The Case for a North American Customs Union
Tariffs seem to be Donald Trump’s tool of choice to address China’s industrial rise and US manufacturing’s decline, despite the economic destruction they cause. But to the extent that tariffs can be useful for negotiating with China, the US would be better off creating a North American customs union with Mexico and Canada.
Guillermo Ortiz
MEXICO CITY – Many of the assumptions underlying the conventional wisdom about globalization in the early 2000s have been upended in recent years.
The COVID-19 pandemic exposed the vulnerability of far-flung supply chains in times of crisis, as well as the world’s overreliance on China for essential goods.
When borders were closed, countries couldn’t access basic medical supplies, highlighting the risks of outsourcing and fueling the nearshoring trend.
Moreover, the United States and other Western countries have experienced a steady decline in manufacturing activity and employment, owing partly to China’s economies of scale and low production costs, and China unexpectedly emerged as a global technology leader.
Chinese firms, bolstered by state support and a long-term vision, now dominate strategic sectors.
Huawei, for example, has led the global rollout of 5G infrastructure and looks poised to do the same for 6G. DJI controls more than 70% of the global drone market.
CATL and BYD are two of the world’s biggest producers of electric-vehicle batteries, offering safer and cheaper alternatives to US models.
Unsurprisingly, in 2024, electric cars accounted for nearly half of all car sales in China, compared to roughly 10% in the US.
US President Donald Trump’s response to China’s economic rise and the decline of US manufacturing has been to build a tariff wall around the American economy.
But his haphazard application of tariffs, targeting friends and rivals alike, has undermined, perhaps fatally, any economic rationale for deploying them.
When Trump announced on April 2 the most sweeping tariffs since the 1930s – a minimum 10% tariff on all US imports and “reciprocal” tariffs on almost all trading partners – China retaliated immediately, and global financial markets swooned.
Treasury yields spiked the next week, and Trump blinked, pausing reciprocal tariffs for 90 days – except, of course, for duties on Chinese exports, which he raised in a tit-for-tat escalation.
The US and China have since agreed to a mutual temporary reduction of tariffs to 10% (bringing the effective US tariff rate on Chinese goods down to 30%, when combined with previously imposed levies), also for 90 days, with the aim of negotiating a long-term trade deal.
But the Trump administration still faces the challenge of how to address perceived unfair trade practices, concerns about intellectual-property violations, and America’s increasing reliance on Chinese goods.
America is not alone.
China’s investment-led growth model has succeeded beyond its leaders’ wildest dreams.
The country currently produces around 52% of the world’s cement, controls more than 80% of solar-panel manufacturing, and has the capacity to build nearly 40 million internal-combustion vehicles annually.
Much of this output now flows to emerging markets, with Chinese exports to these countries more than doubling since 2017.
China had to redirect its massive industrial overcapacity outward after demographic shifts and the success of the country’s urbanization drive led to slower growth in the mid-2010s.
Domestic demand softened, property developers continued to overbuild, and local governments became over-leveraged.
In addition to persistent deflationary pressures and a debt-driven property glut, China’s national savings are 44% of GDP, while public provision of social services, which would likely increase private consumption, remains inadequate.
Given this, the Trump administration should pursue a deal with China that focuses less on trade and more on shifting China’s massive industrial capacity away from exports, and toward domestic demand.
At the same time, the administration should foster domestic competitiveness by supporting research and development and scientific innovation instead of defunding it.
So far, though, the only tool that Trump seems willing to use to reshape Sino-American relations are economically disruptive tariffs.
But to the extent that they can be useful for negotiating with China, the US would be better off creating a North American customs union with Mexico and Canada that adopts a common external tariff for all members.
This new framework would enhance regional coordination and competitiveness, giving the bloc a strategic advantage in trade talks.
A recent study by Pedro Noyola and Jamie Serra Puche outlined the benefits of replacing the US-Mexico-Canada Agreement (USMCA) with a customs union.
Such a shift would eliminate the inefficiencies of rules-of-origin checks within North America, lower transaction costs, and establish the region as a single economic zone.
The combination of Mexico’s workforce and geography, America’s technology, capital, and productive capacity, and Canada’s energy and raw materials would make the bloc an attractive location for global supply chains, increasing its leverage over trading partners – particularly China, but also other countries and blocs.
The USMCA, which replaced the original 1994 North American Free Trade Agreement at the end of Trump’s first term, aimed to discourage additional US automotive investment in Canada and Mexico by raising the local-content requirement for vehicles from 62.5% to 75%.
Instead, regional integration deepened as automakers, including non-USMCA members, restructured supply chains to comply with the new rules while maintaining or expanding operations in the region.
At the same time, US tariffs on Chinese goods accelerated nearshoring to Mexico.
In the first three quarters of 2024 alone, Chinese direct investment in Mexico’s automotive sector surged by more than 86%, reaching $3.5 billion.
Over the past three years, the number of Chinese companies in Mexican industrial parks has doubled.
The US government has expressed concerns about the limitations of current trade tools in managing foreign investment and achieving policy objectives.
A North American customs union, with a common external tariff and unified trade policy, would help address these asymmetries and strengthen oversight of third-country supply chains.
As Trump upends decades-old trade agreements and attempts to reset the US-China relationship, the three North American countries would do well to approach the first mandated review of the USMCA in 2026 with an eye toward this goal.
Adriana Matadamas contributed to this commentary.
Guillermo Ortiz, a former finance minister of Mexico and governor of Banco de Mexico, is Co-Chair of the G30 Working Group on Latin America.
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