Mexico is bracing for a tricky relationship with the US. This time it could play hardball
“This is probably the first time in their history that the US is deeply reliant on Mexico.”
Mexico is used to balancing a finicky relationship with its northern neighbor. As it braces for a second Trump term, it might be better positioned than ever to play hardball.
Having a neighbor like the United States has never been easy. Since Mexico won independence from Spain in 1821, the US has become its closest source of capital, their borders a door connecting an “emerging market” to a developed one, a perceived source of crime and drugs with a proclaimed beacon of justice and security.
Mexican dictator Porfirio Diaz visited New York City in 1875 to court US investors to build the nation’s railroads. US investment was also critical for building Mexico’s oil industry before it was nationalized in 1938.
Most Mexicans are familiar with this quote, widely attributed to Diaz: “Poor Mexico, so far away from God, yet so close to the United States.” The quip playfully reflects the resentment that builds when your neighbor is a global economic and imperialist superpower, one that can lift Mexico as easily as it can toss it to the side.
That dynamic played out once again last week: Donald Trump, who was elected to serve a second term come January, threatened to impose 25% tariffs on Mexico and Canada. As usual, Mexico has more to lose than the US, which accounts for more than 80% of its exports.
But that doesn’t mean Mexico doesn’t have room to bargain.
“You have to look at the other side of the coin, which is how deeply the US has become reliant on Mexico,” said Diego Marroquín Bitar, a researcher at the Wilson Center, a Washington-based think tank. “This is probably the first time in their history that the US is deeply reliant on Mexico.”
Mexico is America’s top importer and second to Canada as a destination for US exports. Since 2016, the amount that the US exports to Mexico has increased by $100 billion.
Mexico’s economy has boomed since 2020, when the US-Mexico-Canada Agreement (USMCA) went into effect. In three years, its gross domestic product went from $1.1 trillion to $1.8 trillion. That growth is now appearing to moderate. Still, Bank of America, for one, is bullish on sustained growth in Mexico.
Tariffs on Mexican goods stand to hit the auto industry hard: Ford, General Motors, BMW, Volkswagen, and Toyota all have operations in Mexico. The US also exports oil and agricultural products to Mexico, which is where retaliatory tariffs could likely hit.
“Mexico has never had this level of integration with the US economy,” Marroquín Bitar said. “What does that mean in this context? Tariffs these days would be very harmful for both economies given that we’re so deeply integrated and interdependent.”
A shaky peso
As recently as March of this year, the peso was hovering around its highest valuation against the dollar since 2015. That was largely caused by investment in the country and the gap between Mexico’s high interest rates and the US’s comparatively low rates. (It is more lucrative to park cash where rates are higher.)
In March, $1 was worth 16.5 Mexican pesos. Now, it’s worth about 20.3 pesos, roughly where it sat in 2022. That happened without a significant change to the interest-rate differential between the two countries.
“It’s all about politics,” Brent Donnelly, president of Spectra Markets, said.
In June, Mexico elected Claudia Sheinbaum, a populist ally of her predecessor, who is seen as hostile — or at least unpredictable — for business. In September, the Mexican legislature passed a controversial judicial reform that would make federal-judge positions elected, further spooking investors. Then in November, Trump won a second term in the US, throwing even more uncertainty into the mix.
The downward pressure tariffs put on the peso may soften the blow. When Trump first imposed tariffs on China in 2018, for example, the value of the Chinese yuan against the US dollar crashed to almost exactly offset the tariff impact, Donnelly said.
Sheinbaum responded to Trump’s social-media post by reading a letter aloud during a press conference. In it, she hinted at retaliation and said that the US is responsible for its citizens’ drug habits and the guns that make their way into Mexico. The two leaders then had a closed-door meeting, though their respective accounts of what they agreed to differ greatly.
It was the first glimpse at the tone Mexico’s president may strike when negotiating with Trump. While her politics don’t deviate much from her predecessor, Sheinbaum, a climate scientist who speaks English fluently, is noticeably more measured.
Meanwhile, Canadian Prime Minister Justin Trudeau reportedly suggested cutting Mexico out of the USMCA entirely when the pact is renegotiated in 2026. Doug Ford, the head of Ontario, Canada’s most populous province, said, “to compare us to Mexico is the most insulting thing I’ve ever heard.”
“I think that we are seeing the three administrations speaking to their bases,” said Luis Monroy Gomez-Franco, an economist at the University of Massachusetts Amherst.
