Mexico: Mexico finds itself in the USA’s crosshairs, with higher inflation and possibly a recession ahead

Event

Following President Trump’s election in November 2024, Mexico found itself in the spotlight. In the past months, the country has often felt Trump’s ire over security issues around their shared border and because Mexico has the highest bilateral trade surplus vis-à-vis the USA. On 3 February, Mexico narrowly avoided a sweeping 25% tariff by agreeing to tighten border security and combat drug smuggling. However, these tariffs were only temporarily paused and were implemented on 4 March, despite the existence of the USMCA free-trade agreement negotiated by Trump in 2018. On 6 March, Trump partly backtracked this tariff and granted a one-month reprieve until 2 April for all goods meeting the USMCA requirements (covering around half of Mexico’s exports to the USA).

Impact

In Trump’s first two months back in office, Latin America emerged as a higher priority than it did for previous governments. Trump aims to roll back Chinese influence in the region (e.g. China’s alleged control of the Panama Canal and Chinese re-exports in Mexico). He also focuses on migration concerns (e.g. (the threat of) trade sanctions on Colombia and Mexico), drugs smuggling (especially the deadly opioid fentanyl) and countries with a trade surplus with the USA. Trump’s negotiating style is marked by rolling deadlines, high unpredictability and abrupt U-turns. He also does not shy away from using punitive tariffs even if they inflict pain on US households and enterprises. This creates large uncertainties, particularly for Mexico, one of Trump’s prime targets. While there is room for negotiations and potential sectoral exemptions or further delays, the world has entered a new phase of global trade wars, with chaotic communication and quickly imposed and high tariffs on a wide range of goods becoming the norm, even among countries considered allies.

The impact of these tariffs is challenging to predict, and will depend on their duration and any retaliatory measures they might entail (which Mexico has not yet announced). Nevertheless, as they apply to half of Mexican exports to the USA, lower economic growth and higher inflation for both countries can be expected. Given the economic integration of certain sectors – e.g. the automotive industry passing the border multiple times – some companies not compliant with USMCA might even halt production if that means avoiding spiralling tariffs as it is still unclear if these tariffs will be added every time a good crosses the border or on the total added value.

Mexico is already experiencing a period of weak growth (see graph below). Economic growth slowed in the past three years and is expected to reach a meagre 1.4% in 2025, though a further slowdown or even a recession is on the cards. Business and investor confidence is weakening, not only because of high uncertainties related to the US trade and immigration policies but also as a result of extensive constitutional reforms (e.g. judicial reforms, abolition of autonomous bodies) and fiscal consolidation. 
 

The impact of the tariffs on Mexico’s trade balance is mixed. Given the USA’s position as Mexico’s top trade partner (accounting for more than 80% of its good exports), current account revenues are expected to reduce, depending on the price elasticity of the concerned products, duration of tariffs, supply chain rigidity and extent of the economic slowdown in the USA. However, imports in Mexico are likely to decline as well given the Mexican economic slowdown. That being said, the depreciation of the Mexican peso, which already lost about 20% vis-à-vis the US dollar year-on-year (see graph below), can reduce import volumes and boost export volumes, also to other markets. However, this evolution will likely take time and depends on whether a global trade war ensues (e.g. between the USA and Europe).

In this context and given the forecasted weak economic growth and exchange rate volatility, there is a negative outlook for Mexico’s business environment risk (currently in category E/G). Political risk ratings also have a negative outlook, depending on how far US policies will go and the degree of deterioration of Mexico’s institutional quality.

Analyst: Jolyn Debuysscher – J.Debuysscher@credendo.com