of economics at the University of Texas at El Paso. “There’s a lot of technological advances occurring in the automotive sector. And these factories need to be upgraded, new factory capacity is needed, and many of those projects are going to get mothballed.”

That may already be happening. Investment in new manufacturing and warehousing space is at a standstill on both sides of the border, according to Cushman & Wakefield PIRES.

“There’s a lot of headline grabbing when you see stuff with, you know, the Mexican companies are going to be hurt. No, they’re hurting domestic companies,” Preston said, “because these rules and these tariffs or these costs eventually either trickle down to the profit margin or they trickle down to the consumer with a higher price.”

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