Mexico: Saved from Tariffs?
Mexico has avoided reciprocal tariffs but still faces steel, aluminum, and auto tariffs. Authorities are negotiating to exempt goods, though retaliatory tariffs on U.S. imports seem unlikely. Mexico's economy is slowing, with growing recession fears and diminishing nearshoring prospects. The industrial sector, especially the maquila industry, is contracting due to reduced U.S. demand. While the USMCA remains valid, Trump may push for better terms. A 0.5% growth forecast remains, but further tariff imposition could push Mexico into a recession.
Figure 1: Mexico’s Industrial Production Index
Source: INEGI
Mexico was saved from the application of reciprocal tariffs announced by President Trump, as was Canada. However, Mexico was not saved from the tariffs on steel, aluminum, and autos. Mexican authorities are trying everything to avoid tariffs and are seeking negotiations to get its items exempted from tariffs. Retaliatory tariffs on certain U.S. goods are an option for the Sheinbaum administration, but we see this as unlikely, as Mexican authorities seek an amicable solution with Trump.
The Mexican economy is already decelerating, and fears of a recession in Mexico are increasing. Although we could still see some solution to avoid tariffs, the impact of uncertainty and Mexico’s medium-term growth strategy is already affected. We see it as very unlikely that new investments will arrive in Mexico, and all the talk of nearshoring, which was dominating the narrative in Mexico, will vanish.
The most affected sector is, by far, the industrial sector, which is very interconnected with the U.S. This sector has been contracting since September, dropping by 4%, suffering from less demand from the U.S. Projecting into the future, the biggest exports from Mexico to the U.S. are industrialized products, especially semi-manufactured goods – known as the maquila industry. If Trump is successful in internalizing most U.S. production, avoiding importing these products from Mexico, it will likely be a big hit to the Mexican economy, with the possibility of decimating entire value chains. However, USMCA is still valid, and Trump might only be looking to negotiate a better deal for the U.S.
For now, we are keeping our 0.5% growth forecast for Mexico this year, which we believe will likely avoid tariffs under the USMCA deal. We believe the Sheinbaum administration will likely make concessions to the U.S., and significant progress in terms of fighting narcotics has been made in the last few months, with several imprisonments and deportations of criminals to be judged in the U.S. However, Trump could still be irrational and apply tariffs anyway on Mexico, which we believe would be a big blow and likely push Mexico into a recession this year.