Mexico, on edge amid Trump’s tariff war

True to his style of tough negotiator, President Donald Trump has taken his tariff threat against Mexico, Canada and China to the limit. The Republican has insisted that “nothing” can spare his neighbors from the tariffs he intends to impose on them as of this Saturday: 25% for Mexico and Canada, and 10% for China. A few hours before the deadline to apply these measures, the president has gone a step further, by assuring that he will set taxes on imports of steel, aluminum, oil, gas, pharmaceuticals and semiconductors. The U.S. warnings, for now, are only in discourse, however, the economic danger for Mexico remains latent. The second-largest economy in Latin America, and main importer of the US, is holding its breath waiting for an agreement in extremis between both governments to avoid the new taxes or, on the contrary, to confirm and know the size of the so-called “tariff wall” of the Trump era.

The US trade deficit with Mexico, of more than 157 billion dollars, has been one of the reasons Trump has used to impose new rules on trade with Mexico, but it is not the only one. Since his presidential campaign, the Republican had assured that he would impose tariffs on Mexican imports if Sheinbaum’s government did not stop the arrival of migrants and drug trafficking, specifically fentanyl to its border. This Friday she has again put in the balance, migration and drug trafficking. “We will impose tariffs on Canada and Mexico for several reasons, the first is the massive number of people who have illegally entered our country; the second, the drugs like fentanyl that flood our communities and, the third, because of the huge subsidies we give them in the form of trade deficit,” Trump said Friday in his conference.

The threat is not new, but the warning of a new tariff crisis has Mexico on the edge of its seat. Analysts and financiers warn that, if these threats are carried out, a blow would be dealt to the peso, exports, investments and remittances. In short, the echo of these measures, they agree, would weaken the economic growth of Latin America’s second largest economy in the coming years.

Alfredo Coutiño, director for Latin America at Moody’s Analytics, assures that Mexico will suffer from both tariff policy and deportations by the U.S. government. “With an overall tariff of 20%, Mexico’s growth would slow to 0.3% from 1.3% in 2024. A higher tariff would send the economy into recession, i.e., negative growth for the year. If the 25% tariff is applied throughout the year, the contraction of the Mexican economy would be between 1.5% and 2%,” the specialist predicts. The agency estimates that some 740 billion dollars in trade flows could be interrupted if the United States turns the tariff threat into reality.

Among the sectors most affected by a generalized tariff is the maquiladora industry, mostly located in the border area with the US. The director of the National Council of the Maquiladora and Export Manufacturing Industry (Index), Carlos Palencia, warns that in the worst case scenario, investment in fixed assets could fall by some 1.8 billion dollars a year, in addition to the loss of some 150,000 jobs, due to the evident drop in new projects and the landing of manufacturing companies. Currently, he adds, there are more than 6,500 companies in the sector awaiting the U.S. government’s decisions; these firms generate 3.3 million direct jobs in Mexico.

Palencia adds that it would be illogical for Trump to order tariffs left and right in Mexico, without first having carried out a market study of the Mexican goods that are most in demand in his country, for example, cars, auto parts, electronics, mobile devices, textiles for the medical sector, among others. “We have to know on which products they are going to impose the tariff, but if the US applies a 25% generalized tariff, they would be shooting themselves in the foot, because the capital of these types of companies is practically American,” he says.

Ignacio Martínez Cortés, coordinator of the Laboratory of Analysis in Trade, Economics and Business at the National Autonomous University of Mexico (UNAM), assures that Mexico is living a déjà vu of the first days of June 2019. At that time, the government of Andrés Manuel López Obrador reached an agreement on migratory matters to stop Trump’s tariff threats. In his first term in the White House, the Republican threatened to impose an initial tariff of 5%, which would rise to 25%. After weeks of tension and negotiations, Mexico defused the tariff bomb with a commitment to toughen immigration policy and send more military to the border. History is now being repeated with two old acquaintances: the Republican at the head of the U.S. and Marcelo Ebrard, who served as Foreign Minister of the Mexican Government.

The specialist notes that since his first term in office and up to now, Trump has used trade threats and uncertainty to the maximum to pressure other countries and achieve victories on different fronts. “If Trump imposes tariffs on Mexico, the Mexican economy would be entering a sharp slowdown, with a recession threshold. Trump did a surgical job of analysis, he knows very well what the current situation and the pressures on the Mexican economy are,” notes the academic, who highlights Mexico’s high economic dependence on the US market, with shipments of more than 466 billion dollars per year.

Sheinbaum’s government is still confident of dodging Trump’s tariff bullet. The president advocated early Friday to maintain dialogue with the United States and “keep a cool head”. She stressed that the imposition of tariffs against Mexico will only cause an inflationary spiral that will harm the US economy. The Ministry of Economy put the cost overruns for the US market caused by new trade tariffs at more than 10 billion dollars. If at first Sheinbaum’s government put on the table that, after a US tariff would come another levy against them in response, in recent weeks, the cabinet’s approach has been more measured, with the focus on dialogue.

Despite Sheinbaum’s and her cabinet’s efforts against the clock to avoid a tariff war, so far, Trump is sticking to what he has said. Far from giving in, the Republican maintains the pressure against Mexico, at a time when its economy is not going through the best moment: in the last quarter of 2024, the Gross Domestic Product (GDP) fell by 0.6%, compared to the previous quarter. At an annual rate, GDP grew last year by 1.3%, a decline, compared to a 3.2% rise in 2023. With these figures, analysts and financiers agree that a generalized tariff of 25% will place Mexico on the verge of a recession.