Could Mexico survive a trade war with US?

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‘Mexico is in a terrible position unless we manage to reach an agreement with Trump,’ warns economist Raul Feliz Generalized tariffs could lead to ‘a vicious cycle that would be detrimental to North America’s economy,’ says analyst Gloria Estrada

MEXICO CITY

As Donald Trump’s second presidency looms closer, so does the specter of a trade war between Mexico and the US.

Mexican leaders are bracing for a delicate balancing act, where they must play their best cards to avoid a domestic crisis and maintain strong ties with their largest trading partner.

In true Trump fashion, the billionaire Republican has already stirred global tensions by threatening the US’ biggest commercial partners and neighbors with hefty tariffs.

For Canada and Mexico, he has spoken about a 25% tariff on all imported goods, unless the two countries comply with US demands, especially stricter border controls to curb immigration and the trafficking of narcotics such as fentanyl.

Trump has vowed to impose the tariffs through an executive order on Jan. 20, the day he returns to the White House, and the announcement has already unsettled investors and industrialists in Mexico.

Mexican concerns ahead of Trump’s presidency

The Mexican Employers’ Confederation (Coparmex), an organization representing businesses and employers, has voiced grave concerns, terming Trump’s actions a threat to the region’s economic stability and the trade relationship sustained by the United States-Mexico-Canada Agreement (USMCA).

“Tariff threats create uncertainty in strategic sectors and jeopardize millions of jobs that depend on trade between the three countries,” Coparmex said in a press release.

Similarly, the Chamber of the Transformation Industry (Caintra), which represents 3,800 manufacturing businesses in Nuevo Leon, a key industrial region near the US border, has urged the Mexican government to protect the USMCA against Trump’s policies.

Meanwhile, the Mexican peso has suffered steep losses since Trump’s election, crossing the 20 pesos-per-dollar mark, its weakest level in years. The currency’s decline underscores growing investor unease and distrust regarding Mexico’s economic prospects.

While the investment climate appears grim, experts emphasize that Mexican industry is a key driver of US manufacturing, which makes tariffs a regional problem.

“No country is self-sufficient in producing all the goods and services required for consumption, whether intermediate or final goods,” Gloria Estrada, president of the Foreign Trade Committee of the Mexican Association of Public Accountants, told Anadolu.

Mexico, for instance, has a critical role in the US manufacturing industry, particularly in auto parts. In 2023 alone, Mexico’s auto industry exported over $35 billion worth of goods to the US, employing more than 830,000 workers. Many American companies, including Ford and General Motors, rely on Mexico-based production facilities to keep costs competitive.

“The most important impact for us would be the disappearance of companies that generate jobs related to exports, a reduction in foreign direct investment because Mexico would become less attractive, and above all, a decrease in revenue from manufacturing activity,” Estrada explained.

In addition, Mexico’s imports of US raw materials, including petrol products critical for industrial operations, are equally important for both countries, accounting for over $28 billion in 2023, according to government data.

“Mexico is in a terrible position unless we manage to reach an agreement with Trump,” Raul Feliz, an economist at the Center for Economic Research and Teaching, told Anadolu.

“If he follows through on his threats, the impact on Mexico would be very bad.”

Calculated response from Mexico

Amid this turbulent environment, Mexican President Claudia Sheinbaum has begun crafting a contingency plan, signaling both cooperation and resistance to Trump’s impending trade policies.

At a Nov. 27 press conference, she warned that “one tariff would be followed by another in response,” emphasizing the mutual damage such measures would inflict on the regional economy.

Currently, the US remains Mexico’s biggest trading partner, with over $745 billion in bilateral trade in 2023, according to a report by BBVA, the largest financial institution in Mexico.

The Mexican economy has specialized in industries vital to the US, such as computers, tractors, and cellphones, with 80% of these exports destined for across the border.

While Sheinbaum’s options are constrained, her gamble of retaliatory tariff threats could work.

Back in May 2018, President Enrique Pena Nieto’s government designed a strategy to counteract Trump’s tariffs on steel and aluminum, and send a political message.

Mexico’s Economy Ministry launched a surgical strike on US exports, targeting goods such as flat-rolled steel, fruits, cheeses, and pork.

This time, though, Trump’s proposed tariffs extend beyond aluminum and steel, affecting all imports and complicating any retaliatory measures.

“If we impose a generalized tariff, it would not only mean setting tariffs on consumer products, but also on intermediate goods that we receive from the US, which are used to produce export goods,” explained Estrada.

“We would enter a vicious cycle that would be detrimental to North America’s economy.”

Inflation risk and jobs on the line

Experts like Estrada and Feliz warn that a trade war with the US could spiral into inflation, eroding Mexicans’ purchasing power and pushing the country toward recession.

“The Mexican peso would have to depreciate even further than it has over the past year, and in the short term, this would accelerate inflation, prompting the Central Bank to keep interest rates at high levels or even raise them for a while,” said Feliz.

“This would deeply aggravate the slowdown the Mexican economy is already experiencing and would push the country into a severe recession.

“That is the worst part of it all … Losing purchasing power is bad, but what’s even more serious is losing jobs.”

On the flip side, President Sheinbaum’s administration has taken some steps to address Washington’s concerns.

Recently, Mexican authorities seized a record-breaking ton of fentanyl, equivalent to 20 million doses, destined for the US, marking the largest seizure of the synthetic opioid in Mexico’s history.

At the same time, Sheinbaum’s government has intensified efforts to curb immigration flows, recently detaining over 5,200 migrants in a single day – an unprecedented figure.

However, these crackdowns have drawn criticism for their heavy-handedness, including reports of violence and fatalities among migrants.

With Trump’s inauguration just weeks away, Sheinbaum has to find a middle ground between appeasing US demands and safeguarding Mexico’s fragile economy, all while preparing for the potential fallout of a new trade war.

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