In the second half of 2024, the U.S. and Mexico were in contraction while Canada showed continual expansion. The Purchasing Managers’ Index (PMI) is based on a survey of private sector executives and measures the health of the economy. Canada has scored in expansion territory (greater than 50) since September while the U.S. and Mexico have been declining (less than 50). The U.S. finally showed signs of life in 2025 with a reading over 50 with Mexico still trailing. What is Canada doing well and how will tariffs impact progress?

Why Has Canadian Manufacturing Been Stronger than the U.S. and Mexico?

Canadian manufacturing employs almost 2 million people and is around 10% of Canada’s GDP. However, when excluding energy trade, the U.S. runs a trade surplus with Canada. Canada largest exports excluding energy include chicken eggs, SUV and light truck manufacturing, aircraft, engine and parts manufacturing, and mineral and phosphate mining. Although Canada is a large trading partner with the U.S., it is number two behind Mexico. On the other hand, Canada is the most important hub for U.S. exports.

Canada has critical products that support U.S. supply chains. For example, Canada has an abundance of natural resources required to support the North America battery supply chain. Of the U.S.’s list of 50 critical minerals, the U.S. is a net importer of 84% of them with China supplying over 50% of them. With that said, Canada has been supplying over 50% of several including zinc, tellerium, nickel, and vanadium. Canada is also tightly integrated into the U.S. automotive supply chains. According to the Congressional Research Service, North American auto parts cross all three borders up to 7 to 8 times prior to final assembly of a vehicle.

Foreign direct investment (FDI) has grown since the pandemic in Canada. The U.S. has led the way although other countries such as the United Kingdom, Japan, and Germany have invested as well. Canada expects to gain from the push to renewables with its robust supply chains. Canada has a skilled workforce, access to natural resources, and comparable affordable utilities. Thus, Canada is less dependent on the U.S. than Mexico.

Mexico’s Manufacturing Follows the U.S.

Since Mexico is the U.S.’s number one trading partner for exports without a comparable number of imports, Mexico is heavily dependent on the U.S. market. Thus, as the U.S. manufacturing activity declined, Mexico’s declined as well. Both were below 50 for the last six months. However, the most recent data shows decline in Mexico with expansion in the U.S., most likely due to concerns surrounding tariffs. China has been heavily investing in Mexico manufacturing capabilities and backed off as tariffs became more likely.

What Is Likely to Occur with Tariffs?

Trump is using tariffs as a negotiating tool. Although he talked about moving forward with 25% tariffs with Canada and Mexico, both were postponed for a month. Since Trump is more concerned about the borders and geopolitical risks, it is likely to minimally impact North America, assuming the countries work collaboratively to mitigate those risks and develop win-win strategies supporting manufacturing growth. 

What is the Future of North American Manufacturing?

Manufacturing in North America has vast potential as regional manufacturing growth gains steam. As the geopolitical risks associated with China ramp up and national security concerns in North America are heightened, reshoring, nearshoring, and regional manufacturing will gain momentum. If the strengths of Canadian natural resources and integrated supply chains, U.S.’s ability to produce at scale, and Mexico’s lower labor costs combined with the ability to scale could be combined, the region could become a manufacturing powerhouse. Regional manufacturing would dramatically shorten lead times and provide improved customer service levels. Given this advantage, the region could better respond to changing conditions more quickly. Since China is the world’s largest manufacturer, even small gains in the region could be substantial.

As energy becomes a dominant factor in the expansion of artificial intelligence, and automation becomes vital in the growth of manufacturing with limited resources, the North American region is well-positioned for success. Since the U.S. economy is robust, the demand could push a collaborative region to unparalleled growth. Canada has significant energy and natural resources, and the U.S. has huge opportunities to expand its use of energy and power its economy with exports to Europe and other countries. Mexico has been the dominant player in lower cost manufacturing and has surpassed China as the U.S.’s number one trading partner and so can leverage this expertise and ramp up quickly to support the region.

Originally published in Brushware Magazine, March/April 2025