From trade agreement to trade war: USMCA, tariff uncertainty, and stock market spillovers

This paper examines how financial markets value trade agreements when their credibility is repeatedly undermined by policy reversals, tariff threats, and executive action. We study the U.S.–Mexico–Canada Agreement (USMCA) using an event-study framework and multivariate GARCH models to analyze equity market returns and volatility spillovers across the United States, Canada, and Mexico. In addition to the original USMCA negotiation, publication, ratification, and amendment dates during President Trump’s first term, we incorporate events associated with President Trump’s return to the Presidency, including renewed tariff threats against Canada and Mexico, executive orders imposing punitive tariffs, and explicit challenges to the viability of USMCA. We show that markets in the three countries generally reacted positively to events that reduce trade policy uncertainty such as USMCA’s official ratification and subsequent revision. Negative market reactions are observed for events that reflect heightened trade policy uncertainty, including risk of the treaty’s abrogation. Sectoral results show that sectors directly impacted by the agreement reacted disproportionately to these different events across the three countries.