President Donald Trump threatened Mexico with escalating import tariffs on all goods unless Mexico makes substantial steps toward eliminating illegal immigration into the US through Mexico. Trump proposed a calendar for gradual tariff increases beginning at 5% on June 10th and reaching 25% on October 1st.
These tariffs are a real and present threat. However, we have several reasons to believe that Trump will stop short of imposing the full 25% tariffs. Trump is mainly imposing these tariffs for domestic political reasons, and they lack broad-based support. These tariffs, alongside the ongoing US-China trade war, would cripple the US economy in the run-up to the 2020 elections. This would cause significant damage to Trump’s reelection prospects in key Midwestern swing states that rely on industrial and auto supply chains that are deeply integrated with Mexico.
- Trump’s tariff threat is driven by domestic US political concerns. The Trump administration publicized the tariff as a solution to the influx of illegal immigrants into the United States. However, he has failed to follow through on his campaign promises on multiple counts. Therefore, Trump has pursued an unexpectedly aggressive approach to strengthen his position on immigration.
- Mexico will take a conciliatory and cautious stance. While Trump is looking to show strength, the Mexican government is not eager for conflict. President Andrés Manuel López Obrador (AMLO) has taken a conciliatory approach to the Trump administration’s demands on border security and immigration. He fears the impact of punitive trade measures and persistent investor uncertainty on its already-fragile economy. However, full complicity with Trump’s demands will prove difficult.
- These tariff measures lack broad-based support. Unlike with Trump’s approach to trade policy with China, he does not have bipartisan support for strict measures against Mexico. These tariffs will negatively impact the agricultural and manufacturing sectors across North America. Therefore, the president may find himself in a weaker, rather than stronger, position if he follows through with these measures. The Trump administration will also face legal challenges from implementing these tariffs, as they are in direct violation of NAFTA.
Business Implications of Tariffs on Mexico
In an environment where businesses were already facing uncertainty in Mexico, the introduction of these tariffs only escalates potential trade volatility. Despite the US recently removing steel and aluminum tariffs on Mexico, the Trump administration is willing to continue to leverage trade measures. This will further erode short-term investment appetite and drive foreign exchange volatility.
The Mexican market had begun to see more interest from North American producers as the US-China trade war escalates. However, imposing these escalating tariffs on Mexico complicates decisions regarding where to optimize for low-cost production with quality supply chains. Therefore, these spillover benefits for Mexico will be limited in the short term.
Scenario-based analysis will be necessary for long-term sourcing decisions in North America. While we still see much uncertainty surrounding the new US-Mexico trade relations, multinational manufacturing companies need to pressure-test their assumptions regarding changes to their sourcing and setting up new manufacturing operations. We support our clients leveraging our scenario-based methodologies to develop specific plans to prepare for these potential changes.
FrontierView’s global teams understand that providing rigorous and timely advice is crucial. Our teams are constantly developing critical insights on the ever-changing macro environment to support out clients growth mandates. We help executives cut through the noise with analytics, data, and proprietary methodologies to find the smartest ways to grow their businesses. Please connect with a team member on Mexico tariffs or another area of support.