Mexico’s Star Economy Dreams Crumble Under Donald Trump’s Tariff Threats
Mexico’s Star Economy Dreams Crumble Under Donald Trump’s Tariff Threats ·Bloomberg
Alex Vasquez
6 min read
(Bloomberg) -- Only a couple years ago, manufacturers were fighting for space to relocate their operations to Monterrey, an industrial city in Mexico’s northeast, as they sought to move closer to the US and its vast consumer market. These days, real estate agents are offering flexible rental plans to keep businesses in the area.
Mexico’s aim to grow rapidly by attracting foreign investment and boosting exports to the US had begun to falter even before Donald Trump returned to the White House. Now the entire nearshoring plan risks collapsing if the US president follows through on promises to hammer Mexican goods with steep tariffs.
“Uncertainty reigns here,” said Mario Galindo, the commercial head of Prommont, which manufactures large crates and platforms to help companies ship their products. The firm, which serves clients in the US and Mexico, is forgoing price hikes and cutting profit margins to keep customers.
“I don’t think we are going to have tariffs, but we can’t know,” Galindo said. “To be able to invest we need certainty.”
The sudden shift in outlook for Latin America’s second-largest economy not only clouds President Claudia Sheinbaum’s five-month-old government but also signals a missed opportunity for Mexico to break free from decades of sluggish growth.
Between 1980 and 2022, gross domestic product expanded just above 2% a year on average, according to the World Bank. A wave of nearshoring investment fueled economic growth of over 3% in 2022 and 2023, leading many investors to believe Mexico was entering a sustained period of even higher expansion — one that could enable it to consistently outpace Latin American peers for years to come.
When Sheinbaum took office in October, Mexico’s economic prospects were already deteriorating. Growth estimates for 2025 had fallen to less than 1% as investors anticipated budget cuts needed to fix a growing fiscal deficit she’s inherited. Then came Trump threatening 25% tariffs on Mexico should it fail to stop the flow of migrants and drugs across the shared border.
Amid intense negotiations, the deadline for the implementation of those tariffs was delayed by one month to March 4. But even if Mexico eventually avoids them, the uncertainty they create may be enough to tip the economy into recession.
“Maybe nothing will happen, but we don’t know,” said Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc. “Just that anxiety until that process is resolved is already having an impact on the economy. We think that the trade policy uncertainty is reducing growth in Mexico by 0.5 to 1 percentage point.”
Mixed Legacy
The uncertainty is also jeopardizing social gains made under Sheinbaum’s predecessor and mentor, former President Andres Manuel Lopez Obrador, who spearheaded large government investments and oversaw Mexico’s biggest drop in poverty and inequality in decades.
AMLO, as the president is known, remained an extremely popular leader through the end of his mandate, although investors largely disapproved of his constitutional reforms, including a judicial overhaul that Congress passed during his final weeks in office.
Much of Mexico’s economic growth in the first half of 2024 was driven by Lopez Obrador’s ambitious infrastructure plans, such as the Tren Maya and the Dos Bocas refinery. But executing such costly projects led to a widening budget gap that Sheinbaum needs to fix to avoid a fiscal crisis during her government.
Her administration is pledging to reduce spending by targeting a budget deficit that’s equivalent to 3.9% of GDP this year, less than the 5.9% shortfall in 2024. That pullback alone represents a major headwind to growth.
‘Pay Me Half’
In Monterrey, the industrial real estate developer Roca Desarrollos is on high alert. The company, which has clients that export to the US, is discounting rents on its buildings to retain customers worried about the uncertainty, and is even offering them deferred payment plans, said Carlos Garza, its head of commercial management.
So far, Roca Desarrollos hasn’t lost any clients, he said. But new companies that were seeking to invest in Mexico and use its services are pausing plans.
“We have different strategies with prospects to facilitate the start of their investments in Mexico, like giving a grace period,” Garza said. “We tell them, ‘take the whole building but pay me only half for six months.’”
In public speeches and news conferences, Sheinbaum says the economy is on solid footing and nearshoring investment is still taking place. Yet her government is now offering incentives like tax breaks for companies that invest in manufacturing operations in Mexico.
The case for investing in Mexico still stands despite the uncertainty, according to Vidal Llerenas Morales, the Deputy Economy Minister of Industry and Commerce.
“There is uncertainty, yes, we recognize that,” he said in an interview. “But the interest in relocating investments from Asia to North America persists and that is going to happen in the medium term.”
Recent data leave no doubt about the downturn that’s gripping Mexico’s economy. The nation’s GDP shrank by 0.6% in the fourth quarter as agriculture and manufacturing tumbled. It was the first such contraction since 2021. The central bank halved its projection for GDP growth this year to 0.6% from 1.2%, warning that potential US trade policies could further hurt activity.
Additionally, there’s growing concern about the possibility of mass deportations of Mexicans from the US, and how that could affect remittances that totaled $64.7 billion in 2024, boosting domestic consumption.
With growth already a fraction of the levels seen in prior years, policymakers accelerated the pace of interest rate cuts in February, but their monetary easing campaign may soon be constrained by uncertainties related to a possible trade war.
The case of Monterrey-based MRM, an importer and distributer of motorcycle parts, is a good example. The firm’s executives are particularly worried that Sheinbaum will agree to Trump’s demands to impose tariffs on China, from which 80% of MRM’s imports come.
MRM is seeking to diversify suppliers in case those tariffs hit, with trips to India, Vietnam and Colombia, Executive Director Alejandro Solorio said. He warned supplier changes would lead to higher prices for its customers.
After Trump said last week that tariffs on Mexican goods will start March 4, Sheinbaum said she would still wait for the outcome of negotiations and left the door open for another phone call with the US president.
“He has his way of communicating,” she said on Thursday, adding that she is “optimistic that we can reach an agreement within the framework of our sovereignty and our principles.”
--With assistance from Marie Monteleone and Danielle Balbi.
