The Trump administration’s transfer to impose tariffs on Mexico despatched shock waves throughout the nation of 130 million folks on Sunday, with financial sector after sector bracing for the impression of those measures.
Thus far, Mexico has but to offer 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, akin to agriculture, and components of the financial system the place it has little or none, just like the vitality trade.
“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 might want to do it in a means that causes financial hurt within the U.S., with precision pictures on sure merchandise that additionally trigger political turbulence,” Mr. Smith Ramos added.
That might 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.
Circumstances have modified because the final time Mexico and the USA had 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 because the prime market worldwide for U.S. meals and agriculture exports, with these imports surging 7 p.c from the earlier yr to greater than $29 billion, based on the U.S. Division of Agriculture.
But when agriculture is one space the place Mexico may discover quite a few methods to retaliate, different components of the financial system, like car manufacturing or vitality, expose the nation’s deep vulnerabilities to Mr. Trump’s heavy-handed ways.
In these sectors, Mexico’s reliance on the USA has truly elevated in recent times, giving its negotiators much less maneuvering room. However Mr. Trump’s tariffs may nonetheless resonate in the USA in the event that they end in greater 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 towards 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 yr, mixed with the tariffs imposed on Canada and China, amongst Mexico’s most important opponents within the U.S. market, will ease the blow from the tariffs in Mexico, mentioned Alberto Ramos, head of the Latin American analysis workforce at Goldman Sachs.
However the true threat to Mexico’s financial system is whether or not the commerce conflict will probably 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 government of Zipfox, a San Diego-based firm that hyperlinks factories in Mexico with American firms in search of alternate options from Asia, mentioned he seen the tariffs as a negotiating tactic geared toward successful concessions from Mexico in areas like migration and the drug commerce.
“All Mexico actually must do, and they’re going to, is present some real trustworthy 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 known as Mr. Trump’s declare that the Mexican authorities had an alliance with prison teams “terribly irresponsible.” She mentioned she was making 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 accomplished 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 can 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 beneath intense stress if the tariff dispute intensifies. Merchandise like avocados, which have skilled skyrocketing demand from American shoppers, will possible get costlier.
However as Mexico has elevated its agricultural exports to the USA, it additionally grown into crucial marketplace for U.S. meals and agricultural exports, forward of each Canada and China.
That might 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 international locations and hammered out the U.S.-Mexico-Canada Settlement, which Mr. Trump signed in 2020.
The destiny of that treaty, often called 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 shifting factories exterior the USA.
In relation 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 international locations 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 exhausting to do within the close to time period.
Vehicles
The brand new tariffs have the potential to wreak havoc on Mexico’s car trade, a linchpin of the nation’s financial system using a couple of million folks and accounting for about 5 p.c of gross home product.
Autos and auto components are Mexico’s largest export to the USA, value $157 billion in 2023. As car manufacturing has waned over time in Canada, it has elevated in Mexico, exposing automotive producers from all over the world, and their many 1000’s of Mexican staff, to disruptions.
About 27 p.c of Nissan’s gross sales in the USA had been sourced from Mexico in 2024, whereas Stellantis sourced 23 p.c and Normal Motors sourced 22 p.c, in accordance a report by S&P International, a supplier of monetary info and credit score rankings.
As provide chains have more and more grown extra complicated and intertwined, Mexico seems to have comparatively little leverage to reply with measures concentrating on U.S. automotive producers since many of those firms already function in Mexico and are grappling themselves with easy 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 automotive producers.
Uncertainty over one of many most important engines of Mexico’s financial system may produce manufacturing unit closures and job losses at house. And in the USA, the tariffs on autos may place higher pressure on car affordability when automotive 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.
Vitality
One other weak spot for Mexico is vitality. After a expensive wager on fossil fuels and years of underinvestment in its personal vitality manufacturing, Mexico faces each declining oil output and a dearth of renewable vitality assets 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 very depending on these vitality imports to energy factories, warehouses and information facilities. That reliance may stop Mexico from inserting its personal tariffs on imported U.S. vitality.
Mexico additionally exports roughly 700,000 barrels of crude oil a day to the USA, cargoes that can now face a 25 p.c import tax. (In contrast, tariffs of simply 10 p.c will probably be positioned on Canadian vitality exports to the USA.)
In flip, Mexico additionally imports giant 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 enormous new refineries in Mexico.
However immense value overruns and delays have stored Pemex, Mexico’s debt-laden nationwide oil firm, from decreasing 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.
