Economics: Implications of an eventual imposition of tariffs on Mexican products

MEXICO - Report 10 Feb 2025 by Mauricio González and Francisco González

The tariffs imposed by Donald Trump on February 1 were paused by the White House for a month as of February 3, conditioned on the "effectiveness" of measures to be implemented by the Mexican government to control the flow of drugs, mainly fentanyl, and the entry of migrants into the US. However, we think it is very likely that he will end up imposing tariffs at some point this year or next as a form of pressure, not only to set the stage for him to eventually claim he has succeeded in rolling back drug trafficking and migration, but also to address other issues that he has previously mentioned, such as Mexico's trade with and investment from China, as well as narrowing the yawning trade deficit that the US has with Mexico.

In view of the possibility that additional tariffs will be imposed by Washington, it is important to consider that their impact would be mitigated by an exchange rate that accumulated a depreciation of close to 20% with respect to the first half of 2024, and that depending on the exported product and the use of imported inputs in these, the effect of the tariff may vary. Because of this, the imposition of 25% tariffs would not translate into a direct impact of the same magnitude in the increase in the price of Mexican products or their corresponding loss of competitiveness, given that several factors mitigate these when it is not a permanent tariff.

This week’s Outlook analyzes the recent foreign trade dynamics of the US and Mexico, as well as those of some relevant product sectors in order to anticipate the possible consequences of the imposition of US tariffs on Mexican products.

Filling out that picture, in our indicators section we report on the latest ebbing of non core inflation and Banxico’s potentially reckless full-point interest rate cut, as well as the institution’s assessment of GDP. We also report on the latest private consumption and GFI data, as well as on the further erosion of consumer sentiment in response to negative economic data and broader developments.

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