Mexico’s Economy Under US Tariffs and Trade Uncertainty

Mexico faces two continuing economic challenges and possible opportunities for the remainder of 2025 and throughout 2026.

First, the Trump administration’s new trade policies — especially the periodic tariff threats and the resulting uncertainty — have caused detrimental effects on Mexico’s interests and will likely continue to do so. Second, particularly in light of the United States’ recent trade actions, Mexico should be planning for new stipulations during the mandatory 2026 review of the U.S.-Mexico-Canada Agreement (USMCA). The review was a mechanism incorporated into the agreement based on U.S. demands during the negotiations.

Attracting new direct foreign investment (FDI) in Mexico is another related concern. Uncertainties regarding new FDI in Mexico also stem from the Sheinbaum administration’s constitutional reform to install a newly elected judiciary and other potential risks to Mexico’s already weak rule of law. Thus, the Sheinbaum administration’s efforts, under the National Regeneration Movement party (Movimiento de Regeneración Nacional, MORENA), are not expected to slow the further degradation of Mexico’s investment climate.

Between the Trump and Sheinbaum administrations, uncertainties created in North America are very likely discouraging new investment and hiring. Mexican trade with and investment from China also infuses unpredictability and risk in the North American market.

Current Tariffs on Mexican Goods

Average Tariff Rates

As of Aug. 1, 2025, Mexico’s access to the U.S. market — the destination for over 80% of Mexico’s exports — was mixed compared to other countries’ treatment under the Trump administration’s tariffs, except for China. Mexico fared better than some because more than an estimated 85% of Mexico’s exports enter the U.S. duty-free if they fully comply with the USMCA’s rules of origin. However, with a few exceptions, exports that are not USMCA compliant are required to pay a 25% tariff, with a threat of 30% if the U.S. and Mexico do not reach an agreement by Nov. 1.

However, Mexico’s current 25% tariff rate is higher than the 15–20% tariffs currently imposed on exports from most other major trading countries, with a few exceptions. As noted in the White House’s newly modified tariff rates, 15% has become the new base.

Tariffs on the Automotive Sector

Currently, many of Mexico’s automotive exports are subject to a 25% tariff. Yet, if the auto export’s U.S. content is over 40%, the 25% tariff does not apply to the U.S. portion of its value. Similar exceptions will soon apply to automotive components imported to the U.S. The Mexican government estimates that this system will reduce the effective duty rate from 25% to approximately 15% for qualifying cars and SUVs. However, the effective duty rate varies on a model-by-model basis depending on the U.S. content.

For American auto producers operating in Mexico, this provision could result in a significant reduction in the effective tariff rate. For foreign producers, such as Kia and Nissan, which rely extensively on components from non-U.S. sources for some models, the 25% rate could apply to all or most of the value of the car.

Thus, for non-USMCA compliant cars with few U.S.-origin parts, it may be more cost effective to supply them directly from Japan or South Korea rather than Mexico. Ongoing negotiating efforts by President Sheinbaum, if successful, could reduce the tariff on non-USMCA compliant cars to 15% and help partially preserve a share of Mexico’s non-USMCA compliant auto exports.

Significantly, automotive and most other exports from the EU, Japan, and South Korea, which are key competitors for the U.S. auto market, are taxed at 15%, offering a clear advantage to these producers if the discrepancy continues.

Tariffs on Metals

Additionally, U.S. steel, aluminum, and copper imports, with an exception for ore and refined copper, are subject to 50% duties worldwide, including Mexico. Mexico is the third-largest exporter of steel to the U.S. and a significant exporter of copper and aluminum. If these rates hold, the impact on these important sectors of the Mexican economy could be significant.

Tariffs, Uncertainty, and Investments

Uncertainty in the market has risen as President Donald Trump has and in the future could modify U.S. tariffs, including those applicable to imports from Mexico, at any time. Given this uncertainty, countries including Mexico, which have benefitted from U.S. pressures toward manufacturers for the U.S. market to de-link from China, are likely to see fewer “nearshoring” foreign investments in 2025 and 2026.

Historically, South Korea, Japan, and the specific EU countries have been major investors in Mexico, especially in the production of automotive goods and consumer electronics. However, foreign investors in Mexico and around the globe cannot make informed, long-term investment decisions with a lifespan of 10, 20, or more years, if access to the U.S. market remains uncertain and is subject to unpredictable changes at least until 2029.

USMCA 2026 Review

While some specific U.S. demands for the 2026 USMCA review are unclear, U.S. Secretary of Commerce Howard Lutnick recently confirmed that Trump is expected to “renegotiate” the USMCA rather than conduct a review. At minimum, the impending review will likely ensure that uncertainty and unpredictability over trade and investment will remain until July 2026.

When the USMCA review occurs, Mexico can expect the United States to request or require inter alia the following:

• Modify the USMCA rules of origin, so that Mexico’s and Canada’s production of automotives and auto parts destined for the U.S. market become less desirable.
• Continue efforts to reduce the U.S.’ trade deficit.
• Place limits on Chinese investment and more thoroughly enforce restrictions on the transshipment of steel and other Chinese goods.
• Implement limits on imports of Chinese vehicles into Mexico and impose high tariffs on these imports, such as 100% as with both Canada and the U.S.
• Discuss critical minerals and supply chains, digital services, and artificial intelligence (AI) technologies.
• Apply pressure to resolve outstanding business conflicts affecting U.S. corporate interests.

The connection of U.S. trade policy to the Trump administration’s non-trade issues, such as fentanyl and immigration, may well continue.

In return, the U.S.’ agreement to the following terms if achieved could yield a positive result:

• Reduce the current 50% tariffs on steel, aluminum, and copper, potentially including a tariff-rate quota or another mechanism to preserve Mexico’s access for metals to the U.S. market.
• Lower the 25% tariffs on autos and auto parts at least to 15%, achieving parity with rates on auto imports from the EU, Japan, and South Korea.
• Provide a guarantee that the renegotiation’s tenets will be honored for the remainder of the Trump administration’s term.

However, if the 2026 review results in an agreement on USMCA modifications, the Trump administration could still effect detrimental changes to the U.S.-Mexico economic relationship in the future.

Mexico’s Investment Climate

Overall, Trump’s current tariffs will likely discourage the entrance of new DFI. Yet, if USMCA-compliant goods are the only imports worldwide that can currently enter the U.S. duty-free, this could result in a potentially significant competitive advantage for Mexico. This would only be the case if goods produced in Mexico are USMCA-compliant, which would be difficult to achieve in the short term due to supply chain challenges.

While an opportunity for substantially increased DFI in Mexico remains, the MORENA-led government in Mexico under the Sheinbaum administration will likely not take advantage of this moment. Instead, it is likely that Mexico’s investment climate will be negatively impacted by the constitutional reform to newly elect judges at all levels, elimination of Mexico’s administrative and oversight agencies, removal of other constraints on the government’s executive powers, and return to a state-controlled energy sector. Under such circumstances, the relatively robust levels of DFI reported for the first half of 2025 may not be repeated in the near future.

China’s Investment in Mexico

China’s investment in Mexico has been increasing, from a low level of around $3–4 billion in total with estimates varying widely from $3 billion to more than $20 billion, as Chinese firms seek a platform for exports to the U.S. Even at the current 25% tariff rate, Mexico’s applicable duties are well below those on direct imports from China, which are 30% to over 55% for most products. Factories producing toys, clothing, footwear, furniture, laptops, and TVs pose no economic or security threat to the United States, but these goods may still be affected by tariffs.

The most sensitive products for U.S. national security concerns are autos and auto parts, particularly “connected” vehicle systems that could be used for espionage, along with semiconductors or chips. While BYD, a major Chinese auto company, has postponed a facility planned for Nuevo León indefinitely, such investment proposals and the Mexican government’s reaction to them will continue to be carefully monitored by the Trump administration and U.S. Congress. Mexican products with a high (yet unspecified) Chinese content also risk being taxed at a higher level than the current 25% rate because of alleged “transshipment” or “circumvention,” a mechanism that has been agreed to by Vietnam and other Association of Southeast Asian Nations (ASEAN) countries.

The substantial imports of Chinese autos, including those manufactured by Ford and General Motors in China, into Mexico now comprise about 30% of Mexico’s total car market. These data are likely being carefully monitored by U.S. officials. Chinese auto imports, while benefitting Mexican consumers as well as Ford and General Motors, will likely continue to impact the profit margins of Mexico’s existing auto makers and their employees throughout 2025 and 2026. This is particularly the case for companies assembling relatively inexpensive, small cars, such as those made by Volkswagen, Kia, and Nissan, since they cannot profitably match the low prices of BYD or other highly subsidized Chinese vehicles now being sold in Mexico.

Conclusion

Trump’s tariff policies, with the exception of the 0% tariff rate for USMCA-compliant goods, are leading to economic hardship, reduced FDI, and loss of employment in Mexico as well as in the United States and Canada. Given what has occurred during the first six months of the Trump administration, the chances of a major change in the tariff policies that have increased average global U.S. tariffs from about 2.5% to 18–20% today seem negligible.

Mexico is only one of over 100 U.S. trading partners where increased tariffs ranging from 10% to 50% have been imposed, with typical tariff rates on U.S. imports from China exceeding an aggregate of 55%. The broad impacts on global trade and growth of the “America First” policies are increasingly having negative economic impacts in the United States and elsewhere.

Mexico, Canada, the United States, and the rest of the world are trading in a period where the era of post-World War II economic liberalism is eroding. This new era is evolving in unpredictable and uncertain directions and carries adverse implications for the U.S.-Mexico relationship in 2025, 2026, and beyond.