Mexico Under Trump’s Tariffs

 Since the 1990s, the Mexican economy has been transformed from a closed introverted system relying on oil exports to an open export orientated powerhouse. Mexico is now by far the largest exporter of manufactures in Latin America and has the export profile of an advanced country. This is not to say that Mexico does not resemble its Latin American neighbors in many other ways such as large scale inequality and violence.

The transformation of Mexico’s export and manufacturing sector has occurred under the NAFTA/USMCA framework where goods and services can flow tariff free between Mexico, the United States and Canada. Such flows are subject to ‘rules of origin’ under which a minimum added value in the region is required; i.e. if finished goods are imported to Mexico from, say, China they cannot be reexported to the US or Canada tariff-free since they don’t meet the minimum local value added requirements. 

It is not clear how Trump’s tariffs are going to work not least because he keeps changing his mind but one can surmise that what he is trying to achieve is to shift manufacturing jobs from Mexico back to the US. This raises a number of questions: 

In our view the goal of relocating manufacturing to the US is valid but in order to be successful it would need to be accompanied by other measures besides tariffs such as a national healthcare plan to reduce costs and a system of apprenticeships to make available a skilled workforce and long term planning in general which requires working with the manufacturing sector rather than against them. In fact, the proposed tariff regime raises numerous legal issues for companies who made investments under the NAFTA/USMCA regime. 

Let’s look at the figures:

This is data for 2023 from www.oec.world (UN Comtrade) and shows Mexico with a US$67bn trade in goods surplus. This is made up of a huge surplus of US$174bn with the US and a significant surplus of US$26bn with Canada. On the other side there is a large deficit with China (US$77bn) as well as deficits with South Korea and Vietnam. For countries such as Germany, Japan and Italy it can be assumed that they are investing in Mexican manufacturing to export to the US and Canada. However, for China and South Korea the data suggest that they are using Mexico to access the North American market and possibly their exports don’t meet ‘rules of origin’ requirements. Note that Vietnam is really just a re-exporter for China and South Korea. 

Our view is that Trump’s tariffs are unworkable in the short term and will, therefore, probably not happen as the companies most affected are US owned and will make their case to the Trump Administration. Were the US to apply stricter controls on ‘rules of origin’ they would reduce the flow through Mexico of goods originating in China, South Korea and Vietnam.  

Of course, the US trade deficit with Mexico and the overall US trade deficit remains unsolved and the question of whether it is sustainable in the event of de-dollarization is an open question. If the rest of the world ditches the US$ then the US will have to pay for imports in foreign currency earned through exports such that its imports would have to reduce drastically. 

We have commented on Brazil in a previous post where we drew attention to the high State share in the economy, unique in the developing world, and how this is placing a burden on the economy which has led to stagnation in the last decade. Our proposed remedy was for the Government to start privatizing the pension system which would lead to an increase in private savings and investment. 

Now looking specifically at Mexico then compared to Brazil: 

In Mexico for those in insured employment there are the Planes de Afores which are Individual Retirement Accounts to which both employers and employees contribute and which are managed by regulated fund managers. Another issue is that VAT in Mexico is collected at Federal level with some redistribution to States and Municipalities whereas in Brazil the ICMS is levied by the States on top of Federal sales taxes. 

In general, we would say that Mexico is run on a much more fiscally sustainable footing than Brazil which would, in the normal course of events, lead to higher growth rates in the medium term. However, the Sword of Damocles of Trump’s tariffs and the US trade deficit hang over Mexico whereas Brazil is comparatively immune. 

Read our full report at https://www.marketresearch.com/Latin-Report-v4296/Economy-Mexico 

Paul Dixon is the founder of Latin Report. His economics articles on a wide variety of topics are very widely read and are often found ranking in search results for months and even years after being first posted.  

Latin Report tries to make sense of the vast volume of information available to understand country economies. Our reports are written from a long term perspective and track a country's evolution over a number of decades. We mostly let the data tell the story with commentary on political events to illuminate features of the data. Latin Report aims to express views that hold their value over time and should therefore assist companies making long term decisions. This compares to competitors' reports based on current analysis which are subject to continual revision.