The Trump administration’s transfer to impose tariffs on Mexico despatched shock waves throughout the nation of 130 million individuals on Sunday, with financial sector after sector bracing for the influence of those measures.
To date, Mexico has but to supply any specifics on the way it plans to hit again. However President Claudia Sheinbaum’s negotiators should choose from areas the place her nation has some leverage to react, equivalent to agriculture, and elements of the financial system the place it has little or none, just like the power business.
“Simply as a place to begin, Mexico has to retaliate,” mentioned Kenneth Smith Ramos, a former Mexican authorities negotiator who put collectively the retaliation record in 2018, when the nation squared off with the primary Trump administration over tariffs.
“However you’ll want to do it in a means that causes financial hurt within the U.S., with precision photographs on sure merchandise that additionally trigger political turbulence,” Mr. Smith Ramos added.
That would imply new tariffs on Kentucky bourbon, high-fructose corn syrup, pork or different merchandise coming predominantly from states that supported President Trump within the November election.
Situations have modified because the final time Mexico and the USA have been mired in a commerce disaster, throughout Mr. Trump’s first time period. Since then, Mexico has eclipsed China as the most important buying and selling companion in items with the USA. Mexico additionally emerged as the highest market worldwide for U.S. meals and agriculture exports, with these imports surging 7 p.c from the earlier 12 months to greater than $29 billion, in line with the U.S. Division of Agriculture.
But when agriculture is one space the place Mexico may discover quite a few methods to retaliate, different elements of the financial system, like car manufacturing or power, expose the nation’s deep vulnerabilities to Mr. Trump’s heavy-handed techniques.
In these sectors, Mexico’s reliance on the USA has truly elevated lately, giving its negotiators much less maneuvering room. However Mr. Trump’s tariffs may nonetheless resonate in the USA in the event that they lead to increased costs for vehicles or refined fuels like diesel.
Mexico additionally has another instruments at its disposal.
The authorities may enable the nation’s forex, the peso, to weaken in opposition to the greenback, successfully making its exports extra aggressive regardless of Mr. Trump’s tariffs. The peso fell 2.5 p.c in buying and selling on Sunday to 21.21 to the greenback, its lowest degree since Russia’s invasion of Ukraine rattled markets in 2022.
A 17 p.c slide in worth of the peso over the previous 12 months, mixed with the tariffs imposed on Canada and China, amongst Mexico’s essential rivals within the U.S. market, will ease the blow from the tariffs in Mexico, mentioned Alberto Ramos, head of the Latin American analysis crew at Goldman Sachs.
However the true danger to Mexico’s financial system is whether or not the commerce battle might be resolved rapidly or prolong over a protracted time frame. If the tensions go unresolved, that would result in manufacturing unit closures, job losses and a recession, economists warn.
Raine Mahdi, chief govt of Zipfox, a San Diego-based firm that hyperlinks factories in Mexico with American firms looking for alternate options from Asia, mentioned he seen the tariffs as a negotiating tactic geared toward profitable concessions from Mexico in areas like migration and the drug commerce.
“All Mexico actually must do, and they’ll, is present some real sincere effort in these areas,” Mr. Mahdi mentioned. “That’s all that is about.”
Nonetheless, politics would possibly get in the way in which of hammering out a deal. The Trump administration’s assertion that Mexico’s authorities has an “insupportable alliance” with drug cartels has already hit a nerve in Mexico’s political institution, producing a stern rebuke from Ms. Sheinbaum.
In a video responding to the U.S. tariffs, the Mexican president on Sunday referred to as Mr. Trump’s declare that the Mexican authorities had an alliance with prison teams “terribly irresponsible.” She mentioned she was getting ready to announce retaliatory measures on Monday morning.
“In the event that they need to act, they need to not set their sights on Mexico, however on their very own nation, the place they’ve performed nothing to cease the unlawful sale of this and different medication,” Ms. Sheinbaum mentioned, referring to fentanyl.
As tensions simmer, these are the areas of Mexico’s financial system which is able to form the nation’s response to Mr. Trump’s tariffs.
Mexican farmers, who provide 63 p.c of U.S. vegetable imports and 47 p.c of its fruit and nut imports, may come below intense strain if the tariff dispute intensifies. Merchandise like avocados, which have skilled skyrocketing demand from American shoppers, will probably get costlier.
However as Mexico has elevated its agricultural exports to the USA, it additionally grown into an important marketplace for U.S. meals and agricultural exports, forward of each Canada and China.
That would enable Mexico to focus on sure merchandise from the USA with tariffs. In 2018, Mexican negotiators strategically positioned tariffs on merchandise from states and areas with sturdy ties to the primary Trump administration, together with apples, bourbon, cheese, cranberries, pork and potatoes.
Canada, which Mr. Trump additionally hit with 25 p.c tariffs, has already introduced retaliatory levies on chosen U.S. items this time round. The nation’s response is concentrated on maximizing the impact in Republican-controlled states, in a bid to get representatives from these states to ask the president to name off U.S. tariffs and de-escalate.
That tactic, together with comparable tariffs on U.S. merchandise from Canada, appeared to work when officers from Mexico, Canada and the USA returned to the negotiating desk. Scrapping the tariffs imposed on the time, they renegotiated the commerce treaty intertwining the three nations and hammered out the U.S.-Mexico-Canada Settlement, which Mr. Trump signed in 2020.
The destiny of that treaty, referred to as the united statesM.C.A., is now up within the air, as Mr. Trump and his advisers argue that its phrases weren’t restrictive sufficient to forestall American producers from transferring factories exterior the USA.
With regards to agriculture, consultants say Mexico may even have the potential to pivot, albeit slowly, to different markets. At the same time as Mexico has relied on the USA, Mexico has more and more sought to broaden commerce with nations in Asia and Latin America.
Mexico has additionally strengthened ties with the European Union, which is the second-largest marketplace for Mexican exports after the USA, and imports merchandise like tequila and beer, espresso, fruit juice, avocados and berries.
Along with tariffs, Mexico may remove preferences for imported grains and vegetable oils from the USA, doubtlessly opting to import such merchandise from Latin American agricultural powerhouses like Brazil or Argentina. However that would require main modifications to infrastructure like ports and railways, one thing onerous to do within the close to time period.
Vehicles
The brand new tariffs have the potential to wreak havoc on Mexico’s car business, a linchpin of the nation’s financial system using a couple of million individuals and accounting for about 5 p.c of gross home product.
Autos and auto elements are Mexico’s largest export to the USA, value $157 billion in 2023. As car manufacturing has waned through the years in Canada, it has elevated in Mexico, exposing automobile producers from all over the world, and their many 1000’s of Mexican workers, to disruptions.
About 27 p.c of Nissan’s gross sales in the USA have been sourced from Mexico in 2024, whereas Stellantis sourced 23 p.c and Basic Motors sourced 22 p.c, in accordance a report by S&P World, a supplier of monetary data and credit score rankings.
As provide chains have more and more grown extra advanced and intertwined, Mexico seems to have comparatively little leverage to reply with measures concentrating on U.S. automobile producers since many of those firms already function in Mexico and are grappling themselves with methods to react.
However Mexico may present a concession by doing extra to curb imports of Chinese language autos, that are rapidly making inroads in an necessary marketplace for U.S. and European automobile producers.
Uncertainty over one of many essential engines of Mexico’s financial system may produce manufacturing unit closures and job losses at residence. And in the USA, the tariffs on autos may place higher pressure on car affordability when automobile costs are approaching historic highs.
For American shoppers, the 25 p.c import tax would add $6,250 to the common $25,000 landed value (which incorporates the car value, transportation and duties) of a car from Mexico, S&P estimated.
Power
One other weak spot for Mexico is power. After a expensive wager on fossil fuels and years of underinvestment in its personal power manufacturing, Mexico faces each declining oil output and a dearth of renewable power sources to bolster its grid.
Laying naked this dilemma, Mexico depends on imports of U.S. pure gasoline for a staggering 70 p.c of its home pure gasoline consumption.
The nation’s fast-growing, low-cost industrial base is particularly depending on these power imports to energy factories, warehouses and knowledge facilities. That reliance may stop Mexico from putting its personal tariffs on imported U.S. power.
Mexico additionally exports roughly 700,000 barrels of crude oil a day to the USA, cargoes that may now face a 25 p.c import tax. (In contrast, tariffs of simply 10 p.c might be positioned on Canadian power exports to the USA.)
In flip, Mexico additionally imports massive quantities of refined fuels like gasoline and diesel from the USA. Ms. Sheinbaum’s predecessor, Andrés Manuel López Obrador, had sought to curb this dependence by constructing big new refineries in Mexico.
However immense value overruns and delays have saved Pemex, Mexico’s debt-laden nationwide oil firm, from lowering this dependence on gasoline imports from the USA. That leaves Mexico with much less leverage because it prepares to answer the Trump administration’s measures.
Annie Correal contributed reporting from Mexico Metropolis.
