Tariff Shock Pulled 80% of North American Trade Into USMCA

The share of U.S. imports entering duty-free under the United States–Mexico–Canada Agreement hit roughly 80 percent by July 2025, up from about 50 percent for Mexican goods and below 40 percent for Canadian ones a year earlier. The jump came as a new wave of U.S. tariffs raised the cost of non-USMCA trade while preserving the exemption for qualifying goods, according to data from the U.S. International Trade Commission.

Compliance with the trade pact carries its own costs. Certification, documentation and rules-of-origin requirements add administrative burdens and limit sourcing flexibility. Exporters can choose to pay a fallback tariff rate instead, a route many Mexican and Canadian firms took before 2025 when those rates were still low.

Two earlier agreements – the U.S.–Canada Free Trade Agreement in 1989 and NAFTA in 1994 – eliminated most internal tariffs while conditioning access on regional input sourcing. That conditionality tightened under the USMCA, which replaced NAFTA in July 2020. Stricter origin rules and certification demands added to the compliance load.

Compliance rates had drifted lower in the late 2000s and again early in the pandemic. They stabilized at historic lows before accelerating sharply in early 2025, when the new tariffs raised the cost of non-USMCA trade while keeping the exemption for qualifying goods. The recent increase marked a structural shift in how Mexican and Canadian goods enter the U.S., Federal Reserve Bank of Dallas economists Enrique Martínez García and Ron Mau wrote in a report.

Entering under USMCA does not always mean duty-free. Most qualifying goods face zero duty, eligibility is assessed product by product at the tariff-line level. A single shipment can include goods that qualify and others that do not, because they fall short of origin rules or lack proper documentation.

Banco de México economists José Ramón Morán and Alfonso Cebreros have shown that stricter rules of origin shape sourcing decisions by tying access to regional content thresholds. Compliance burdens limit efficient sourcing. Higher non-preferential tariffs push firms toward compliance, promoting regionalization but increasing administrative and production costs, the Fed economists noted.

Tariff exposure is not evenly spread. Product-level exemptions have partly shielded AI-related goods, keeping effective rates there lower than for other products. In those sectors, trade is driven more by demand tied to the AI investment boom than by tariff avoidance, the report said.