Mexico Gets a Tariff Lifeline. Now Sheinbaum Needs a Quick Deal.

by Juan Pablo Spinetto of Bloomberg News, 4/5/25

The North American trade treaty isn’t dead just yet.

By sparing Mexico and Canada from his reciprocal tariffs on Wednesday, US President Donald Trump has kept the pact known as USMCA on life support. That’s no small feat given the animosity shown by the US government toward its neighbors in the past weeks. We don’t know whether the exception stems from a sincere recognition of the complexity of North America’s integrated supply chain or is just a tactical pause to avoid further corporate carnage. But the message is clear: Despite his rhetoric, Trump still gives the USMCA partners some preferential treatment.

In Mexico, the decision was greeted with cheers and relief. President Claudia Sheinbaum did a predictable victory lap: “We achieved this preferential treatment,” she said in her first reactions Thursday morning. “Mexico is respected.”

Sheinbaum has earned praise: Her appeasement strategy combined with intense lobbying by Mexican officials in Washington enabled them to dodge a devastating bullet that could have forced her to retaliate. The peso surged the most in two months in early trading; and hey, American consumers will still be able to enjoy great avocados on the cheap. Still, we shouldn’t lose sight that an aggressive and retaliatory Canada pursuing the opposite approach arrived at a similar place. Perhaps Trump has some love left for North American integration after all...

Now for the bad news: Even without reciprocal tariffs, Mexico’s appeal as an investment destination has taken a smack across the kisser, and its companies are already suffering from Trump’s protectionist agenda. While all USMCA products are exempted and can cross into the US tax-free, goods that don’t qualify — about 15% of Mexico’s total exports — pay a 25% tariff. Same for steel and aluminum and for auto exports outside the treaty; for cars compliant with USMCA rules, the 25% tariff applies to the non-US content used in the automobile. If all this sounds complicated, imagine being the hapless bureaucrats trying to decide what tariff a Cadillac produced in Coahuila should be charged when crossing the border.

These measures add to a painful outlook for the Mexican economy, which is likely to have fallen into recession after a probable contraction in the first quarter. Indicators are flashing warning signs, in contrast to the official optimism: Business confidence is sliding down, private consumption and gross fixed investment continue to slump and even remittances have shrunk in February to their lowest monthly level in two years. Some companies are already announcing relocations into the US. All very worrying.

Some experts highlight the country’s improved position vis-à-vis its competitors thanks to Wednesday’s exception: “Mexico will continue to gain market share of the US import market,” Banco Bradesco SA analysts Rodolfo Ramos and Juan Ponce wrote in a note. “Southeast Asia was a beneficiary of nearshoring, but with these global tariffs, we believe Mexico will further consolidate its position as the US number one trading partner.”

Yes, compared with some Asian allies such as Japan (slapped with a 24% tariff), Mexico is evidently better off. The Mexican government is also working to expand the proportion of exports that comply with USMCA regulations to ship more tariff-free products to the US. It may well be that the relatively lower tariffs could make Mexico a must-invest destination again — or at least a triangulation hotspot for third countries. But for that to happen more consistently, Mexico needs to take the next step and solidify the legal underpinnings of its trade arrangements with the US. As long as Trump can wield arbitrary decisions against US trade partners, the much-touted nearshoring boom will have to keep waiting.

Moving forward the revision of the USMCA, originally expected for next year, has some risks: Negotiating with an emboldened Trump may result in worse conditions than waiting until the tariff Armageddon starts impacting the US economy and the president’s popularity. But it’s a risk worth taking given that no significant investment will come to Mexico without an improved legal and commercial framework. Hammering out a revised agreement will take time. And don’t forget that on top of Trump’s tariffs, Mexico has scored plenty of institutional own goals, particularly with its damaging judicial overhaul.

Trump has left the door open by pledging to cut non-USMCA tariffs to 12% if Mexico makes progress on the fentanyl and migration fronts. Now’s the moment for Sheinbaum, who said she’s focused on auto, steel and aluminum conversations, to push for a comprehensive deal that dispels the cumulonimbus of uncertainty hovering over its economy.

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Bloomberg News provided this article. For more articles like this please visit bloomberg.com.

Mexico Gets a Tariff Lifeline. Now Sheinbaum Needs a Quick Deal.

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