During the first few weeks of his second term in office, U.S. President Donald Trump has threatened to blow up the U.S.-Mexico relationship and implement new tariffs that could disrupt cross-border supply chains and maybe even end the wave of nearshoring investment in Mexico.
On March 4, 2025 Trump’s pushed ahead with implementing a new 25% tariff on imports from Mexico. Mexico’s president has promised to respond with retaliatory tariffs.
Business leaders on both sides of the border are now scrambling to figure out if the new 25% tariff is just a short-term negotiating tool or whether Trump really wants to upend the economic relationship the U.S. has built with its neighbors since the North American Free Trade Act was signed in 1994.
During a recent podcast interview, Diego Marroquin Bitar, a researcher who studies the North American economy at the Wilson Center, a Washington D.C.-based think tank, explained that private sector executives need to start to view tariffs as a real core component of Trump’s economic vision, not just a bargaining tool.
“Tariffs are an industrial tool, no longer just a bargaining chip. The border and security were the justification but I think the real intent behind those tariffs is to make manufacturing in the U.S. more attractive. The trade paradigm is changing,” he said.
While U.S. financial markets immediately fell following Trump’s announcement that he would follow through on his threat to implement tariffs on Mexico and Canada, private sector executives are still trying to figure exactly how the tariffs will impact Mexico’s economy.
Mexico has built up extensive export-oriented industries over the last three decades and is now tightly integrated with the U.S. economy. Cross-border commerce has been a major driver of growth in Mexico, but dependency on the U.S. is now a liability for Mexico.
Exports account for over a third of Mexico’s GDP and over 80 percent of Mexico’s exports go to the US. On the other hand, US exports of goods to Mexico account for only about 1% of the US’s GDP.
Although both countries benefit from cross-border commerce, the relationship is more important to Mexico than it is to the U.S.
The asymmetry inherent in the U.S.-Mexico relationship presents Trump with an opportunity to bully Mexico. Trump knows that on any given day he could provoke an immediate recession in Mexico by shutting down truck crossings at the US border.
The threats from Trump are already weighing on Mexico’s economy. Mexico’s economy was already contracting in late 2024. Mexico’s government faces a widening fiscal deficit and has limited ability to use fiscal policy on countercyclical spending during a downturn.
“If you suddenly put a 25% tax on exports, on the engine of the Mexican economy, then suddenly Mexico is in a really tough spot. We had really growth projections for this year. If tariffs are imposed and Mexico retaliates Mexico could go into recession,” Marroquin Bitar explained.
Some political analysts believe that Mexico’s President Claudia Sheinbaum can still negotiate a deal to remove or reduce tariffs on Mexican exports to the U.S. But, for Mexico one key question remains unanswered: Does Trump actually want to make a deal to avert tariffs?
The way Trump and his advisors talk about tariffs they seem to zigzag between describing the tariffs as a punitive measure for fentanyl inflows and a viable long-term economic strategy.
So, on the one hand it seems like Sheinbaum is well-positioned to negotiate a new deal for cross-border relations. But, the wildcard here is Trump.
To many observers it still seems like it’s still unclear if Mexico can really make a deal with Trump.
Are the tariffs just a tactic for bullying Mexico during broader negotiations? Or are we starting an improvised experiment with radically shaking up the global trade system?
“Trump 1.0 used tariffs as a bargaining chip. I think right now more than just a concession extraction tool tariffs are being used to undermine Mexico’s nearshoring potential. I think this is something [Trump and his team] are doing on purpose. They are making manufacturing in Mexico less attractive vis-à-vis the U.S.,” Marroquin Bitar said.
Even before the new tariffs went into effect Mexico’s economy was only expected to grow by around 1 percent.
Executives at foreign companies are going to have to figure out how serious Trump really is about using tariffs as a long-term economic strategy.
In the short-term, this new environment of unprecedented levels of uncertainty in the global economy will hurt investment in Mexico.
“I think in the present it’s definitely a red light. I think for the present it’s going to be very difficult for companies to invest in Mexico. The key for investors is certainty. Certainty is not there in Mexico [or] the U.S.,” Marroquin Bitar explained.