The evolving trade dynamics between Mexico and the United States, particularly in the aftermath of the 2024 U.S. presidential elections, mark a critical juncture for economic relations and nearshoring initiatives. As President Donald Trump secures another term, his administration's stance on tariffs and trade policies could dramatically influence the economic landscape. This article explores the potential economic fallout and strategic adaptations within Mexico, emphasizing the impact on the foreign exchange and bond markets, and offering insights into viable trading strategies amid these shifts.
An Overview of Mexico’s Relationship With the US
Since 1987, Mexico's GDP has experienced substantial growth and is projected to grow at a CAGR of 3.86% between 2024 and 2029. In November 2024, Banco de México reduced its benchmark rate to 10.25%, following 25-bp cuts in September and October. This decision, unanimously supported, aligns with forward guidance signaling potential additional rate reductions.
Figure 1: Mexico GDP Historical Chart (Source: IMF)
Mexico is a highly trade-oriented economy, with foreign trade accounting for 88% of the GDP in 2022 (World Bank). Santander reports that Mexico's primary exports include automobiles (8.1%), data-processing equipment (7.4%), vehicle components (6.6%), freight transport vehicles (5.7%), and petroleum oils (5.5%). Meanwhile, key imports consist of petroleum oils (6.9%), motor vehicle parts and accessories (4.9%), electronic integrated circuits (4.4%), petroleum gas (2.9%), and telephone equipment (2.7%, according to Comtrade). Beyond these figures, the structure of Mexico's economy is supported by diverse sectors. The service sector, which includes tourism, telecommunications, and finance, contributes approximately 63% to the GDP. The industrial sector, especially manufacturing that is highly integrated with U.S. markets through nearshoring, accounts for another 24%. The agricultural sector, though smaller, adds about 4% and underscores the country's economic versatility.
The US Perspective
The United States conducts more trade with Mexico than any other country. Indeed, in 2023, U.S. trade with Mexico reached $799 billion, comprising $475 billion in imports and nearly $323 billion in exports.
Figure 2: US Trading Partners by Volume of Imports (Source: US Census Bureau)
According to BBVA bank, more than 83% of Mexico's exports are directed to the United States, most of which were manufactured goods last year. The U.S. imported over $400 billion in manufactured goods from Mexico, significantly higher than imports from other sectors, such as agriculture, forestry, and livestock, which each accounted for about $20 billion. Similar values were seen in imports from the oil, gas, and mining industries. The bank also notes that goods included automobiles and components, electronics like computers, beverages, medical devices, and household appliances. In addition to trade, remittances are another crucial pillar of Mexico-U.S. relations, providing a significant source of hard currency for Mexico. In 2023, remittances from the U.S. amounted to $61 billion, representing 96% of total remittance inflows and 3.4% of Mexico's GDP, according to central bank data. These figures originate predominantly from approximately 12 million Mexican-born individuals residing in the U.S., 63% of whom are employed (U.S. Census Bureau). Notably, remittances from unauthorized Mexican immigrants in the U.S. were estimated to contribute approximately 1.1% of the GDP in 2023.
Figure 3: US Historical Monthly Imports and Exports with Mexico (Source: U.S. Census Bureau)
In recent times, the ties between the U.S. and Mexico have only grown stronger. Both economies are highly integrated, especially with the abovementioned USMCA which replaced NAFTA. As a result, actions or policies in one country often have a significant impact on the other, and the president-elect Donald Trump has shown how significantly his statement can shake Mexico’s policies.
US-Mexico Trade Relations: Vulnerability
These factors expose Mexico to the dependence on commercial relations with its trading partners, specifically with its northern neighbor due to reasons stated above. The statement made by Mr. Trump on November 26th clearly shows how vulnerable Mexico is in this relationship: he plans to impose a 25% tariff on all products coming into the U.S. from Mexico within the first few days of getting back in the White House. Claudia Sheinbaum, Mexico’s President, said her government would retaliate should the tariffs be implemented and warned of severe bilateral economic repercussions.
Furthermore, Mexico has faced criticism from the U.S. over allegations of facilitating the entry of Chinese components into North America. The following is a prime example of how concerned the Mexican government is about maintaining the trust from the States. According to Bloomberg, USMCA was the reason behind Mexico’s stand as the world's fourth largest exporter of light vehicles, shipping nearly 2.6 million vehicles to the U.S. last year. As such, it has been drawing attention from foreign manufacturers, including BYD, a Chinese electric-vehicle maker and the direct competitor against Tesla, who was expecting to enter the North American market through a new Mexican factory.
To address the concerns about shadowy relations with China, Sheinbaum has led the government to launch a campaign to replace Chinese components with locally manufactured goods. This move showcases the efforts to maintain a good relationship with the U.S. and ensure the continuity of the USMCA.
Mexico is also improving its infrastructure to maintain its global trade status. According to Bloomberg, a $2.7 billion expansion of the Manzanillo port, set to double its capacity by 2030, will position it as one of Latin America’s busiest ports and bring it to compete directly with Peru's Chinese-built $3.4 billion Chancay port inaugurated earlier this month. On top of this, other notable projects such as the expansion of the Port of Veracruz and the development of the Isthmus of Tehuantepec trade corridor have been designed to improve trade logistics and connectivity with the U.S., supporting Mexico’s export-led growth. This underscores the country's commitment to becoming a regional trade powerhouse.
Trump’s Approach to the US-Mexico Trade Relationships
The main contribution of President Donald Trump to the trade relationship between US and Mexico is coherent with its promised policies of bringing back jobs to the U.S. and asserting American economic and political affairs abroad: his Administration renegotiated the NAFTA (North American Free Trade Agreement) to create the USMCA (United States-Mexico-Canada Agreement). The approach to this renegotiation was based on Americans’ belief that free trade agreements were disadvantageous to the U.S. economy and the individual American, especially in industries that were easier and cheaper to source internationally, such as manufacturing.
Since Trump openly spoke about outsourcing to Mexico especially, it was no surprise his administration implemented policies which forced Mexican companies to hike wages and working standards for their workers, which increased the cost of producing in Mexico and closed the cost of production gap between Mexico and the U.S. These policies included NAFTA mandating that 40-45% of auto parts be made by workers earning at least $16 an hour, worker’s rights being strengthened, and enhanced the ability of unions to represent workers effectively. Whilst the effectiveness of such policies is debatable as critics argue enforcement is a challenge, the intent is clear for all to see: Trump aims to bring jobs back to the US.
On November 5th 2024, Trump returned to the presidency, and for his second term, he promised to be even bolder with his protectionist policies. He vowed to finish the wall that he had begun building, which Biden had surprisingly continued funding, having claimed would ‘stop the drugs’ and ‘keep the criminals out’ from Mexico, and, perhaps even more radically; he promised to implement a “universal tariff” of up to 20% on all imports entering the U.S, and a 60% tariff on any good originating in China. The latter directly responds to Chinese companies choosing to set up production facilities in Mexico, in what has been nicknamed ‘nearshoring.
US-Mexico Trade Relations: Vulnerability
These factors expose Mexico to the dependence on commercial relations with its trading partners, specifically with its northern neighbor due to reasons stated above. The statement made by Mr. Trump on November 26th clearly shows how vulnerable Mexico is in this relationship: he plans to impose a 25% tariff on all products coming into the U.S. from Mexico within the first few days of getting back in the White House. Claudia Sheinbaum, Mexico’s President, said her government would retaliate should the tariffs be implemented and warned of severe bilateral economic repercussions.
Furthermore, Mexico has faced criticism from the U.S. over allegations of facilitating the entry of Chinese components into North America. The following is a prime example of how concerned the Mexican government is about maintaining the trust from the States. According to Bloomberg, USMCA was the reason behind Mexico’s stand as the world's fourth largest exporter of light vehicles, shipping nearly 2.6 million vehicles to the U.S. last year. As such, it has been drawing attention from foreign manufacturers, including BYD, a Chinese electric-vehicle maker and the direct competitor against Tesla, who was expecting to enter the North American market through a new Mexican factory.
To address the concerns about shadowy relations with China, Sheinbaum has led the government to launch a campaign to replace Chinese components with locally manufactured goods. This move showcases the efforts to maintain a good relationship with the U.S. and ensure the continuity of the USMCA.
Mexico is also improving its infrastructure to maintain its global trade status. According to Bloomberg, a $2.7 billion expansion of the Manzanillo port, set to double its capacity by 2030, will position it as one of Latin America’s busiest ports and bring it to compete directly with Peru's Chinese-built $3.4 billion Chancay port inaugurated earlier this month. On top of this, other notable projects such as the expansion of the Port of Veracruz and the development of the Isthmus of Tehuantepec trade corridor have been designed to improve trade logistics and connectivity with the U.S., supporting Mexico’s export-led growth. This underscores the country's commitment to becoming a regional trade powerhouse.
Trump’s Approach to the US-Mexico Trade Relationships
The main contribution of President Donald Trump to the trade relationship between US and Mexico is coherent with its promised policies of bringing back jobs to the U.S. and asserting American economic and political affairs abroad: his Administration renegotiated the NAFTA (North American Free Trade Agreement) to create the USMCA (United States-Mexico-Canada Agreement). The approach to this renegotiation was based on Americans’ belief that free trade agreements were disadvantageous to the U.S. economy and the individual American, especially in industries that were easier and cheaper to source internationally, such as manufacturing.
Since Trump openly spoke about outsourcing to Mexico especially, it was no surprise his administration implemented policies which forced Mexican companies to hike wages and working standards for their workers, which increased the cost of producing in Mexico and closed the cost of production gap between Mexico and the U.S. These policies included NAFTA mandating that 40-45% of auto parts be made by workers earning at least $16 an hour, worker’s rights being strengthened, and enhanced the ability of unions to represent workers effectively. Whilst the effectiveness of such policies is debatable as critics argue enforcement is a challenge, the intent is clear for all to see: Trump aims to bring jobs back to the US.
On November 5th 2024, Trump returned to the presidency, and for his second term, he promised to be even bolder with his protectionist policies. He vowed to finish the wall that he had begun building, which Biden had surprisingly continued funding, having claimed would ‘stop the drugs’ and ‘keep the criminals out’ from Mexico, and, perhaps even more radically; he promised to implement a “universal tariff” of up to 20% on all imports entering the U.S, and a 60% tariff on any good originating in China. The latter directly responds to Chinese companies choosing to set up production facilities in Mexico, in what has been nicknamed ‘nearshoring.
Impact of US election on Peso and the Mexican Bond Market
The US Presidential election and Donald Trump’s victory in early November, through the threats of heavy US tariffs on Mexico and rising geopolitical volatility, proved to be a catalyst for a falling Peso and rising Mexican bond yields. Pre-election bets on a Trump victory, the so-called ‘Trump trades’, already highlighted market sentiment’s increased wariness of protectionist measures, only amplified by Trump’s eventual triumph in the election.
Tariffs: Are They Credible?
Trump widely touted a repeat of the protectionist measures that characterized his first term with the main threat to Mexico being the general 25% tariff on all imports to the US. However, the credibility of these measures is an important factor to consider as one is driven to ask the question of whether this is a genuine intent of economic policy, a pure negotiation tactic, or rather a marketing strategy for its election campaign.
On one hand, Trump has openly and widely announced his tariff plans and has been a proponent of protectionist measures in the past, previously mentioning protectionist-based economic plans in interviews as far back as the 1990s. Reducing the US trade deficit and curbing indirect demand for Chinese manufacturing (that is potentially used in Mexican exports to the US) are priorities for the President-elect. Furthermore, pushing for tariffs could serve as aggressive bargaining pressure in the effort to force Mexico to reduce undocumented migration and the flow of fentanyl into the US.
However, Trump has been known not to always honoring the claims he makes and, should the tariffs be used as a bargaining tool, holding their threat over Mexico could be more effective than putting them in place. As a matter of fact, the protectionist measure would arguably hurt the US economy, with an estimated 400,000 job losses as the product of heavy tariffs. The US automotive industry, with its active manufacturing base in Mexico, would also be affected, including American companies General Motors and Ford who produce 88% of pickup trucks sold in the US. Moreover, US consumers who continue buying Mexican goods will face increased prices, with tariffs having shown to be largely passed onto consumers, lowering disposable income or causing an inflationary effect.
Diplomatic cooperation between the two nations in the wake of Trump’s election also seems likely with Mexican President Sheinbaum having had a seemingly promising phone call with Trump, the latter describing it as “wonderful”. Her predecessor Andrés Manuel López Obrador had an agreement with Trump where migration to the US was controlled in exchange for the absence of tariffs and hopes are that Sheinbaum can create a similar sort of deal. Concessionary measures could include an increased effort on security, migration and drugs.
Nevertheless, should the cooperative approach fall through, the prospect of retaliatory tariffs on the US is also not a threat to be underestimated. With an already large trade deficit and international relations looking more frayed than ever for the US, the prospect of increased difficulty exporting to one of its biggest trading partners is not likely to be taken lightly.
Mexico’s Bond and FX Market
Though, in practice, the measures put in place by the US may not be the 25% tariff that Trump has advertised, the threat of protectionist measures and frayed relations between the US and Mexico still looms large. The Mexican peso has steadily fallen in the last 6 months, surpassing the 20 MXN/USD barrier in November and facing a 4.5% depreciation in the last 30 days before the elections, as the likelihood of a Trump presidency was increasing, and with protectionist measures likely to cause an economic slowdown. Additionally, the currency and economy were not helped by the unwinding of the yen carry trades in July 2024, as well as by the judicial reforms and the changes to independent regulators that were put in place. Alongside the currency depreciation, sovereign bond yields have increased reaching 10.3% from a low of 9.3% in September. This rise can be attributed to the increased currency volatility adding risk to rates trading returns, as well as the increased economic risk related to the forecasted impact of tariffs as a result of the US election results.
Figure 4: Mexico 10Y Bond Yield Historical Chart (Source: Trading Economics)
Given these economic conditions, as a result of the enhanced uncertainty of the path to come, our base case scenario supports increased volatility both in the Mexican Bond and FX market, with the Peso poising to fall further against the dollar in the first part of 2025, and with hedge funds, asset managers and traders holding $23.3bn in derivatives positioned long on the US Dollar, the highest amount since July. Thierry Wizman, global foreign-exchange and rates strategist at Macquarie sees additional losses to 21.75 peso per dollar by the end of 2025. What about the path of Mexican yields going forward? Even though the volatility in yield is highly correlated to that of the currency, we believe the Mexican Central Bank will maintain a dovish approach in 2025, therefore trying to stimulate growth in light of potential US restrictions by putting downward pressure on yields.
How to profit on the current scenario: a trader’s perspective
Carry trades, a popular strategy among foreign exchange traders, consists in borrowing in the currency of a country with low interest rates — such as Japanese Yen — to invest in higheryielding liquid assets in an other currency, such as Mexico’s. In fact, the country’s central bank raised borrowing costs early and aggressively to curb inflation in the wake of the Covid-19 pandemic, setting its benchmark interest rate at 11.25% from May 2023 to February 2024. Therefore, the yen/peso carry trade had been wildly popular and profitable in recent years, returning more than 50% from the start of 2023 to May 2024, according to Sam Lynton-Brown, Head of Global Macro Strategy at BNP Paribas. However, investors’ propensity for such investments is conditional to an environment with relative lack of volatility in currency markets. “The idea of the carry trade assumes you have a stable political and economic framework whereby markets can try and take advantage of large carry differentials,” said Shahab Jalinoos, Head of G10 Foreign Exchange Strategy at UBS. “Once you start getting large idiosyncratic risks the story becomes different. You’re getting paid to take a risk that you may not be comfortable with.”
The reversal of this strategy started during summer, following the election of Sheinbaum and the potential for a bumpy ride as she pursues her reform agenda, leading to a sharp peso’s decline. Donald Trump’s pledge to levy additional tariffs on imports from Canada, Mexico and China is worsening this steep drop, with the Mexican peso falling 1.1% against the dollar after last Tuesday’s announcement.
Figure 5: Price History and Trade Volumes of USD/MXN (Source: Factset)
The imposition of tariffs and potential changes to the USMCA is likely to weaken Mexico’s export-driven economy, leading to a further depreciation of the MXN that outweighs benefits from interest rate differentials. Furthermore, even if Mexico traditionally offers higher interest rates than the U.S, its central bank is expected to cut rates to stimulate growth under economic strain, reducing the carry advantage of holding MXN. On the other hand, Trump’s promised mixture of tariffs and tax cuts is expected to feed inflation and put upward pressure on interest rates, leading to a further appreciation of the USD.
In the scenario in which Mexican peso (MXN) continues to depreciate against the dollar, a profitable trade strategy could be short selling MXN and going long on a stable currency such as the US dollar. As a result, when the Mexican peso depreciates, the value of the position will increase when the trade is closed. However, one could argue that potential tariffs on Mexico were at least partially discounted in the peso’s valuation.
As a result, further currency depreciation would require tariffs to become reality, and that could require some time if Trump prioritizes tax cuts and deregulation in his political agenda. Therefore the main risk associated to the strategy would be a rebound in the peso before these tariffs could potentially materialize.
By Bianca Proverbio, Alex Murray-Bruce, Neil Pinto, Anh Tho Vu
Sources:
- IMF
- Bloomberg
- Statista
- Wall Street Journal
- US Census Bureau
- US Department of Commerce
- The Financial Times
- RBC Asset Management: Insights
- Argus
- The Atlantic
- Washington Examiner
- Americas Quarterly
- CEPAL
- Tecma
- Council on Foreign Relations
- WITA