Mexico prepares retaliation to US tariffs amid doubts about their duration

US President Donald Trump followed through on his threat to impose tariffs on the USMCA partners, Mexico and Canada, effectively overturning the free trade agreement signed during his previous term.

Markets remain skeptical of how long they will be in force, keeping the peso stable. At the same time, Mexico is preparing retaliatory tariffs, with President Claudia Sheinbaum condemning the move as a "unilateral" and provocative decision.

Trump's decree, which took effect at midnight on March 4, officially imposed 25% tariffs on imports from the two nations.  

Trump has insisted that neither Mexico nor Canada has done enough to curb the entry of undocumented migrants into the US, as well as the flow of drugs – particularly fentanyl, which is trafficked from China. He also raised tariffs on Chinese imports by an additional 10% to 20%, ostensibly to punish the Asian nation for failing to halt shipments of the drug to the US.

Despite the decree, the markets continue to expect the measure to be suspended or postponed shortly. As a result, the Mexican peso has not fallen against the US dollar to the levels seen in February when the tariffs were initially announced before being postponed for 30 days.

Mexico announced it will unveil retaliatory tariffs and other countermeasures on Sunday in response to what President Claudia Sheinbaum described as a United States' "unilateral" decision.

She described the US statement as "offensive, defamatory and baseless." On Thursday, she is scheduled to speak with Trump.

Canada, for its part, has already announced a 25% reciprocal tariff on US products, marking the beginning of what observers fear could become a trade war. 

"I still believe this will be very, very temporary. In fact, even Sheinbaum’s announcement about retaliatory measures on Sunday is part of her attempt to engage with Trump. That is, she will call him on Thursday to see if the situation can be defused," James Salazar, deputy director of economic analysis at CI Banco, told BNamericas.

"Even the financial market, particularly the Mexican exchange market, still anticipates this, given that, considering the implications of a widespread 25% tariff, the pressure should have been much stronger. However, the reality is that it has been contained. The peso has indeed fallen, but it has not yet dropped to the levels seen in early February, when it reached 21.30 pesos per dollar after the executive order was signed," he added.

Mexico’s deputy foreign trade minister, Luis Rosendo Gutiérrez, stated on his X account that "it is evident that Mexico did its part" and expressed confidence that political and economic rationality will soon lead to shared economic prosperity. "Regardless of the circumstances, Mexico will undoubtedly emerge stronger," he added.

At the end of last week, high-level bilateral meetings were held in Washington. Mexican authorities announced the deportation of 29 high-profile drug traffickers to the US, although they clarified that these were not extraditions.

The American Chamber of Commerce in Mexico said in a statement that "the numbers tell the story: Total trade in goods and services among the USMCA partners increased more than 50% between 2021 and 2023 (USTR, 2024). But this isn't just about trade – it's about coproduction, a system where we build and compete together and draw on each other's strengths."

The chamber also noted that "imports from Mexico contain more than twice the American value-added compared to imports from the rest of the world – and nearly ten times more than imports from China.  

"Tariffs put all of this at risk. Imposing tariffs on a co-production system would backfire. We've seen it from the instant reaction of the markets, the fear of small and mid-size producers, to the predictive increase in auto prices and inflation. The only real winners are our global competitors, especially China." 

Kenneth Smith, former chief technical negotiator for Mexico in the USMCA talks, echoed this concern. On Monday night, he told media outlet MeganoticiasMx: "At the end of the day, an emerging trade war between the three North American countries clearly violates the treaty, but the only real beneficiary is China and some of our key competitors. No matter how you look at it, this is a bad idea – an ideologically driven policy completely disconnected from economic reality."

Dark outlook

Although Salazar still believes the tariffs will be short-lived, he warned that if they remain in place without signs of negotiations to reverse them, the situation could take a different turn.

"The effects would start to become evident, particularly in Mexico's exports to the United States. Even if Mexico retaliates, we could see some inflationary pressures here," Salazar said.

"These same effects could also be felt in the US, leading to inflationary pressures and weaker economic activity. This could prompt the Federal Reserve to extend its pause on interest rate cuts or even consider raising rates again. If that happens, we would likely see declines in most financial assets, and the exchange rate could surpass 21.60 pesos per dollar. This scenario will become more likely if the prospect of a swift agreement continues to fade," he underscored.