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 impression of those measures.
To this point, 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, akin to agriculture, and components of the financial system the place it has little or none, just like the power trade.
“Simply as a place to begin, Mexico has to retaliate,” stated Kenneth Smith Ramos, a former Mexican authorities negotiator who put collectively the retaliation listing 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 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 america have been mired in a commerce disaster, throughout Mr. Trump’s first time period. Since then, Mexico has eclipsed China as the biggest buying and selling accomplice in items with america. Mexico additionally emerged because the top 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, in line with the U.S. Department of Agriculture.
But when agriculture is one space the place Mexico might discover quite a few methods to retaliate, different components of the financial system, like vehicle manufacturing or power, expose the nation’s deep vulnerabilities to Mr. Trump’s heavy-handed techniques.
In these sectors, Mexico’s reliance on america has really elevated lately, giving its negotiators much less maneuvering room. However Mr. Trump’s tariffs might nonetheless resonate in america 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 might permit 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 yr, mixed with the tariffs imposed on Canada and China, amongst Mexico’s foremost opponents within the U.S. market, will ease the blow from the tariffs in Mexico, stated Alberto Ramos, head of the Latin American analysis workforce at Goldman Sachs.
However the true danger to Mexico’s financial system is whether or not the commerce warfare will probably be resolved shortly or prolong over an extended 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 searching for options from Asia, stated he considered the tariffs as a negotiating tactic aimed 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 trustworthy effort in these areas,” Mr. Mahdi stated. “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 stated 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 performed nothing to cease the unlawful sale of this and different medication,” Ms. Sheinbaum stated, 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, might come below intense strain if the tariff dispute intensifies. Merchandise like avocados, which have skilled skyrocketing demand from American customers, will seemingly get dearer.
However as Mexico has elevated its agricultural exports to america, it additionally grown into crucial marketplace for U.S. meals and agricultural exports, forward of each Canada and China.
That might permit Mexico to focus on sure merchandise from america with tariffs. In 2018, Mexican negotiators strategically positioned tariffs on merchandise from states and areas with robust 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 country’s response is focused 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 america 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, generally known as the usM.C.A., is now up within the air, as Mr. Trump and his advisers argue that its phrases weren’t restrictive sufficient to stop American producers from transferring factories outdoors america.
In the case of agriculture, consultants say Mexico might even have the potential to pivot, albeit slowly, to different markets. At the same time as Mexico has relied on america, Mexico has more and more sought to develop commerce with international locations in Asia and Latin America.
Mexico has additionally strengthened ties with the European Union, which is the second-largest market for Mexican exports after america, and imports merchandise like tequila and beer, espresso, fruit juice, avocados and berries.
Along with tariffs, Mexico might eradicate preferences for imported grains and vegetable oils from america, doubtlessly opting to import such merchandise from Latin American agricultural powerhouses like Brazil or Argentina. However that would require main adjustments to infrastructure like ports and railways, one thing arduous to do within the close to time period.
Cars
The brand new tariffs have the potential to wreak havoc on Mexico’s vehicle trade, a linchpin of the nation’s financial system using multiple million individuals and accounting for about 5 p.c of gross home product.
Autos and auto components are Mexico’s largest export to america, price $157 billion in 2023. As automobile manufacturing has waned over time in Canada, it has elevated in Mexico, exposing automotive producers from all over the world, and their many hundreds of Mexican workers, to disruptions.
About 27 p.c of Nissan’s gross sales in america 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 economic data and credit score scores.
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. automotive producers since many of those firms already function in Mexico and are grappling themselves with the way to react.
However Mexico might present a concession by doing extra to curb imports of Chinese language automobiles, that are shortly making inroads in an vital marketplace for U.S. and European automotive producers.
Uncertainty over one of many foremost engines of Mexico’s financial system might produce manufacturing unit closures and job losses at house. And in america, the tariffs on automobiles might place larger pressure on automobile affordability when automotive costs are approaching historic highs.
For American customers, the 25 p.c import tax would add $6,250 to the typical $25,000 landed value (which incorporates the automobile value, transportation and duties) of a automobile from Mexico, S&P estimated.
Vitality
One other weak spot for Mexico is power. After a costly bet on fossil fuels and years of underinvestment in its personal power manufacturing, Mexico faces each declining oil output and a dearth of renewable power assets to bolster its grid.
Laying naked this dilemma, Mexico relies 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 power imports to energy factories, warehouses and information facilities. That reliance might 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 america, cargoes that can now face a 25 p.c import tax. (Against this, tariffs of simply 10 p.c will probably be positioned on Canadian power exports to america.)
In flip, Mexico additionally imports giant quantities of refined fuels like gasoline and diesel from america. Ms. Sheinbaum’s predecessor, Andrés Manuel López Obrador, had sought to curb this dependence by constructing large 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 america. That leaves Mexico with much less leverage because it prepares to reply to the Trump administration’s measures.
Annie Correal contributed reporting from Mexico Metropolis.
