The neighbour less beggared
Can Mexico make hay after avoiding the reciprocal-tariff tantrum?
It may struggle to do so
WhILE the tariffs announced on April 2nd were met with panic and consternation around the world, Mexico celebrated.
Along with Canada, it was exempted from sweeping “reciprocal” tariffs imposed by the United States.
President Claudia Sheinbaum hailed the escape as “good for the country”.
The Mexican peso rose, as did the country’s stockmarket.
The comparatively gentle treatment by President Donald Trump brought comparative advantage.
Even when, on April 9th, Mr Trump paused most of those reciprocal tariffs at a baseline rate of 10%, again Mexico was exempt: the advantage endured.
The United States is Mexico’s key trading partner, receiving more than 80% of Mexican exports—equivalent to just under 30% of Mexico’s gdp.
This is a larger share than any other emerging market’s. Although Mexico is still vulnerable to Mr Trump’s fickle policymaking, for the time being it has an opportunity to seize.
Mr Trump’s first trade war with China, and then the pandemic, spurred firms to reduce their reliance on suppliers in China.
While Mexico attracted some of that business, other countries, notably Vietnam, gained more.
But with Vietnam now swept up in the reciprocal-tariff whiplash, many investors who chose it are ruing their decisions.
Mexico, by contrast, looks more appealing than ever.
Today 49% of Mexican exports travel under the rules-of-origin requirements of the United States-Mexico-Canada Agreement (usmca), and continue to enjoy tariff-free access.
The rest is subject to a 25% tariff that Mr Trump announced in February.
However, this could be reduced to 12% if Mexico were to satisfy (nebulous) criteria on slowing illegal flows of migrants and fentanyl.
Moreover, officials and analysts reckon a further 41% of Mexico’s exports probably meet usmca’s rules, but previously did not bother to provide evidence because they could get in tariff-free under the general guidelines.
“It’s a door that’s relatively easy to open,” says Ana Gutiérrez of imco, a think-tank in Mexico City.
Today cars and lorries make up around 20% of usmca trade, and the same tariff will apply to auto parts once a mechanism is agreed.
The American levy on steel and aluminium has a smaller impact.
All told, the effective tariff rate on Mexican exports is 5-8%.
That comes at a tricky time for Mexico’s economy.
It contracted in the final quarter of 2024 and is expected to shrink again in the first quarter of 2025, putting the country into recession.
JPMorgan Chase, a bank, revised its 2025 growth forecast from 0.4% expansion to a 0.2% contraction.
Mexican officials will continue to lobby in Washington, angling to reduce tariffs and cement Mexico’s trade advantage, while Ms Sheinbaum will try to strengthen the economy at home.
On April 3rd she unveiled 18 new measures under Plan Mexico, her flagship economic-development initiative to reduce foreign dependence.
They include proposals to increase self-sufficiency in food and energy and boost domestic production in strategic sectors from cars to semiconductors.
But Ms Sheinbaum has little budget headroom.
Many wonder how the government will afford the investments outlined in this plan.
Foreign investors will also remain cautious, says Pedro Casas of the American Chamber of Commerce in Mexico City.
“We may be the initial winners but this is a marathon, not a sprint,” he says.
Volatility is the enemy of investment: some companies such as Stellantis, a carmaker, have already paused some production in Mexico.
And structural issues at home including weak rule of law, shoddy infrastructure and an upcoming judicial overhaul may hold back investment.
Mexico must also be careful to avoid becoming a backdoor into the American market.
After Mr Trump’s first-term tariffs, Chinese firms were quick to shift production to Mexico in order to take advantage of usmca access.
That prompted bipartisan pushback in Washington.
Mexico is now setting up an investment-screening body designed to block deals that could irritate Mr Trump.
For all the talk of USMCA having survived the tariff torrent somewhat intact, it is by no means out of the woods.
Mr Trump wants to use a review of the agreement, scheduled for 2026, to bend it further in the United States’ favour.
The escape for Mexico and Canada from the most recent round of levies “isn’t about Trump recognising Mexico as a partner”, says Diego Marroquín, a trade analyst.
“It’s because of the interdependence we’ve built.”
That is to say, the very interdependence that Mr Trump seeks to undo.
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