Is this a tariff turning point?
As the Trump administration suffers a setback in court, Carney offers a G7 opening that could produce a G20 triumph for US trade leadership
On Wednesday, May 28, the US Court of International Trade found in favor of plaintiffs challenging the Trump administration’s imposition of tariffs citing the International Economic Emergency Powers Act of 1977 (IEEPA) in two cases. The White House announced that it would appeal both rulings but for now, these decisions, which were unanimous three-judge rulings, are a setback. Momentum from recent escalation of US unilateral tariffs and other measures imposed on imports from China and the European Union has partly dissipated.
Although Canada and Mexico did not join the legal challenges, both countries benefit from the invalidation of tariffs based on IEEPA authority since this was the authority cited by the Trump administration in 25 percent tariffs to counter the threat of fentanyl and human trafficking from both countries into the United States. IEEPA was also cited to justify the 10 percent reciprocal tariffs introduced on April 2 and suspended for 90 days shortly thereafter. Tariffs imposed on imported steel and aluminum under Section 232 of the Trade Expansion Act of 1962 were not covered in recent rulings and remain in effect.
Not all the news last week was bad for the Trump administration’s trade policy. Canada’s Prime Minister Mark Carney made a move that gives the Trump administration a chance to pivot the trade war’s focus to China by starting talks with the two largest US trading partners, Mexico and Canada. If Trump capitalizes on this opening, markets and the US economy would welcome the return of stability in the North American trade and investment climate.
Carney took a calculated risk by extending an invitation to Mexican President Claudia Sheinbaum to attend the Group of Seven (G7) Leaders’ Summit in Kananaskis, Alberta June 15-17. If Sheinbaum accepts and attends, Carney, Sheinbaum, and Trump could meet and agree on the timing and agenda for the review of the United States Mexico Canada Agreement (USMCA) that must occur by 2026 under Article 34.7 of the USMCA text.
The G7 includes Britain, Canada, France, Germany, Italy, Japan, and the United States. Each year a different member country plays host to a year-long series of ministerial-level meetings and a leader’s summit. As the 2025 host, Carney can invite leaders to attend the Summit. Mexican presidents have attended before: in 2005, British Prime Minister Tony Blair invited Mexican President Vicente Fox to attend the 38th G7 Summit in Gleneagles, Scotland; and in 2018, Canadian Prime Minister Justin Trudeau extended an invitation to Enrique Peña Nieto when he hosted the G7 in Charlevoix, Quebec.
In 2005, US President George W. Bush inaugurated a new series of North American Leaders’ Summits (sometimes referred to as NALS) by inviting Fox and Canadian Prime Minister Paul Martin to his ranch in Prairie Chapel, Texas. Like the G7, NALS meetings rotate hosting duties, but there were gaps between summits. In 2022, Mexico’s then-President Andrés Manuel López Obrador was due to host NALS but was unable to schedule one until January 2023. Next in line Canada might have hosted later in 2023, or in 2024, but was unable to find a date that worked for all three leaders, hindered by presidential elections in Mexico and the United States in 2024.
By inviting Sheinbaum, Carney created the opportunity for a NALS meeting on the sidelines of the G7 in 2025.
All three North American leaders have individually proposed that the USMCA review start in 2025, with Mexican Economy Minister Marcelo Ebrard calling for talks to start by September. But as this will be the first mandated review of the USMCA, there are no established procedures or precedents for how it should proceed. An NALS agreement on a framework and timetable would allow officials to begin work preparing for the review.
Since all three leaders have already called for an early start to the USMCA review, you might assume that this would be a simple undertaking. However, Canada and Mexico are likely to request a ceasefire in US unilateral tariffs as a precondition for starting the USMCA review. In exchange, Carney and Sheinbaum would have to be open to a full discussion of Trump’s concerns about Canadian and Mexican unfair trade practices and willing to work with the United States to resolve these issues in good faith.
Prospects for the early launch of the USMCA review also improved last week when the US Court of International Trade unanimously found that Trump reciprocal tariffs and tariffs issued under International Economic Emergency Powers Act authority were invalid. Both rulings came quickly: the first based on hearings a week before, the second based on hearings only two days before. The Trump administration will continue to collect the tariffs while it pursues appeals in both cases.
The cases against Trump tariffs were brought by domestic US interests, not by Canada, Mexico, nor on behalf of other US trading partners. But all US trading partners will benefit if the rulings are upheld on appeal – most of all China, which obtains some potential tariff relief after weeks of escalating US tariffs and economic measures against it.
There are four scenarios for what may happen next, and most provide the United States with a win and an economic boost.
Scenario 1: The Trade War Continues. This is the default position for the Trump administration. A series of new threats to trade could be issued to recapture momentum while the US administration appeals the court rulings. If the objective of the trade war is to generate deals with US trading partners, then the administration will continue this course. The risk is that continued economic uncertainty hampers investment and starts to produce unemployment ahead of the 2026 US midterm elections. Voters unhappy with their economic fortunes could give Democrats control of Congress (the House at least) and render Trump a “lame duck.” Democrats might also gain state governorships and legislatures, producing leaders with experience for future federal elections that could reverse Trump’s policies.
Scenario 2: A New US-Canada Security and Economic Agreement. Carney has proposed ae negotiation of a new bilateral arrangement to reframe relations as the top priority in his mandate letter to cabinet. This could include an investment in defense to close the gap on Canada’s NATO pledge to spend 2 percent on defense, address border security including fentanyl flows, and establish new cooperation on migration from third countries – all top US priorities. In exchange, Canada would seek relief from recent US tariffs and stabilization of investment rules. A bilateral agreement might also establish cooperation on critical minerals and rare earths extraction and processing, a shared priority that has been much discussed but with limited progress to date. The bilateral agenda offers enough wins for both sides to be worth a separate deal.
Scenario 3: USMCA Review and Upgrade. Carney has provided an opening for the United States to secure the start the review process in Kananaskis. This would allow the Trump administration to reassure markets and US multinationals and to focus on China. This could be pursued alongside negotiations toward Carney’s proposed bilateral agreement. It could also fold the Carney agenda into a North American or USMCA Plus negotiation with strong potential benefits to the US economy.
Scenario 4: Why not a WTO Trump Round? The Trump administration’s efforts to revise the global trade order has been pursued in a series of bilateral measures with individual trade partners. The downside of this approach is that it could present US business with a slippery spaghetti-bowl of rules and tariff levels that undermine US competitiveness. The World Trade Organization, though flawed, remains a broadly inclusive framework that could be improved upon. For example, a glaring flaw in the WTO has been the lack of a graduation mechanism for developing countries, who do not have to open their domestic markets and follow certain rules that bind the United States and other countries. China continues to maintain that it is a developing country even though it is the second largest economy in the world. There have been problems with WTO dispute resolution, particularly at the Appellate Body, which have aggravated the United States for a decade.
The last WTO Round, dubbed the “Doha Development Round” was launched by the George W. Bush administration and collapsed in failure during the second Barack Obama term. Early rounds (then part of the General Agreement on Tariffs and Trade (GATT) took less than a year: Geneva (1947), Annecy (1949), Torquay (1950), Geneva II (1956), and Dillon (1960). As the agenda and number of participants increased, GATT Rounds took longer: Kennedy (1964-1968), Tokyo (1973-1979), and Uruguay (1986-1993).
If the United States wants to revise the international trade rules it helped to craft after World War II, destroying the WTO and negotiating bilateral deals will not be enough. A Trump Round of WTO talks would be far better for this purpose. President Trump could even propose this when the United States the G20 in 2026.
Scenario four is ambitious, and I would rate it as the least but with the greatest potential impact. As Trump told Carney, “Never say never”!