U.S. Tariffs, Potential and Otherwise: An Analysis from a European Interim Executive Operating in Mexico

What impact could a potential increased customs tariff of 25% have on Mexico, assuming all exports from Mexico into the U.S. will be affected similarly?

Let’s do some simple math. If the cost of goods sold is about 50% (+/- 10%), multiply that by 1.25 to reflect the increased cost under a 25% tariff. It could make these goods 10-15% more expensive for U.S. consumers.

That has the potential to result in significant inflation. Not good for U.S. economic growth since the price increases will not be considered GDP growth. What happens then? The U.S. administration, facing backlash over double-digit inflation rates, will call for the Federal Reserve to cut interest rates.

How will the markets for stock and crypto react? If we take goods that are pure imports from Mexico (no final manufacturing or assembly in Mexico), the price hike would be closer to 25%. I do not think significant price reductions are possible to reduce this burden unless manufacturers significantly reduce quality – a concern for consumers and a time lag on the entire market.

The consequences of such a burden would be evident immediately. Case in point: Consider recent events, when the US administration announced tariffs on Mexico and Canada and then postponed them the next day.

In Mexico, we felt the shock. The country has to evaluate whether imposing a 25% retaliatory tariff on U.S. imports is worth it. “Wait and see” might be a good strategy for both the U.S. and Mexico. Tariffs are a double-sided sword. Significantly higher inflation in the U.S. could make the peso stronger, which would lessen the impact of a 25% tariff. That could be an advantage but, at the same time, a threat, depending on how Mexico plays it.

I would not be surprised if the U.S. allows the dollar to devalue a bit to gain additional competitive advantage by reducing imports and benefitting foreign debt. It also might boost cryptocurrencies.

How Will Mexico React to Sanctions? 

A 25% tariff increase on all goods is similar in some ways to Western sanctions on Russia circa 2014. Russia reoriented its economy and industry towards China, India, and Turkey.

The world is economically round, and I believe that if the West does not supply you with goods, you get them from the East. Mexico could do the same. I see this as an imminent threat to the U.S. vision of keeping China’s influence out of the Americas.

Since Mexico imports electronics, machines, and plastics primarily from the U.S., they can try to get more electronics from China and the developing countries where China manufactures goods, such as Ethiopia. Will the U.S. then sanction poor Ethiopia, which is exploited by China but at least giving the country some employment? This is complex, but could also foster smuggling and corruption.

And in Germany…

I believe Germany is in the process of de-industrialization and could become an even bigger investor in Mexico (many German industrialists have left or shut down their companies, or are now investing outside Germany or the European Union). The German government can only intensify its business activities with Mexico if its de facto “Washington HQ” (the U.S. administration) will allow that and not make them a better offer to invest in the U.S.

This could be a time when Mexico’s government will be able to step out of the shadow cast by the U.S. I believe that given Mexico’s newly formed government, it has the power and potential to do so.