Despite intensive negotiations from August 19-21, 2026, Canada and the United States failed to reach an agreement that would have suspended the 50% tariffs the U.S. threatened a month ago on $20 billion worth of Canadian exports to the U.S. (The list includes hockey equipment, cement, alcoholic beverages, paper pulp, and many others.) Those tariffs, covering roughly 5% of total Canadian exports to the U.S., are significant in part because they are the first large group of USMCA-compliant goods that have been subject to prohibitively high (50%) U.S. tariffs, reflecting another flagrant U.S. violation of the USMCA. (New US Tariffs) (The previous U.S. tariffs on USMCA-compliant goods were on goods in specific sectors, pursuant to investigations under Section 232.)

It emerged Saturday morning, August 22, that several major new demands by the United States had contributed to Prime Minister Carney's decision to suspend the negotiations, even though it meant imposition by the U.S. of the 50% tariffs. According to Carney, "the U.S. introduced at the last hours efforts to restrict our ability to have other trade deals."  (Carney August 21 Speech) Canada in recent years has concluded various trade deals along with economic and security partnerships, including major free trade agreements with the EU, the UK, India, South Korea, and members of the Comprehensive and Progressive Agreement for Transpacific Partnership. A major element of Carney's economic policy since he took office in 2025 has been to seek to double Canada's non-U.S. trade from 20% to 40% of the total over the next decade, to be achieved in significant part by concluding new or expanded trading arrangements. (Trade Diversification) Given that Ambassador Greer, Commerce Secretary Lutnick, and other U.S. officials knew that trade diversification through an expanded network of trade agreements is a hallmark of Carney's economic policy, it is reasonable to ask whether this apparently last-minute demand was a deliberate (and successful) effort to scuttle the negotiations.

 Other ‘red lines” for Canada reportedly included a refusal to reduce tariffs on medium and heavy trucks, which was considered essential to preserve the Canadian automotive industry, and pressure to curtail the use of French in streaming services and French content requirements in Quebec and elsewhere. (Red lines) The U.S. reportedly also sought “exclusive access” to Canada’s critical minerals. (Critical mineral access) (Bloomberg reported that U.S. negotiators had been willing to eliminate a lumber tariff, a decades-long irritant in bilateral relations, but no details were provided.)

While I have no inside information, reliable public reports last week (before the alleged last-minute U.S. demands) suggested that Prime Minister Carney was willing to remove retaliatory tariffs on Canadian imports of U.S. automotive products, steel and aluminum; improve to at least a limited degree U.S. access to Canada's dairy market; and pressure the premiers of eight Canadian provinces to discontinue the boycott of American wine and distilled spirits in provincial liquor stores. (These were three of the major U.S. complaints that generated the July threat of tariffs.) (Settlement Proposals) Ultimately, what Carney was reluctant to accept, presumably for the longer-term, were lower but still prohibitively high tariffs on three mainstays of the Canadian industrial economy, steel and aluminum (50% to 25%) and autos (25% to 15% on the non-US content). According to some published reports the 25% steel tariff (but not the lower aluminum tariff) would only have applied to the first four million tons, with additional exports reverting to 50%. (Steel quota) Derivative steel and aluminum products were to be subject to varying rates.

It also seems evident Canada had concluded, based on their own and other countries' experience with the constantly varying levels of Trump's tariffs over the past 18 months, that any deal concluded at this time could never be regarded as final, as it might be changed in the future based on Trump's whims. As Carney suggested in his August 22 speech to the nation, U.S. trade agreements are “signed in pencil.” (Written in Pencil)

Implications

The failure to conclude the deal is a defeat for many stakeholders throughout North America, with the ongoing uncertainties continuing to retard both foreign and domestic investment and job creation now and for the foreseeable future. Some of the smaller Canadian producers of the goods subject to the new 50% tariffs, and their U.S. customers, may not survive. Canadian exporters and U.S. buyers of steel, aluminum and autos will continue to face higher prices. American wine producers will continue the emasculation of their largest export market. (US wine exports)

The tariffs on aluminum seem particularly unwise since the U.S. is not a leading producer due to prohibitively high electricity costs and local opposition to new based on adverse environmental impacts. (Oklahoma Smelter Opposition) Nor is it in the U.S. national interest to become more dependent on leading foreign producers Russia and China--where "national security" concerns are not bogus– for U.S. aluminum needs. (Aluminum shipments from the UAE may be welcome at 50% tariffs but have been disrupted by the Iran war.) Petroleum interests in Alberta, which for the first time in a decade saw the possibility of a revival of the XL pipeline project (an objective shared by Trump), are no doubt disappointed, as are refineries throughout the U.S.

The U.S. attempt to restrict Canada’s agreements with third countries, the latest escalation of the Trump/Greer trade war with Canada and potentially all other U.S. trading partners, is deeply troubling for reasons that go well beyond additional fracturing of what until January 2025 was the United States' premier political and military as well as economic relationship. Significantly, the United States is attacking trade agreements that are consistent with Article XXIV of the GATT, which has authorized limited discrimination under certain conditions in favor of FTA partners since 1947 (as with the USMCA among the U.S., Canada, and Mexico, which Trump championed). It is one affront to provide in USMCA Article 32.10 that Canada and Mexico may not conclude new trade agreements with non-market economies (e.g., China). These broader restrictions on third country trade agreements are a challenge to sovereignty that neither Canada nor most other U.S. trading partners are prepared to accept, even when many have already tentatively concluded one-sided trade "deals" with the United States.

This latest iteration of the trade “war” (Carney’s term) is far from over. Carney, with strong backing from l provincial leaders and many Canadian businesses, has promised “dollar for dollar” retaliation, which will almost certainly result in counterretaliation by the United States, as Ambassador Greer has promised. (U.S. Counterretaliation) Whether and when bilateral negotiations will resume is uncertain. One likely result of the impasse is that even more Canadian citizens will continue to boycott U.S. wine, distilled spirits and other products and avoid vacation travel to the United States.

Impact on Mexico

If anyone sees a silver lining to this cloud it could be Mexican President Sheinbaum. Had the deal with Canada gone forward, her cordial relationship with Trump compared to Carney's frostier one could have attracted broad criticism in Mexico, despite recent friction over Trump’s demand that the U.S. be permitted to send troops into Mexico to fight drug cartels. (US Troops to Mexico). Formal USMCA negotiations between the U.S. and Mexico that began months ago are scheduled to continue in September. (Next US-Mexico Talks)  At present, Mexico has little to show from them other than Trump and Greer's kind words.

 Moreover, Mexico is apparently still facing US demands for 50% U.S. content to qualify for (unspecified) reduced auto tariff access to the U.S. It also seems likely that the U.S. will be reluctant to offer Mexico a better deal than the 25%-25%-15% (steel, aluminum, autos) reduced tariffs offered to (and rejected by) Canada. Unlike Canada, Mexico is benefitting from greatly increased AI computer server exports to the U.S. which for the most part enter duty-free. (Mexico recently passed Taiwan to become the number one U.S. source.) (Mexican Server Exports) Unfortunately, with a Mexican value added estimated at only 5%-7%, the server boom helps the export numbers (with the increasing trade surplus a risk), but it will do little to stem unemployment in the automotive sector.

The new U.S. demand relating to Canada’s third-country trade agreements is also a wake-up call for Mexico, which currently has free trade agreements with the UK, the EU, the European Free Trade Association, Japan, the Transpacific Partnership members, the members of Latin America's Pacific Alliance, and dozens of other countries. (Mexico's free trade agreements) Those agreements are designed to be consistent with GATT Article XXIV or the 1979 GATT Enabling Clause (which permits FTAs among developing countries under more flexible rules than GATT article XXIV). (Enabling Clause) If Canada is being challenged because of its third-country trade agreements, Mexico has no assurance that it will not be next on the list.

David A. Gantz

Will Clayton Fellow for Trade and Int’l Economics,

Baker Institute for Public Policy

Peter offered some partial support for my view, in particular on my skepticism of the political importance of tariffs as revenue generators. Heather, whose original comments on this issue were the trigger for my post, pushed back a bit. In doing so, she elaborated on her points about the incremental value of tariff revenue in making the U.S. fiscal situation a bit more sane, as well as the constituencies that develop around specific tariffs.

Let me first note that, as their LinkedIn profiles make clear, both Heather and Peter have spent a good deal of time working in the executive branch, and I am quite sure their insider experience gives them insights that I don't have. As a result, I take seriously anything they say on these matters.

At the same time, I think that working on the inside can put you in a bubble to some degree, and sometimes the thoughts of a naive, idealistic outsider can be useful. I'm happy to play that role here!

Putting that theory into practice, as an outsider, it seems to me that there can sometimes be so much caution and care in political decision-making that we end up with something close to paralysis. If people agonize too much about how every interest group and faction will view a policy decision, they may end up with a bad decision or no decision at all. Sometimes it's better to trust your instincts and just go for it.

The practical risk here is that the agonizing could lead to an overly cautious approach to changing various Trump policies. There are a wide range of these policies that a future Democratic president would likely object to, including foreign policy interventions, insufficient protections for workers and minorities, immigration crackdowns, income taxes, spending choices, and, of course, tariffs. Our hypothetical Democratic president – it could be a Republican taking over, of course, but at this point let's just focus on how a Democrat would handle things because it is simpler in some ways – will have to look at each one, and make a decision on how quickly and thoroughly to reverse course. As part of this, a key question will be whether to shut things down immediately and develop a replacement later, or to keep things in place while a new policy is worked out.

I understand the desire for caution, but I can also imagine that if you don't do certain things right away, they may not get done at all. Four years can seem like a long time as you are entering office, but with everything you will have to deal with, it may feel like it goes by more quickly than you expected.

Getting back to the policy at issue here, in the case of the Trump tariffs a key point is the link between tariff revenue and budget deficits. It seems to me that a future president could make the case for revisiting both of the main components of that deficit (income tax and spending levels), and in that context explain that the tariffs haven't made much of a dent in the budget deficit (and in the meantime have led to problems in the domestic economy and in international relations).

Will there be certain constituencies that object to the removal of these tariffs? Sure, but as part of the broader policy review that would be taking place, I suspect that the people staffing this new administration can think of ways to keep these constituencies happy.

Anyway, let's have the midterms first, then come back to this issue next year!

During the past several years, the composition of Mexican exports to the United States has significantly changed. Auto and auto parts exports have decreased because of high Trump administration tariffs designed to shift production for the U.S. market from Mexico (and Canada) to the United States. (Trump tariff policy) Simultaneously, Mexican exports of the servers required to satisfy the apparently insatiable demand for AI data centers has skyrocketed. An estimated $650 billion investment in U.S. data centers is expected in 2026. (data center investment) Mexico now provides an estimated 40% of U.S. server imports, with sales reaching $46.9 billion for the first seven months, second to Taiwan, with sales of $53.5 billion. (Vietnam is third, with those three country suppliers largely replacing U.S. imports from China.) (US AI Server imports)

Servers and related hardware made up almost one-fifth of the $317 billion of goods Mexico exported to the United States between January and May 2026. This reflected a more than 100% increase compared to the same period a year earlier. (Mexican AI server exports)

Although specific import/export data is not available, it appears that at least some companies producing AI data servers in Mexico are exporting them to Canada as well as to the United States. Nvidia is reported as importing servers for its Canadian operations from Mexico under the USMCA. (Canadian server imports) Although volumes are not available, Nvidia recently announced that it had partnered with Ciara Technologies to assemble some AI servers in Montreal. (Nvidia Canadian server production) AI data center operators in Canada including Nvidia have greater sourcing flexibility since Imports of servers from third countries such as Taiwan, unlike into the United States, are generally duty free under the WTO’s Information Technology Agreement. (Zero Server Tariffs)

In the short and medium-term at least, server exports have thus helped to keep the Mexican economy from tanking. (Mexico's economic outlook) However, the server production phenomenon in Mexico raises major questions. Can the mostly Taiwanese new investment be sustained despite such concerns as Mexico's poor investment climate and the uncertainties that are a product of Mr. Trump's tariff policies, including the uncertain future of the United States-Mexico-Canada Agreement (USMCA)? Can server production help to replace lost automotive jobs? Will a significant percentage of the materials and components required for server production ever be sourced in Mexico, or will most of the value added continued to be imported from Taiwan, China, and the United States? Finally, what happens to the industry in the unlikely event that U.S. demand for new data centers diminishes because of electric power shortages or public opposition or, worse, if the AI craze turns out to be a "bubble" that bursts sooner rather than later? I seek to provide at least partial answers below.

Mexican Server Production and Exports

Development of Mexico as a major source of server production for U.S. AI data centers is a recent phenomenon. (Mexico: cornerstone of American AI boom) The servers, specialized computers used to store, manage, and process data inside AI data centers, are the major building blocks for data centers. “An AI data center is purpose-built … to handle AI training and inference.” AI workloads are estimated to require ten times more computational power than traditional applications. Three thousand AI centers are estimated to be under construction or planned globally by 2030, representing an estimated $7 trillion in total investment, with $3 trillion in the United States. For example, Texas currently has more than four hundred projects in the pipeline. (AI data centers)

Several considerations appear to have encouraged nearshoring of AI data server production to Mexico. Taiwanese enterprises, the principal source of Mexican server investment, were not surprisingly attracted by lower tariffs on exports to the United States, close physical proximity to the rapidly expanding U.S. market for data centers (and other high-tech electronic components), the desirability of diversification away from Taiwan, and lower labor costs for competent workers. (Taiwan nearshoring to Mexico) In particular, for most AI server exports to the United States, tariff treatment is favorable, with no specific regional value content requirement under USMCA rules or origin. (Server Tariff treatment) For Mexico, the disadvantage of this treatment is that there is less incentive for foreign producers to seek local components when imported components can be used without affecting duty-free entry.

Significantly, Taiwanese enterprises such as Foxconn decided to locate manufacturing facilities in Mexico in part because American tech giants including Amazon, Google, Microsoft, and Nvidia strongly encouraged Taiwanese enterprises to establish server production there. (Encouraging Server production in Mexico)

Among the logistical advantages, supplying necessary third-country parts and components to factories in Ciudad Juárez and other border cities is relatively straightforward: a container unloaded at Los Angeles or Long Beach can reach Mexico in less than two days. Shipping the heavy servers to data centers in most of the United States by truck is also manageable. Like many other Asian enterprises that have established manufacturing operations in Mexico, Taiwanese businesses do not seem overly worried with rule of law issues in Mexico although some concerns have been expressed. The advantages of co-production with Texas are also considered important. (Texas Co-production)  Other challenges, such as electric power and water shortages, could become more of a problem for new Taiwanese and other investments in the future.

Many of these same considerations have encouraged substantial direct foreign investment in Mexico for many years, despite concerns over crime, corruption, poor infrastructure, electricity shortages and a weak judiciary and regulatory uncertainty. (Mexico's Investment Climate)

Developing Mexican Supply Chains

A major challenge for Taiwanese server enterprises and for the Mexican economy itself is developing component production in Mexico so imports can be reduced and more local jobs created. The North American automotive industry, because of integration of Mexico with the United States and Canada, has done remarkably in producing parts and components by more than twelve thousand enterprises both large and small. (North American auto parts producers) However, historically, the electronics industry in Mexico has not done nearly as well. Consequently, flat screen TV producers (e.g., Visio in Baja California) and laptop producers (e.g., Lenovo in Nuevo León) must rely on a limited if slowly growing local supply chain. (electronics supply chain) Currently, as Christine Smith and Alan Murray for the Financial Times have noted,

Ciudad Juárez, across the Rio Grande from El Paso in Texas, is at the heart of the [AI server] industry, building off the border town’s existing Taiwanese factories that have been making simpler electronics for decades. The new production lines assemble parts shipped from Asia into AI servers, which are stacked in refrigerator-sized racks that can weigh more than two tonnes each and are then trucked across the border. (server assembly)

Taiwanese producer Pegatron is reported to have five assembly plants in Ciudad Juárez. It is arguably in everyone's interest to encourage relocation of Taiwanese and other Asian parts production for servers (and other electronic products) to Mexico, to lower costs and shorten supply chains, among other considerations.

Impact on Employment in Mexico

The Mexican automotive industry lost an estimated 320,000 jobs (out of almost two million), 2024-2025, due not only to tariffs but to production of EVs (using far fewer parts than gasoline-powered vehicles), increased automation and continued reliance on vulnerable Asian suppliers. (Employment decline)  By the end of the first quarter of 2026, exports of autos and auto parts to the United States declined by $4.87 billion, or by 11% compared to 2025. (Auto exports decline)

In my view, there is no reason to believe that major auto and auto parts producers for the U. S. market will fail to respond to the Trump administration's demands that they relocate at least some operations to the United States. Should USTR Jamieson Greer convince Mexico to accept a new 50% US content requirement for autos exported to the United States, Mexico's industry employment is expected to continue to decline, as Mexico currently accounts for 42% of all U.S. auto parts. (Fifty percent U.S. Content Requirement) Thus, a key factor is the extent to which it is feasible to shift and retraining auto workers for server production or other employment (which as noted below seems unlikely).

Unfortunately, reliable employment data are not available as of this writing. Fernando Alba, deputy economy minister in Chihuahua state, where Ciudad Juárez is located, is quoted in the Financial Times as observing, "One truck [of servers] is the equivalent of one thousand cars.” Unfortunately for the Mexican labor force, one thousand cars require far more workers than a truckload of servers produced in highly automated plants. Data provided by experts to the Financial Times’ reporters indicates that under current conditions that server production could realistically aspire to reach 3-7 per cent Mexican content, primarily regional direct labor, facility overhead, and localized logistics, compared to 39 per cent for autos. Nor does there appear to be any significant Mexican impact on product design. (Mexican content in servers) The director of the Claudio X. Gonzalez Center for the U.S. and Mexico, Tony Payan, recently shared with me his on-site observations that manufacturing in Ciudad Juárez began a decline before the beginning of the second Trump administration and is continuing despite expanding AI data server production.

Still, some auto industry employers might find employment in the data server industry. Workers with experience in assembly, production, quality control, maintenance, and supervisory roles could be transferrable, according to Luis Ricardo Rodriguez, managing director of Monarch Global Industries in Monterrey who counsels multiple foreign investors in Mexico. He notes that the capacity to absorb displaced automotive workers depends heavily on the type of operation. Server assembly, final-device manufacturing, and some back-end semiconductor activities are more labor-intensive, while semiconductor fabrication and other advanced manufacturing processes are significantly more capital- and skill-intensive. Many positions in data server production positions would require technical retraining, specialized skills, and, in some cases, English proficiency. As a result, these investments could absorb part of the displaced workforce, but probably not automatically or on a one-for-one basis.

Nevertheless, in time it seems reasonable to expect that higher Mexican component content could gradually be achieved, some of it much more labor-intensive than AI server assembly. A substantial share of the value incorporated into Mexican electronics exports is still generated abroad, with China, Taiwan, Korea, Malaysia, and Singapore remaining key suppliers, particularly of high-value components. But the domestic supplier ecosystem is gradually expanding, according to Rodriguez. Some multinational electronics companies already source a meaningful portion of their supply chain locally, in areas such as printed circuit boards, substrates, wiring, packaging materials, metal components, and other back-end manufacturing inputs.

As far as broader North American sourcing is concerned, it also seems reasonably possible that TSMC, a giant Taiwanese semiconductor producer with more than $265 billion of actual and planned investment in Arizona, will eventually be supplying some of the chips necessary for server production in Mexico from the United States, although currently most imports are from Asia. (https://www.taipeitimes.com/News/editorials/archives/2026/07/29/2003861544). Other American chip input to server assembly in Mexico could also be significant as eight of the world’s top chipmakers—Nividia, AMD, Intel, Alphabet, IBM, Meta, Broadcom and Qualcomm—are U.S. companies, although many of the chips they make are not currently produced in the United States. (U.S. computer chip producers) One estimate suggests that a single AI server rack contains at least 4,500 chips accounting for as much as 95% of the content value of a server ranging from inexpensive foundational chips to unique integrated circuits. (Chip value in servers)  (Chip varieties) Among other important considerations, sourcing more of the chips from the United States may be feasible if increased incentives for domestic production and for upstream materials are implemented. (U.S. Production Incentives) An added political and economic benefit from more U.S. sourcing would be reducing Mexico’s trade surplus with the United States.

Nor are U.S. policies regarding automotive industry imports likely to be extensively reversed in 2029, regardless of which political party gains the presidency. The U.S. auto unions, which have broad influence on many Republican as well as Democratic politicians in the United States, oppose Mexican imports in significant part because of much lower Mexican labor costs (e.g., at General Motors’ Mexican plants workers reportedly earn $25 per day compared to $18-$32 per hour in the United States. (Auto worker wages)  U.S. unions, which have opposed freer trade for decades, support higher tariffs on autos and auto parts imported from Mexico and Canada. (Union support for tariffs) Consequently, while server production can at least narrow or bridge the gap in the overall value of Mexican exports to the United States, it will probably not have a major impact on longer-term unemployment in the Mexican auto industry.

Risks for Mexico

The likelihood that the Trump administration would limit Mexican-sourced server imports seems low, given the importance of major AI enterprises such as Meta, Microsoft, Google, OpenAI and Nvidia to the administration and to the American economy. (AI providers' power)  However, it is not out of the question given U.S. concerns with the increasing trade deficit with Mexico and Mexican reliance on third-country inputs. U.S. actions detrimental to Mexican electronics exports, rational or not, could occur because of their continued reliance on parts and components imported from China and other Asian countries. (trade circumvention actions)

Another risk in my view is a decline in U.S. demand, either because of the bursting of an AI "bubble" warned against by some observers, or simply a decrease in demand in future years as new data centers are no longer being built. (AI Bubble) It is difficult to assess the chances of a bubble because of overbuilding, but overall, the installation of new AI data centers in the United States seems more likely to continue increasing than decreasing in the foreseeable future. It has been suggested that the AI facilities buildup “is the largest scale infrastructure build-out in the history of humanity,” compared in scope to the railroads in the 1800s and Roosevelt’s New Deal in the 1930s. AI investment in infrastructure is forecast to increase globally from $318 billion in 2025 to over $1 trillion in 2029. (AI Build-out)

Still, a temporary slowdown in U.S. AI data center construction could occur because of two factors. First, growing citizen opposition, reflecting NIMBY along with rising consumer electric bills and high center water usage, has led to moratoriums on new construction. New York was recently the first state to order a state-wide one-year construction moratorium. (Data Center Moratoriums) Secondly, it has also been predicted that data center power demand will increase from 31 GW in 2025 to 66 GW in 2027. (Data Center power demands)

Increasing AI server demand may also occur because of continuing upgrading of servers, for example to reduce electric power requirements or speed up computing operations. Thus, the situation is again quite different from the mature automotive industry, where US demand for new cars and small trucks is relatively stable at 15-17 million in recent years (rather than increasing), despite a small decline 2026 over 2025. (U.S. new car sales)

Any of these scenarios for future AI data server demand could have a negative impact on all players in the AI industry in the United States and on suppliers of the servers as well as the chips and other components. The impact on Mexico's exports could be material. The risk suggests that it is urgent for the Mexican government, working with Taiwanese investors, to take steps once again to try to develop a broader group of Mexican-based components suppliers, which presumably could supply electronic parts and components not only to server producers but to other producers of electronic products in Mexico. The fact that Taiwanese companies are investing in other electronic sectors, encouraging a "strategic axis in advanced manufacturing" between the two countries, is a positive factor for Mexico's economy. (https://mexicobusiness.news/trade-and-investment/news/mexico-taiwan-deepen-strategic-axis-advanced-manufacturing) This not only results in technology transfer and job creation, but provides an important alternative to mainland Chinese investment that is no longer politically feasible. (Mexico's China Problem)

Conclusions and Recommendations

The boom in AI server production and exports is not a solution to Mexico’s job losses because of Mr. Trump’s trade policies, even though it may replace much of the export revenue lost in the automotive sector. However, in my view it presents Mexico with a golden opportunity to move a large segment of Mexican manufacturing up the supply chain. As noted earlier, only 3-7% of the value of the AI data servers represents Mexican inputs; the rest are Taiwanese, Chinese, other Asian, or American. No one expects Mexico to become a manufacturer of chips in the foreseeable future; Mexico lacks the engineering talent and legal stability among other factors. Still, Taiwanese companies, working with the Mexican government, could in time raise the Mexican content of the servers, perhaps significantly if they believe the investment climate is sufficiently favorable. Mexico could also strongly encourage Taiwanese producers in Mexico to source their server chips from the United States rather than Taiwan or elsewhere in Asia, to the extent feasible. In this respect at least, American, and Mexican objectives are consistent: it is in the United States’ as well as Mexico’s interests to continue to encourage increased AI chip production in the United States, whether for use in AI servers or otherwise.

Whether the Sheinbaum administration has the willingness and the political ability to improve the business climate to the point where substantial additional direct foreign investment in component production, from Taiwan and elsewhere, occurs is problematic. In the view of some observers, President Sheinbaum’s predecessor, Andres Manuel Lopez Obrador, squandered many of the potential benefits of the nearshoring boom that began in 2017 or before by actively discouraging new direct foreign investment, particularly in the energy sectors. (Undermining Mexico's Favorable Investment Climate) After nearly two years as president, Sheinbaum in my view has mostly made things worse, replacing Mexico’s appointed judges with popularly elected ones, emasculating Mexico’s independent regulatory agencies, and accelerating Mexico’s movement toward becoming a one-party state, as it was before 2000. (Single-Party governance) Thus one can hope but not really expect the current Mexican government to be proactive in improving the investment climate, in this instance giving the AI server industry no viable alternative to importing most of the components from outside Mexico, as is the case today.

The data provided in monthly BEA trade data releases only goes back two years, so to get a four year comparison, I took the releases for June 2026 and June 2024 and then integrated the data from Exhibit 7: U.S. Exports of Goods by End-Use Category and Commodity in each release to create the table at the bottom of this post – scroll down to see it. An Excel spreadsheet I created with the data is here.

Note that the figures are nominal rather than inflation-adjusted. Given the relatively high levels of inflation in recent years, I should probably adjust them to give a clearer picture of things, but I was feeling a bit lazy (and formatting the table to display it here was a pain and took some time!). So take that into account. Next time I come back to this I'll do the adjustment.

Here are the highlights of what I see:

• Agriculture exports are up slightly, with corn and nuts accounting for most of the increase, and soybeans now almost back to 2023 levels. (China has stepped up its soybean purchases, so that might explain things there. On corn, an article from March says Japan, South Korea, Mexico, Taiwan, and Spain are responsible for most of the increase in corn exports. U.S. corn production was up a lot in 2025, so maybe that's part of the explanation for this one.)
• Industrial supply exports are up, but that is mostly due to oil/natural gas (presumably because of higher prices) and non-monetary gold (which, as I noted in my earlier post, seems to mainly be about people looking for safe investment assets).
• Capital goods exports are up, with aircraft/engines and computers/semiconductors driving the numbers. The latter may be due to the general AI infrastructure boom.
• Automobile exports are continuing their downward trend.
• Consumer goods are also down slightly.
• "Other goods" are up but I don't have a sense of what this is about.

Here's the table (which is broken up into multiple images because I couldn't get it all in one image):

U.S. Exports of Goods by End-Use Category and Commodity (in millions of dollars), January - June, by year 2023-2026

The concept of transshipment is far from new. For decades under U.S. unfair trade laws, interested domestic parties could bring a "circumvention" action when goods effectively originating in a country subject to an outstanding antidumping or countervailing order were routed goods through third countries. (Such laws may be used by the administration as a legal basis for its transshipment efforts.) (Legal Basis) The Trump Administration also proposed an anti-circumvention rule in July 2025, which apparently was never implemented.

Circumvention occurs where there is minimal local value added in the third country. (19 U.S.C. § 1677)  A recent (2023) example related to solar panels originating in China. Soon after the U.S. AD/CVD orders against China were published, shipments of solar panels from Malaysia, Thailand, Vietnam, and Cambodia to the United States greatly increased in volume. The U.S. domestic solar panel industry filed an anti-circumvention action. Ultimately, the Department of Commerce concluded, because of the low valued added in the intermediate countries and the heavy dependence on Chinese-source components, that the orders were being circumvented. With several delays not relevant here the solar panels from Vietnam and the other three countries were made subject to the tariff rates that would have been applied if the panels had been shipped directly from China. (Final Scope Determination)

The Navarro transshipment tariffs, if applied, differ from past circumvention actions in two critical ways. First, their application would not be limited to goods subject to an outstanding U.S. antidumping, countervailing duty or other order. Secondly, instead of limiting the actions to specific goods from a given country or countries, the anti-transshipment actions could apply to more than 40 countries, not only low labor cost nations such as Mexico, India, Turkey and Vietnam, but to the EU, Canada, Israel, South Korea and Japan. Thus, while the administration’s primary concern is over Chinese efforts to evade U.S. tariffs as the primary instigator of transshipment for duty evasion, the threatened new chapter in America's trade war with the world would cut a much wider swath.

Implementing a broad transshipment policy could be difficult politically as well as legally. The likelihood of broader retaliation against higher tariffs from former friends and allies (particularly the EU and Canada) beyond current very limited levels exists. Although China as the transshipment initiator rather than one of the intermediate countries is not a direct target, the economic interests of the Chinese government and hundreds of Chinese enterprises could be directly harmed. Under such circumstances it would be naive to assume that China would not retaliate with its own pressure points such as restrictions on rare earth minerals, reduction of agricultural purchases from the United States agribusiness, and import restrictions.

Other downsides are obvious. The restrictions would inevitably be inflationary, raising both finished product and supply chain costs for both U.S. businesses and consumers. The administrative burdens, including new record-keeping, would be substantial, particularly for small and medium-sized enterprises and on Customs and Border Protection, even once the new AI-enabled “Detective Border” mechanism proposed under the White House report were perfected. Some important products could at least temporarily be unavailable in the United States. The uncertainties created as of August 14 as to how the Navarro proposals will be implemented in the real world of exports and imports will add further to those created since April 2025, continuing their chilling impact on new investment and hiring both in the U.S. and elsewhere.

Future tariff treatment of goods traded under the USMCA is also in question. Despite 25%-50% tariffs on aluminum, steel, copper, their derivative goods as well as up to 25% on autos and auto parts, 80%-85% of Mexican and Canadian goods meeting USMCA rules of origin currently enter the U.S. duty free.(U.S. Tariff rates)  (This may change August 19 if Mr. Trump proceeds with his threat to impose 50% tariffs on about $20 billion worth of USMCA-compliant products entering from Canada.) (New Tariffs on Canada) Given the number of Mexican exports to the U.S. that rely on some parts and components from outside North America that still meet USMCA rules of origin, there is no guarantee that such goods will continue to enter duty free, even if legally eligible to do. The same applies to goods imported from Canada and under the United States-Korea FTA and other U.S. FTAs with more than a dozen other countries. (U.S. FTAs)

None of these comments should be interpreted as advocating against reasonable, well-targeted new rules against transshipment. Transshipment has been a recurring problem with China not only in solar panels but for the United States and many other countries with steel, autos and other commodities such as some consumer electronic devices, clothing, and textiles. The departure by the Trump administration from U.S. most-favored nation tariffs averaging around 3% and FTA tariffs normally set at zero in favor of widely differing tariff rates applicable almost on a country-by-country basis seem likely in my view to have exacerbated the urgency for enterprises to seek lower tariff rates, and not only by China. Estimates of annual U.S. tariff losses according to Dr. Navarro’s data range from $18 billion to $136 billion.

However, it can be argued that the U.S. administration should follow a more focused approach, prioritizing goods that have national security implications and/or could realistically be produced in the United States. It would be sensible to negotiate initially with a few suspected major transshipping destinations, such as Vietnam, India, and Mexico. It is difficult to see how Dr. Navarro's anticipated broad-brush approach will work out well for the United States and major trading partners. As Dr. Navarro well understands, transshipping is a problem primarily created by China, with an assist from the U.S. administration’s tariff policies (including but not limited to the widely varying levels applicable to China) and pressures from both Trump and Biden administrations to delink production destined for the United States from China.. Unfortunately, for legitimate economic, political, and national security reasons the United States cannot hold China accountable for fear of risking damaging retaliation, as noted earlier.

Finally, as the paper is authored by Dr. Navarro, probably the administration's most doctrinaire protectionist, it will be surprising to some observers if the applicable rules are designed to address legitimate transshipping concerns rather than as another (probably futile) attempt to reduce the U.S. trade deficit, generate high volumes of tariff revenue, or encourage U.S. manufacturing and job creation. Rather, the policy is as much or more likely to increase costs of imports for many if not most American importers and consumers. Unfortunately, expanding Mr. Trump's tariff war with the rest of the world may well be considered by some to be an additional fringe benefit in itself, as will be the rush by well-connected foreign producers and importers to obtain exceptions.

Derby Clerfe purchased handguns in the United States and smuggled them to the Republic of Haiti in violation of numerous federal laws. He was indicted for and later pleaded guilty to one count of conspiring to violate federal laws that prohibit exporting firearms without filing an export information in violation of 18 U.S.C. § 371. ...

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Clerfe ... argues that the various laws prohibiting the export of firearms without filing an export information violate his Second Amendment rights. ...

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We agree with the government that "keep[ing] and bear[ing[] Arms" does not encompass sending them abroad in violation of arms-trafficking laws.

We begin with Heller, which explicated the meaning of the phrases "keep arms" and "bear arms." Looking to founding-era dictionaries and treatises, the Supreme Court concluded that "the most natural reading of 'keep Arms' in the Second Amendment is to 'have weapons.'" … By comparison, Clerfe's conduct—exporting arms abroad—involved dispossessing himself of firearms. ...

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As a fallback, Clerfe argues that even if exporting arms abroad does not count as "keep[ing] Arms," his conduct is covered by the plain text because the Second Amendment prohibits all "infringe[ments]," which he reads to mean anything that hinders the right. He suggests that "even the smallest burden" hinders the right. Clerfe relatedly points to pre-Bruen caselaw recognizing that the Second Amendment right, like other rights, "implicitly protect[s] those closely related acts necessary to [its] exercise." We agree with those authorities. But Clerfe's argument is tautological: His right to "keep Arms" was not "infringed" for the same reason that exporting arms abroad is not protected by the right to "keep Arms" in the first place….

Finally, Clerfe cites to this Court's pre-Bruen caselaw stating that "[c]ommercial regulations on the sale of firearms do not fall outside the scope of the Second Amendment." Clerfe stretches that language much too far. The explicit lesson of those cases is that it matters whether a commercial regulation impinges upon the "right to possess and carry weapons in case of confrontation." After all, "[i]f there were somehow a categorical exception for these restrictions, it would follow that there would be no constitutional defect in prohibiting the commercial sale of firearms. Such a result would be untenable." …

Put differently, a commercial regulation cannot end-run the "individual right to possess and carry weapons," but if the regulation does nothing to "infringe[]" upon that right, the Second Amendment is not implicated. Because the laws that prohibit Clerfe from exporting handguns to Haiti do not limit his right to "keep and bear Arms," the plain text of the Second Amendment does not protect the conduct at issue….

Even assuming the Second Amendment covers Clerfe's conduct, the government has shown that the challenged laws prohibiting the export of weapons abroad are "consistent with the Nation's historical tradition of firearm regulation." Since the founding of the Republic to the present day, Congress has restricted the exportation of weapons abroad. In 1794, just three years after the Second Amendment was adopted, the Third Congress passed a law titled "An Act prohibiting for a limited time the Exportation of Arms and Ammunition, and encouraging the Importation of the same." That statute made it unlawful "to export from the United States any cannon, muskets, pistols, bayonets, swords, cutlasses, musket balls, lead, bombs, grenados, gunpowder," etc.

Likewise, the Ninth Congress "suspend[ed] the commercial intercourse between the United States, and certain parts of the island of St. Domingo"—modern-day Haiti. And the Tenth Congress for its part promulgated the Embargo Act of 1807 which prohibited the export of all goods, including firearms, from the United States. The Congresses that enacted these laws included John Adams, Oliver Ellsworth, Rufus King, Albert Gallatin, Robert Morris, James Monroe, Joseph Story, Jonathan Trumbull, James Madison, Henry Clay, John Quincy Adams, and others who knew a thing or two about the Constitution.

Clerfe resists these historical analogues, arguing that they, especially the 1794 law, addressed different societal problems and imposed different burdens. He claims that the 1794 law had nothing to do with the foreign-policy concerns that motivate modern-day arms export regulations. Though the 1794 law, titled "An Act prohibiting for a limited time the Exportation of Arms and Ammunition, and encouraging the Importation of the same" seems to have been enacted, in part, to increase the domestic stock of firearms, it strains credulity to think that foreign-policy considerations were not also relevant. But even spotting Clerfe that difference, other generally applicable founding-era export controls addressed the same sort of foreign-policy consideration. ...

Up to the early 1900s, the U.S. did not have an income tax, and tariffs were one of the primary means of raising money for the U.S. Treasury. And because this is not something that was true in the lifetimes of most Americans, we have gotten used to not thinking about it, or thinking about it as an illegitimate use for tariffs. And that the legitimate uses for tariffs are ... related to national security or to protection of specific industries and jobs. But in fact, our predecessors very much saw tariffs as a perfectly legitimate revenue-raising strategy. ...

So my contention is that in the current moment, because of the changes to our tax structure and the skyrocketing levels of our deficit, it's going to be very hard for any future president from any political party to forego revenue. So we shouldn't expect a complete and instant rollback because that's a political leader giving up revenue, which they're just not going to do. So that's point 1.

Point 2 is ... that we've seen from the Trump tariffs that there are some industries and sectors that perceive that they have benefited, and it's very hard, and again politically challenging, to pull that back.

I see her points here and there is some logic to them. However, on the issue of giving up revenue in the midst of high budget deficits, I think it's worth noting that the Trump tariffs have coincided with a period of well above average budget deficits. As the first Section 232/301 tariffs were being imposed under Trump, the budget deficit started increasing, and the trend of both higher tariffs and higher budget deficits has continued since then.

In addition, Heather takes us back to the early 1900s and before, when tariff revenue played a bigger role. But given the size of the federal government today, there's no level at which tariffs can be set that will make more than a modest dent in the deficit/debt.

All of this suggests that high tariffs are not an effective way of addressing budget deficits or the debt, and what we need with U.S. fiscal policy at the moment is a broader rethink of tax revenues and spending. Tariff revenues may not be totally irrelevant here, but they are a somewhat marginal component of the discussion.

Even if I'm right about all this in an objective sense, though, how will things play out in political debates? What will future legislators and executive branch officials think? And what will the voters want here (to the extent we can figure that out)?

My points above should be fairly easy to communicate with simple charts showing the tariff increases along with the rising budget deficit and debt, so I'm hopeful this can work politically for a future president who may be interested in pursuing the removal of these tariffs. As noted, tariff revenue is simply not the main factor in dealing with budget deficits/debt, and the focus of the tariff debate should be on the broader impact of the tariffs on the economy and on relations with other countries (which, in my view, hasn't been great so far).

With regard to Heather's point about whether any changes can be "instant," it is true that tariff removal on the proverbial "day 1" of the presidency might be difficult. There are processes that need to be followed under tariff provisions such as Section 301, and if a future administration were making an effort to follow the rules when removing tariffs, it might want to be sure everything was done properly. Nevertheless, if the administration were inclined to go in that direction, it could probably do things pretty quickly.

As to "complete" removal, this could be tough because of the China element. Politically speaking, removal of China-specific tariffs will be a challenge. Someone will have to come up with a coherent alternative policy in relation to China in order to get those tariffs removed (this can be done, but it won't be easy). However, I would think most of the non-China Trump tariffs could be rolled back over time. Yes, as Heather notes, there are special interests who have benefitted and will want to keep them in place. But if you'll permit me a bit of wishful thinking, we may be at a moment where people are fed up with the government catering to special interests.

Of course, subsidies aren't the only factor suppressing Chinese consumption, according to this view. Michael Pettis, with whom I sometimes spar over these issues, recently listed the following domestic policy areas in which China could make policy changes in order to achieve greater domestic consumption (subsidies are at the end of the list):

· Faster wage growth transfers income from employers to workers.

· Larger social transfers shift income from the state to retirees and the poor.

· Lower income taxes or consumption taxes increase the GDP share of household disposable income.

· Pro-union legislation, or the elimination of residency restrictions, transfers income from employers to workers.

· Stricter environmental protection transfers income from industrial polluters to local households.

· Reducing subsidies to manufacturing, infrastructure, or favored borrowers shifts resources away from producers and toward households.

After presenting this list, he stated: "Although these policies appear very different, they all accomplish a similar macroeconomic objective: raising the household share of GDP while reducing the producer share, thereby reducing the excess saving that ultimately manifests itself as current account surpluses."

Just to state clearly what I think will be obvious to trade policy experts, there is an important difference between industrial subsidies and the other items on the list: For subsidies, when China joined the WTO it agreed to abide by the obligations of the SCM Agreement and its Accession Protocol, whereas China did not sign on to an international agreement for the other items. As a result, there isn't much scope for governments to press China on the other issues. Obviously, any government can raise whatever issue it wants with any other government. But I'm not sure the Chinese government is going to pay much attention to what foreign governments have to say on these other issues. (I doubt the U.S. government would take action if it were pressed by other governments on all this). I suppose the idea is to impose some sort of sanction in order to pressure China, but I'm skeptical that China would respond positively to that.

By contrast, because China did sign on to an international agreement on subsidies, there is a clear avenue for others to exert pressure in a constructive way. China's record on compliance with adverse WTO dispute settlement decisions is decent, so why not try to enforce the rules on subsidies? The arguments I've heard against bringing WTO complaints here are not very persuasive. Yes, these complaints can take a while, but (1) if the complaints had been brought back in 2018 when the conversation around these issues picked up, we could have made a great deal of progress already and (2) if we don't start the complaints now, we could still be talking about all the same things in 2034. And the alternative approaches that have been used in the meantime haven't gotten us anywhere.

Turning to "the need to strengthen household consumption" (as Pettis puts it), while I think that Chinese government subsidies and other non-market practices are a real problem, the broader logic tying producer subsidies to household consumption is not as convincing. It's certainly possible that consumption would rise if Chinese government subsidies to producers were reined in, but the actual consumption outcomes depend on what exactly is done with the money previously given to producers. Would consumption go up a bit if the Chinese government transferred more money to retirees and the poor? Probably. But it's worth emphasizing that the debate over transfers to retirees and the poor happens everywhere, and is a very sensitive one in domestic politics. It's difficult to influence how other governments approach this, and my sense is that the views of the Chinese government about these policies are firm and not easily changed.

But that doesn't mean people should ignore the subsidies. While reducing subsidies to industry may or may not translate into much greater consumer spending, these subsidies do have a real impact on trade flows. As part of the effort to create a level playing field, it makes sense to enforce the rules on subsidies that every government agreed to. Thus, other governments should press China on complying with WTO rules on subsidies (and the behavior of state-owned enterprises as well). This shouldn't be particularly controversial, as it just means enforcing the international rules in this area. While there's no guarantee of a big payoff in terms of increased Chinese consumption as a result, it would help make everyone feel like the trading system is operating under terms that are fair.