- A second Trump presidential term poses a risk to Mexico’s status as the US’s top trade partner.
- Capital Economics said Trump could focus on border security and impose new tariffs.
- A 10% universal tariff could reduce US imports by 5%, which may cut Mexico’s GDP by 1.5% or more.
Thanks for signing up!
Access your favorite topics in a personalized feed while you’re on the go.
download the app
Mexico became America’s top trade partner last year, leap-frogging China as the biggest exporter of goods to the US. But that may change if Donald Trump takes back the White House.
According to Capital Economics, Trump 2.0 threatens Mexico’s newly gained status. In a Tuesday note, Capital Economics strategists said much of the impact would hinge on whether the US-Mexico-Canada Agreement (USMCA) deal remains intact.
USMCA substituted the North America Free Trade Agreement in July 2020, but should Trump choose to repeal or adjust it, Mexico could face economic and trade risks.
Mexico overtook China as the US’ top trade partner in 2023.
Capital Economics
In recent interviews, the former president has raised the possibility of a universal 10% tariff on US imports. To Capital Economics, Mexico is one of the most vulnerable emerging markets as far as repercussions to this potential move.
If that scenario plays out, the US-Mexico relations would likely face more friction on top of Trump’s existing focus on security at the southern border.
“That is likely to dent optimism about near-shoring in Mexico — and investment inflows into the country,” strategists said. “Higher US import tariffs and a strong dollar environment could lead to sharp falls in the peso and higher interest rates than would otherwise be the case.”
Mexico’s trade with the US accounts for about one-third of its GDP. Capital Economics estimates that a 10% universal tariff could cut US imports by 5%, and ultimately lower Mexico’s GDP by 1.5% or more.
A large volume of goods cross the US-Mexico border multiple times before being assembled into final products. New tariffs could jack up prices as much as 10% for some items, Capital Economics said.
“Mexico’s deep supply chain linkages with the US mean that many goods cross the border multiple times meaning that the impact of [tariffs] would be magnified, which may force some firms to scale back their operations in Mexico,” strategists said.
The US Alliance of Automobile Manufacturers, for instance, has said before that auto components cross the border as many as eight times. Some companies then may be forced to consolidate production into either the US or Mexico, rather than using both.
That, in turn, could result in a response from the Mexican government, which may impose tariffs of its own.
A new China tariff
It’s possible that Trump considers removing China’s “most favored nation” status, which could open the door to as high as a 60% tariff on Chinese imports. That could plausibly create a 30% decline in Chinese exports to the US, worth roughly $120 billion.
Mexico could stand to benefit from China’s trade pain, in the firm’s view.
“For Mexico, that would clearly open up an opportunity for exporters to grab market share,” the strategists said.
In fact, they estimated that Mexico could step in to fill that gap and see its exports rise by $23 billion, or about 1.3% of GDP — approximating the same size loss if Mexico was subjected to a universal 10% tariff.
“Mexico is well placed to act as an alternative to China as a supplier of goods to the US,” strategists said.
Broad uncertainty
The overarching theme of a new Trump presidency would be increased uncertainty around the future of Mexico-US trade relations, Capital Economics said.
Trump 2.0 appears unlikely to be conducive to investment, and it could present a risk of the peso sharply depreciating against the dollar, the research team noted.
They added that all of this ultimately reinforces the view that “optimism about Mexico’s prospects from the nearshoring of supply chains looks overdone.”
