Trump's return expected to threaten investor confidence in Mexico

Uncertainties surrounding future US trade policy and the fallout from controversial constitutional reforms could weaken investor confidence in Mexico.

In a report, investment bank UBS wrote that these two factors – along with the scheduled review of the USMCA trade agreement in 2026 – could increase the volatility of Mexican financial assets, including the peso.

UBS, however, also wrote that Mexico’s “strong integration” into North American supply chains offers reasons for optimism in the medium term. “We expect Mexico and the United States to eventually develop a cooperative relationship,” the report said.

US President-elect Trump has said that one of his first executive orders upon taking office on January 20 will be to impose 25% tariffs on imports from Mexico and Canada and raise tariffs on Chinese products by an additional 10%.

UBS predicts that the Republican strongman's return to the White House could lead to “intense rhetoric and challenging negotiations” between the US and Mexico in the coming months.

"Although there is a threat of a 25% tariff on all Mexican products, we believe that this is unlikely to be implemented due to potential inflationary pressures and the deep economic integration between the two countries," the bank said.

“Even if imposed temporarily, such tariffs would have widespread economic consequences, including increased inflation and disruption of supply chains.”

Automotive sector

UBS cited the automotive sector as an example of this interdependence through integrated production between the two countries.

“Nearly 40% of the value of vehicles exported from Mexico to the US is made up of American content. Tariffs on Mexican goods would effectively penalize American manufacturers, workers, and consumers,” according to the report.

It warned that possible retaliatory actions by Mexico should also be considered since Mexico is the second-largest destination of US exports and the largest market for agricultural exports.

“As long as uncertainty around tariffs persists, Mexican assets are likely to experience heightened volatility and demand a higher risk premium,” UBS forecast. “However, the medium-term outlook offers reasons for optimism, as the economic reality of North American integration is likely to prevail.”

Constitutional changes

UBS also highlighted that Mexico's institutional framework is undergoing significant changes that threaten to erode checks and balances, raising concerns about legal certainty and the ability to capitalize on nearshoring opportunities.

“Recent constitutional amendments, including a judiciary overhaul, indicate a shift of power toward the executive branch. These changes, along with other reforms under consideration, have triggered caution among business leaders at home and abroad,” the report said.

On November 28, the senate approved controversial legislation to dissolve several autonomous bodies, transferring their responsibilities to federal ministries.

“This move is more than just bureaucratic restructuring – it could challenge Mexico's commitments under the USMCA,” UBS warned.

“Eliminating independent oversight bodies undermines competition policy and market access provisions outlined in the trade agreement. These reforms are particularly concerning as the USMCA's 2026 review approaches,” it said.

UBS expects the Mexican peso to face increased pressure in the near term as discussions on tariffs, migration policies and the USMCA review process intensify. “We anticipate that the first quarter of 2025 could be the peak of these risks.”

A November survey of private sector specialists carried out by the central bank showed that the exchange rate was expected to reach 20.29 pesos per dollar at the end of December instead of the 19.80 pesos estimated in the previous month.

(The report can be downloaded under the Documents box in the top right corner of this screen.)