More Tariffs To Come – Four Initial Considerations From Mexico
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February 11, 2025
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President Donald Trump’s decision to impose, and then postpone a month, 25 percent across-the-board tariffs on Mexico and Canada (with a 10 percent carve-out for Canadian energy) is a watershed moment for North America.1 Regardless of the assessment of how much was ultimately achieved by each side in this episode, there’s no question that this is only round one in a protracted negotiation that spans from trade to security. Most of it is still to be played out.
While similar threats were made and negotiated away in the first Trump administration, this is not a rerun. We are in the opening days of a new era in which free trade and lower prices can be expendable in the pursuit of other economic goals. A full review of the country’s trade policy was ordered on day one and will be completed by April.2 A nuanced understanding of evolving dynamics is needed to mitigate new categories of risk while pursuing new opportunities. The following are four initial considerations to keep in mind.
Tariffs Dislocate the Regional Economy — That Is the Point
Team Trump is fully aware that tariffs disrupt prices, value chains and supply patterns.3 Insisting on explaining this to officials will hardly dissuade them. If tariffs within the region end up going forward, the current iteration of the United-States-Mexico-Canada Agreement (“USMCA”) would not be collateral damage but the target of the action.4 President Trump has reiterated he considers the current economic relations with Canada and Mexico remain “unfair.”5
Traditional economic logic is out the window. Trump advisors such as Peter Navarro and Robert Lighthizer have argued that a single-minded focus on low costs and free trade has come at the cost of domestic jobs, created dependency on foreign suppliers and made the United States lose ground to foreign competitors.6 Correctly or not, the Government of the United States has decided on a major shake-up and President Trump has already acknowledged there may be “some pain.”7
As advocacy tools, traditional economic arguments should be rethought or replaced. Calls to look after domestic consumers and safeguard or strengthen regional competitiveness are both correct and off the mark. Acting to shape change looks like a far better bet.
Preserving an expansive North American project is still a possibility. Yet, a taxed regional relationship would not be game over for Canada, Mexico or the companies operating in either country. Exports to the United States will continue (geography and weaker currencies cut into tariffs), trade agreements are in place with most major economies (via the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and with the European Union) and both domestic markets are very significant.8
The Reframing of United States-Mexico Relations Is Not Transitory
This is not a stand-alone episode to be waited out. Even if additional deals are reached to further postpone, scale down or contain tariffs, the shift in approach from the United States will be the norm for at least the next four years.
As shown in his week-one spat with Colombia over immigration enforcement cooperation, and now again with Mexico and Canada, President Trump will use the threat of tariffs to coerce friends and foes into acting on his economic and non-economic priorities.9 This, in addition to the push described above to change the terms of trade and investment.
The trafficking of migrants and fentanyl across the borders was the basis for invoking the International Emergency Economic Powers Act (“IEEPA”).10 This could have been a strategic choice to avoid having to negotiate trade policy with the U.S. Congress. Moreover, the United States took the unprecedented step of bluntly accusing, in an Executive Order, the Mexican government of having “an intolerable alliance” with drug cartels.11 Once these arguments have been made, it is very difficult to walk them back — or to prevent them from shaping subsequent bilateral interactions.
Washington could be expecting, at a minimum, confidence-building measures and meaningful, open and unfettered cooperation. The deal with Canada, for instance, foresees a “Canada-U.S. Joint Strike Force” and “a new intelligence directive on organized crime and fentanyl.”12 Rallying around the flag in Mexico City may be a political necessity — but meaningful strategic change ought to be considered.
For Companies in Mexico, Enhanced Compliance Is Urgent and Indispensable
On day one of the new administration, President Trump ordered that Mexican drug cartels be designated foreign terrorist organizations (“FTOs”).13 Once operationalized, providing material support to them will lead to severe responses from the United States, even on an extraterritorial basis, including potential asset seizures, criminal charges and substantial fines.14 As Washington claims that the Mexican government itself has provided such assistance, members of the Trump inner circle are calling for U.S. special operations and other forms of military action to take place.15
Even without such escalation, the emerging scenario has substantive implications for companies operating in Mexico. Heightened internal controls and due diligence when engaging with third parties will be key to ensure compliance with both U.S. and Mexican legislation. Moreover, it would be prudent to adopt best practices, and document them, ahead of engaging with U.S. officials to discuss company-specific needs and constraints as corporate strategies evolve and adapt.
Mexico’s Energy Sector Will Be a Pressure Point To Watch
Canadian energy exports were to be subject to a differentiated tariff of 10 percent, while Mexico’s faced the full 25 percent. This tacitly acknowledged U.S. reliance on supply across its northern border but not from the south. This is a major risk for Pemex, Mexico’s embattled state-owned oil and gas company, and, through it, to Mexico’s fiscal stability.
From January to November 2024, 57.6 percent of Pemex’s crude oil exports were to the United States.16 Yet, due to declining Mexican production, this accounted for an average of only 464,811 barrels per day (U.S. production was 13.4 million). 17 If tariffs were imposed, even the Pemex-owned Deer Park refinery in Texas could be compelled to stop using Mexican crude, since more than 80 percent of its production is sold in the U.S. market.18 Such a shock to the company could hardly come at a worse time, as it struggles to cover an estimated 25 billion dollars in short-term payments to suppliers — on top of already being the world’s most indebted oil company.19
Mexico would have no leverage to seek reprieve. Sector-for-sector reciprocation seems out of the question — last year, Mexico imported 63 percent of liquid fuels used in the country and 69 percent of natural gas (used, among other things, to generate 60 percent of total electricity).20Preventing fuel and electricity prices from rising above inflation remains a core government promise, which could be made to be beyond reach.21
For observers seeking to gauge Mexico’s capacity to negotiate, absorb or respond to President Trump’s tariff policy, energy may be the canary in the mine.
The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals.
Footnotes:
1: Donald J. Trump (@realDonaldTrump), “Today, I have implemented a 25% Tariff on Imports from Mexico and Canada (10% on Canadian Energy)…,” Truth Social (Feb. 1, 2025, 5:42 PM); Donald J. Trump (@realDonaldTrump), “Canada has agreed to ensure we have a secure Northern Border…,” Truth Social (Feb. 3, 2025, 4:57 PM); Donald J. Trump (@realDonaldTrump), “I just spoke with President Claudia Sheinbaum of Mexico. It was a very friendly conversation wherein she agreed to immediately…,” Truth Social (Feb. 3, 2025, 10:41 AM).
2: “America First Trade Policy,” White House (January 20, 2025).
3: Donald J. Trump (@realDonaldTrump), “The “Tariff Lobby,” headed by the Globalist, and always wrong, Wall Street Journal, is working hard to justify Countries like…,” Truth Social (Feb. 2, 2025, 8:09 AM).
4: For instance, see: Brian Schwartz, Gavin Bade, and Vipal Monga, “Trump Pushes for Early Renegotiation of U.S. Trade Deal With Mexico, Canada,” Wall Street Journal (January 21, 2025).
5: Donald J. Trump (@realDonaldTrump), “Canada has agreed to ensure we have a secure Northern Border…,” Truth Social (Feb. 3, 2025, 4:57 PM); Donald J. Trump (@realDonaldTrump), “I just spoke with President Claudia Sheinbaum of Mexico. It was a very friendly conversation wherein she agreed to immediately…,” Truth Social (Feb. 3, 2025, 10:41 AM).
6: For instance, see: Ari Hawkins, “Navarro: Trump will ‘structurally shift’ American economy with tariff revenue,” Politico (February 04, 2025); Scott Pelley, “Trump’s former trade chief says China is a threat, tariffs are necessary,” CBS (February 02, 2025).
7: Donald J. Trump (@realDonaldTrump), “The “Tariff Lobby,” headed by the Globalist, and always wrong, Wall Street Journal, is working hard to justify Countries like…,” Truth Social (Feb. 2, 2025, 8:09 AM).
8: “Text of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP),” United Kingdom; “EU-Canada Comprehensive Economic and Trade Agreement (CETA),” European Union; “EU trade relations with Mexico. Facts, figures and latest developments,” European Union.
9: Vanessa Buschschlüter and Ian Aikman, “Colombia yields on US deportation flights to avert trade war,” BBC (January 27, 2025); for instance, see: Jessica Murphy “US commerce nominee says Canada and Mexico can avoid tariffs,” BBC (January 29, 2025), https://www.bbc.com/news/articles/c78w1xexn92o.
10: Donald J. Trump (@realDonaldTrump), “Today, I have implemented a 25% Tariff on Imports from Mexico and Canada (10% on Canadian Energy)…,” Truth Social (Feb. 1, 2025, 5:42 PM).
11: Executive Order, “Imposing Duties to Address the Situation at Our Southern Border,” The White House (February 01, 2025).
12: Justin Trudeau (@JustinTrudeau), “I just had a good call with President Trump. Canada is implementing our $1.3 billion border plan — reinforcing the border…,” X (Feb. 3, 2025, 4:36 PM).
13: Executive Order, “Designating Cartels And Other Organizations As Foreign Terrorist Organizations And Specially Designated Global Terrorists,” The White House (January 20, 2025).
14: “Know Your Risk: Terrorist Designation of Cartels on Business Interests in Mexico,” FTI Consulting.
15: For instance, see: Elon Musk (@elonmusk), “Ultimately, I doubt the cartels can be defeated without US Special Operations,” X (Feb. 1, 2025, 2:07 AM); Asawin Suebsaeng and Andrew Perez “Team Trump Debates ‘How Much Should We Invade Mexico?’,” Rolling Stone (November 27, 2024).
16: “Oil Prices End 2024 on a High Note,” Mexico Business News (January 6, 2025).
17: “U.S. crude oil production established a new record in August 2024,” U.S. Energy Information Administration (November 26, 2024).
18: Perla Velasco, “Deer Park Exports Still Lacking,” Mexico Business News (June 21, 2023).
19: Figures utilized from Spanish language article: Héctor Usla, “Deuda de Pemex con proveedores sube a 25 mil millones de pesos mensuales, estima AMESPAC,” El Financiero (December 05, 2024); “Mexico’s Pemex reduces financial debt, increases refining but production falls,” Reuters (April 26, 2024).
20: Figures utilized from Spanish language article: Karol García, “Pemex compra 63% de la demanda de gasolinas y diésel, pero promete dejar de importar en 2024,” El Economista (January 04, 2024).
21: “Sheinbaum to Prevent Fuel Price Hikes,” Mexico Business News (January 06, 2025).
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