Mexico – Time, patience and cold blood

A complicated relationship

Mexico accounted for 16% of US exports in 2023 – second only to Canada and on a par with total exports to the Eurozone – and one quarter of the entire US trade deficit, while the US accounts for 83% of Mexico’s exports. As such, trade developments will again be the number one post-election issue for these two countries. This suggests a bigger impact if Donald Trump beats Kamala Harris. As part of the United States-Mexico-Canada Agreement (USMCA) trade deal, we would expect Mexico to be exempt from any blanket 10% tariff as threatened by Trump, in theory boosting US demand for Mexican exports as alternatives become more expensive.

Yet there are several frictions from a Trump perspective. The US deficit with Mexico has doubled over the last five years and is now close to China’s as a proportion of the total US shortfall (Exhibit 7). Moreover, China has materially increased investment in Mexico, pouring investment into manufacturing facilities to produce goods for export into the US that bypass direct tariffs. Trump has stated he will impose a 100% tariff on Chinese produced electric vehicles (EVs) from Mexico, seemingly despite the trade deal, while Trump’s broader antithesis to US EV adoption presents a further risk. Both are likely to cause Mexico difficulties when it comes to the USMCA trade deal renegotiation in 2026, which could be difficult under either candidate. In 2017, the USMCA identified “non-market economies” (China) and restricted trade agreements allowed with them. More recently, the Inflation Reduction Act identified (although did not precisely define) “foreign entities of concern” (China). The USMCA renegotiation could well include provisions along these lines, leaving Mexico in a tricky position with regards to Chinese investment, particularly if geopolitical tensions between the US and China deteriorate. Additionally, any restrictive changes to the USMCA would also impact trade with Canada – Mexico’s second largest export market.

Previously, Trump has used trade negotiations as leverage over other policy areas and we envisage two flash points. Fentanyl is the largest cause of death of US in 18-to-45-year-olds and most is believed to arrive from Mexico. US Republican senators have suggested bombing Mexican drug laboratories and/or using Special Forces to operate in Mexico. In 2020, Mexican President Andrés Manuel López Obrador restricted US Drug Enforcement Agency (DEA) operations in Mexico, but recently tightened controls and legislation, joined the United Nations (UN)’s anti-trafficking campaign and increased co-operation with the DEA again. We expect further progress to be part of a trade deal. Moreover, Mexico has just passed judicial reform to elect judges. This was opposed by the Mexican judiciary and has raised concerns in the US, which may restrict future US investment in Mexico.

On migration, both Harris and Trump would likely slow immigration, but Trump would likely do more so and threatens deportations, which would be more disruptive. PEW Research shows in 2022 of 11mn undocumented migrants, 4mn were Mexican and 4mn Latin American (LatAm). Mexico will be wary of a revival of Trump’s first-term Migrant Protection Protocols – the “Remain in Mexico” policy. A reduction in migrants may also reduce remittances to Mexico, worth 4% of GDP – with a larger impact across the rest of LatAm – something that would also be impacted by threatened taxes. However, migration is an area where Mexico can help the US: alleviating US southern border pressure, by better controlling its own. This is leverage that might help in negotiations.

Finally, Mexico will be particularly vulnerable to US economic spillovers. Our expectation for higher US inflation, a stronger dollar and less monetary policy loosening under Trump would increase pressure on the Mexican central bank, Banxico, which has only lowered rates by 50bps from its 11.25% post-pandemic peak. This would further weigh on the Mexican growth outlook, as would the slowdown in US activity expected under a Trump presidency and any reduction in Chinese investment in the event of more restrictive conditions in a renegotiated USMCA.