U.S. tariffs will likely hurt Mexico in the short term, but should current trade dynamics persist, the country's partial duty-free access access to the U.S. market will help Mexico gain an edge over its competitors, likely attracting investments that help offset damage caused by U.S. protectionism. As of April 23, Mexico is facing a 25% tariff on all exports to the United States that do not comply with the U.S.-Mexico-Canada Agreement (USMCA), which accounted for roughly half of Mexico's exports to the United States in 2024. Mexico's steel and aluminum, as well as cars and auto parts, are also subject to 25% tariffs that Washington has enacted on all countries, while the White House announced on April 14 that it will impose 21% duties on Mexican tomatoes starting July 14. On April 3, one day after U.S. President Donald Trump unveiled his "reciprocal tariffs," Mexican President Claudia Sheinbaum said Mexico received "preferential treatment" but that her administration would push for better conditions for the auto and steel and aluminum industries. However, on April 21, Sheinbaum said she and Trump had not reached an agreement on these sectors during a phone call held on April 16.

• The percentage of Mexico's exports to the United States that do not comply with the USMCA could increase to up to 90% by the end of April 2025 as companies shift their export practices, according to Mexican Economy Minister Marcelo Ebrard.

Mexico's high economic dependence on exports to the United States will reduce incentives for its government to impose retaliatory tariffs on U.S. imports, with domestic policies focusing instead on reducing uncertainty, strengthening the local consumer market and inducing growth via public and private investments. U.S. duties and the uncertainty around Trump's policies, combined with a likely resulting slowdown in U.S. economic activity, will likely weaken the Mexican economy and potentially push it into a recession in 2025. However, the Mexican government will likely refrain from retaliating against the United States given that 85% of Mexico's exports and 42% of its imports go to and come from its northern neighbor, so an escalation to a full-blown trade war (as seen with China's reaction to U.S. tariffs) would have devastating impacts on Mexico's economy. Instead, the Mexican government will seek to incentivize domestic manufacturing in various sectors, such as pharmaceuticals and automotives, as well as expand public housing and construction works, including by reducing bureaucracy and opting for local companies in government procurement purchases. 

• The Mexican economy could shrink by 1.3% in 2025 and 0.6% in 2026, according to the Organization for Economic Cooperation and Development's estimate from mid-March. Meanwhile, in mid-April, the Mexican Institute of Finance Executives reduced its 2025 Mexican annual GDP growth estimate for a second consecutive month to 0.2%, down from 0.6% in March and 1% in February.
• Before Trump's inauguration in January, Sheinbaum unveiled "Plan Mexico," her flagship initiative to court investors and mitigate uncertainty driven by the Trump administration. The plan aims to secure food and energy sovereignty while expanding welfare benefits to maintain domestic economic resilience and even expand Mexico's consumer market to reduce its dependence on foreign (especially U.S.) trade. However, the Mexican government has not disclosed detailed cost or investment estimates associated with the initiative.

If USMCA carveouts continue to shield strategic Mexican sectors, Mexico could eventually gain a competitive advantage over other countries, likely attracting foreign direct investment that, combined with domestic policies, would help mitigate the negative impacts of slower global economic growth. So far, Mexico has not been exposed to Trump's reciprocal tariffs, and the current USMCA protections make it and Canada, for now, the only countries with some tariff-free access to the U.S. market. Should current tariff policies remain in place and uncertainty recede, this access could give Mexico a competitive edge over other countries in the long term. Even if Trump reimposes reciprocal tariffs after the ongoing 90-day pause expires in July, U.S. officials have noted that Mexico would face duties of only 12%, which would leave Mexico among the countries with the lowest tariffs worldwide, given the 10% baseline duty. Mexico's 12% rate would also be much lower than the duties north of 30% that many of its Asian competitors would face, further increasing Mexico's competitive advantage in the new trade landscape. That advantage could draw increased foreign investments as manufacturers seek to leverage Mexico's cheap labor market, geographic proximity and tariff-free access to the United States to expand the assembly of electronics and other manufactured goods beyond the automotive industry, boosting nearshoring. Increased investment inflows would likely lead to an appreciation of the peso and a consequent reduction in companies' imported input costs. Therefore, despite likely short-term economic pain, Mexico may emerge from the Trump administration's deluge of tariffs in a comparatively better position vis-a-vis other countries, especially those in Southeast Asia, which may limit the negative impacts on its economy or even allow for modest growth. 

• Benefits to the Mexican economy are unlikely to be evenly distributed across sectors. The production of electronics, furniture, pharmaceutical, textile and agricultural goods will likely remain attractive for investors, while the steel and aluminum and auto sectors are set to lose steam given strict trade conditions the United States will likely adopt over the coming years, including following USMCA renegotiations due by July 2026.
• Mexico has free trade agreements with 52 countries, mostly across Latin America and Europe, including with the European Union. 

The full-blown U.S.-China trade war will likely send a flood of Chinese goods into Mexico, potentially making imported inputs cheaper but also increasing competition for local manufacturers, meaning the government could impose tariffs on China to protect its industry and appease Washington in trade negotiations. Since imposing initial reciprocal tariffs on China on April 2, the United States has hiked those duties to 125%, a figure that rises to as much as 245% on some Chinese goods when factoring in other tariffs. At their current levels, duties virtually close the U.S. market to Chinese goods, likely leading to a diversion of inputs and finalized products across various other countries, including Mexico. This could result in a flood of products hitting Mexico at lower prices, potentially including intermediary goods that could further reduce input costs and finished items that would compete with local producers for the domestic market. While cheaper inputs would benefit some importers, the Mexican government may adopt additional restrictions on imports from China to fight dumping that could harm some Mexican companies. Mexico could also restrict trade with or investments from China as concessions in trade talks with Washington, especially amid the upcoming USMCA renegotiations due by July 2026. In such a scenario, companies in Mexico may face restrictions that force them to purchase inputs from other countries or incur significantly higher import costs.

• In December 2024, Mexico introduced a temporary tariff increase from 25% to 35% on 138 textile intermediary goods to prevent an influx that would undermine the competitiveness of finished goods manufactured wholly or mostly in Mexico; in January, Mexican authorities imposed a 19% duty on courier imports from countries with which Mexico does not have a free trade agreement, hitting mostly Chinese online retailers.
• In July 2024, the United States and Mexico jointly introduced a policy to prevent countries like China from using Mexico as a back door to bypass U.S. tariffs on aluminum and steel. The policy requires companies to provide proof that steel product imports from Mexico have been melted and poured in North America to qualify for an exemption from the 25% U.S. "Section 232" tariffs, while aluminum product imports will only avoid the 10% tariffs if they do not contain material that is smelted or cast in Belarus, China, Iran and Russia.

If tariffs or the collapse of North America's free trade framework significantly worsen economic conditions in Mexico over time, demand and foreign investment would sink, while protests and crime would likely increase, fueling operational and security risks for companies but not destabilizing the government. Mexico's likely competitive advantage will not necessarily translate into strong and sustained economic expansion in the long term, since widespread disruption to global trade will likely reduce economic activity. Moreover, companies currently operating in Mexico or seeking to relocate there will remain exposed to heightened uncertainty and policy volatility given Trump's erratic policymaking style. Any substantial slowdown in sales to the United States would force manufacturing facilities in Mexico to close, triggering mass layoffs that increase unemployment levels and poverty throughout the country. These drivers could increase protest activity in major urban centers, including Mexico City, Guadalajara and Monterrey (especially the latter two due to their status as industrial hubs). In addition to triggering social unrest, a significant increase in poverty levels would likely lead to an expansion in organized crime activities, as drug cartels commonly recruit (willingly or forcibly) new members from impoverished communities. This scenario would include violence on major highways, with cartels often setting up roadblocks. Reduced income from extortion due to a potential recession would also make criminal groups increasingly aggressive in seeking out new sources of revenue, potentially expanding threats to corporations. However, increased social discontent would not be enough to destabilize the Sheinbaum administration, given that she currently enjoys very high approval ratings and will retain strong support among backers of the ruling Morena party, enabling her to adopt policies aimed at mitigating U.S. tariffs' negative socioeconomic impacts.

• Several drivers could significantly damage Mexico's economy, given the country's high reliance on exports across its northern border, including particularly severe tariffs specifically against Mexico, duties adopted for long periods, the revocation of the USMCA, and/or trade policies that ultimately impede free trade across North America and trigger a recession in the United States
• Although Trump's recent tariff policy reversals will likely limit the negative impact of his protectionist policies on the U.S. economy, the uncertainty of his aggressive and erratic policymaking style will still likely postpone or suspend investment decisions, resulting in an economic slowdown or potentially even a recession. Given Mexico's exposure to the U.S. economy, the Mexican economy would likely falter in such a scenario, especially as U.S. demand for goods from Mexico's manufacturing sector would decline. 
• While extortion most commonly targets small local businesses, reports in recent years have shown that criminal groups also frequently single out foreign businesses. A 2024 survey by the U.S.-Mexico Chamber of Commerce found that one in eight members said criminal groups took "partial control of sales, distribution and/or pricing of their goods."
• Sheinbaum had an approval rating of 80%-83% between February and March, with only 15% of Mexicans disapproving of her, according to polls.