Mexico—tiptoeing around tariffs

Migration into the United States remain at a 25% rate for non-USMCA products. Currently, 49% of Mexican exports qualify under the USMCA and are exempt from these extra charges, leaving 51% subject to tariffs.¹

Mexican President Claudia Sheinbaum has taken a conciliatory approach in response to US tariffs. Instead of retaliating, she announced an 18-point plan on April 3 to promote self-sufficiency through domestic food production, boost fuel output, develop infrastructure and create jobs in strategic sectors.

Domestically, Mexico faces significant economic challenges. A slowing US economy, persistent trade uncertainty and a sizable fiscal deficit are all looming risks. If the first quarter GDP contracts, there is a danger of slipping into a technical recession. With limited fiscal space—partly due to past loose expenditure policies and ongoing support for Pemex²—President Sheinbaum has little room to maneuver on spending. Instead, monetary policy is set to do the heavy lifting; the central bank of Mexico (Banxico) has already accelerated its rate cuts to 50 basis points as inflation eases toward its 2%-4% target.

The government’s latest budget reflects a commitment to fiscal consolidation, projecting a reduction of the deficit from a forecasted 5.9% at the end of 2024 to 3.9% by the end of 2025. While some sectors, particularly autos, face challenging tariff implications, the absence of additional tariffs signals continued US support for USMCA. With a dovish central bank outlook and a focus on tightening fiscal discipline, Mexico appears positioned to navigate these external pressures despite the current headwinds.

Impact on Mexican corporates

Changes in US trade policy have significantly increased tariff risks for Mexican corporate bonds. At first glance, US tariffs could pressure the profitability of export-focused businesses, depending on each company’s market position, financial profile and business strength. However, we believe secondary impacts such as currency market volatility, broader market weakness, and changes in consumer behavior and investor sentiment must also be considered.

So far, there haven’t been any major announcements on capital expenditures or investment plan changes due to US tariffs and USMCA. Shifting production and supply chains is a complex process that could take years to implement. Companies are unlikely to make investment decisions without knowing if or how US tariffs will be implemented, and the shifting stances by the United States on tariffs will only foster more uncertainty.

Autos and auto suppliers

In the automotive sector, the situation is mixed. Due to content requirements, about 82% of Mexican autos will face an effective tariff of around 22%, while the remaining 18% could be hit with a steep 55% tariff.³ Negotiations are expected to continue, with efforts to use USMCA “side letters” to refine content rules and possibly secure more favorable exemptions for key sectors.

However, the revenues of Mexican auto parts producers are closely linked to the United States and are very exposed to trade tariffs. Mexican auto parts makers are highly integrated with the US auto manufacturing sector. In recent years, US suppliers and original equipment manufacturers have relocated to Mexico for cost savings. One such example is a supplier of cylinder heads and engine blocks for automobiles and light trucks. The company’s export exposure to the United States is offset by six production plants in America.

Industrials and REITs

Mexican real estate investment trusts (REITs) have benefited from the nearshoring trend driven partly by foreign direct investment (FDI) demand for industrial properties in Mexico. Retail and office properties have also benefited from economic growth linked to nearshoring. While tariffs could impact demand and momentum for nearshoring, the long-term potential remains. Most Mexican REITs are supported by long-term inflation-linked rental contracts and generate predictable cash flows.

Consumer goods

Consumer goods companies are primarily focused on domestic markets with local production. These companies may have significant production in the United States and are not dependent on exports. The key risk for this sector is a tariff-induced economic slowdown that could negatively impact consumer demand. Foreign exchange (FX) volatility could significantly impact margins due to changes in input costs and other costs linked to the US dollar. There are, however, some exposed consumer goods companies that have large export exposure to the United States and could face significant earnings impact from tariffs.

Chemicals

Mexican chemical producers are highly integrated into US supply chains, making them vulnerable to trade tariffs. They rely on US petrochemical feedstock, which could face potential retaliatory tariffs from Mexico and raise production costs.

Utilities

Utilities are primarily domestic-focused businesses, and most companies have limited export exposure to the United States. However, Mexico imports a significant amount of natural gas from the United States for power generation. Retaliatory tariffs from Mexico could result in higher input costs. Higher electricity costs could dampen power demand and could pressure cash flow generation for power utilities such as the Federal Electricity Commission (CFE) if inflated costs are not passed through to customers.

Telecommunications

Telecommunication companies are typically domestic in focus and are insulated from reciprocal tariffs. Key concerns for this sector include changes in consumer sentiment, which could impact subscription demand. FX price volatility could impact telecom companies that have a large currency mismatch from high levels of US-dollar denominated debt.

In closing

Mexico finds itself in a favorable position under the new US tariff regime. No additional tariffs have been imposed on its goods, reinforcing the USMCA trade agreement. However, sectors like autos, chemicals and utilities remain vulnerable to sustained higher tariffs. So far, President Sheinbaum has chosen not to retaliate, instead focusing on boosting domestic production and job creation. Despite facing economic challenges such as a slowing US economy and a sizable fiscal deficit, we expect Mexico to navigate these pressures through a dovish central bank outlook and a commitment to fiscal consolidation.