Will Trump take a hard line with Mexico, the most important trade partner?

Even if he will still change his customs policy, the damage has already been done: Investors are unsettled and will reduce their investments in the country. This will affect German companies in particular.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

Donald Trump is following through with his isolationist policy, as he has announced: He has now announced import tariffs for Mexico (and Canada) at 25 percent. The increase for Mexico will only apply from April 2. This is likely to drive the Mexican economy into recession this year. The tariffs will also accelerate inflation and slow down growth in the USA.

This is because Mexico is the USA’s most important trading partner. The USA and Mexico, together with Canada, have been linked by free trade agreements for more than 30 years.

Initially, it was the 1994 NAFTA agreement, the North American Free Trade Agreement, that drove trade and the expansion of value chains in North America. The successor agreement USMCA (United States-Mexico-Canada Agreement) has been in force since 2020 and is due to be revised in the coming year.

Thanks to these institutional trade agreements, Mexico has been the USA’s most important trading partner since 2023 – ahead of China. Last year, Mexico exported goods worth 506 billion US dollars to the USA. By comparison, German companies’ exports to the USA amounted to 161 billion euros last year.

In turn, US companies exported goods worth 335 billion dollars to Mexico. The trade deficit (171 billion dollars) is therefore almost three times as high as that with Canada.

However, the trade balances say little about the intensive interdependence of the companies: Hundreds of US companies have been producing in Mexico for decades – from consumer goods manufacturers in the food sector to high-tech companies in the aerospace industry.

The division of labor is most advanced in the automotive industry. This means that a car is transported back and forth between the plants in Mexico and the USA several times during its production before it rolls off the production line.

German industry is particularly affected by this division of labor. According to the German Bundesbank, German companies have invested between 15 and 20 billion US dollars in Mexico since the turn of the millennium. This makes Mexico the most important recipient of German direct investment in Latin America after Brazil.

There are more than 2,000 companies there with German capital participation. The Mexican branches of German companies also export the majority of their production to the north. The products are correspondingly highly developed compared to the South American locations, where the local market is usually the target.

With the US tariff policy, the average price of a passenger car manufactured in Mexico will now increase by around 6,000 dollars in the US. An SUV, i.e. a city jeep, could now cost 8,000 dollars more. The government has now announced that it wants to exempt US companies from the tariffs. However, it remains to be seen how and whether this will be implemented.

It is obvious that the measures will also cause great damage to the US economy. The US stock market reacted negatively, inflation expectations rose and growth prospects became gloomier.

Following the announcement of the tariff increases, US Secretary of Commerce Howard Lutnick tried to reassure the public that he was in constant contact with the “partner countries”.