The current US trade war is having far-reaching and significant impact on global supply chains, and some say it will inevitably result in a lengthy recession. We’ve previously discussed the potential impact of Chinese tariffs on certain American industries and given a comprehensive analysis of the effects of tariffs on supply chains generally. But the elephant (or perhaps elefante) in the room is that since 2023, the US has begun importing more goods from Mexico than it does from China. This is a condition that hadn’t previously happened in over 20 years, but which can potentially impact multiple US industries if imports of Mexican goods slow and possible reciprocal Mexican tariffs on the US’s exports to that country are levied. Let’s have a closer look at how the trade war between the US and Mexico might impact American industries.
On April 2, 2025, President Trump announced his administration’s revised tariff policy dealing with imported products from various countries. In February, there were initially stiffer tariffs intended for Mexico, but diplomatic talks between President Trump and Mexico’s President Claudia Sheinbaum Pardo resulted in some compromises during the first quarter of 2025, extending deadlines and other measures to soften the blow to US’s southern neighbor, as well as maintain friendlier trade relations. These tariff delays and exemptions are certainly not completely altruistic on America’s part, as they can potentially have a large impact on several US industries as well, as we’ll discuss below.
While China’s products are now being taxed at an astonishing 145% (up from 34% previously) including the recently enacted 20% fentanyl tariff, in the case of Mexico, products that comply with USMCA (United States-Mexico-Canada Agreement, in force as of July 1, 2020) regulations are currently exempt from the new tariffs. USMCA-compliant products and goods amount to approximately half of Mexico’s exports to the United States. However, exports from Mexico that do not qualify as complying with USMCA provisions (amounting to roughly $300 billion worth of goods annually) will be subject to a 25% tariff, or individually adjusted, reduced tariffs based on mutual negotiation in certain cases (details below). Previously, these non-USMCA-qualified products were subject to a 2.5% tariff rate.
The 25% tariff on products not protected under the terms of the USMCA was initially enacted by President Trump to pressure Mexico on the issues of fentanyl trafficking and undocumented immigration. However, after the diplomatic negotiations and compromises, the Trump administration says that if Mexico continues working with the US on these issues, Mexican products not already protected by the USMCA will instead be subject to a lower 12% tariff rate. Similar conditions have been proposed to Canadian leaders, with a similar, more favorable tariff rate for non-USMCA-qualified Canadian goods.
Many people are surprised to discover that the US imports more cars and trucks from Mexico than from any other country. In 2024, Mexico was the number one country of origin for US light vehicle imports, with a value of almost $78.5 billion. (Japan and South Korea were the runners-up, at $39 billion and $36 billion, respectively.) Today, over 80% of cars produced in Mexico are exported to the US.
However, when we’re talking about the potential impact to Mexico of levying heavy tariffs on Mexican-produced goods, it can actually be worse for US automakers, which are heavily reliant on Mexican-made parts to produce domestic vehicles. This dependence has developed over the past decades due to Mexico’s cost-competitive manufacturing sector, meaning prices on parts from Mexico can be significantly lower than domestically produced parts. As CEOs have been looking for ways to trim costs, streamline supply chains, and improve profits for shareholders (and thus earn their bonuses), they have migrated much of their manufacturing and parts-sourcing out of the country. People in favor of our post-postmodern, increasingly globalized supply chain may rejoice, and shareholders can count their dividends in the short term, but as we can see, any potential supply chain disruptions and resulting cost increases may temper this enthusiasm as reality sets in.
Initially, President Trump announced a blanket 25% tariff on all imported Mexican-built autos and auto parts, but the implementation of this tariff has grown increasingly complicated and fluid after US automakers first went into panic mode, and then immediately and vigorously began lobbying the Trump administration for a re-think. Since US automakers rely so heavily on Mexican parts, a tariff on these items would essentially be a tariff on these US companies. It might be argued that these American firms may as well reap the whirlwind, since they’ve spent decades outsourcing manufacturing and jobs, but the resulting potential impact to the American auto industry and economy has garnered widespread attention and engendered some further discussion before full implementation.
Certain exceptions and conditions are currently in effect or are in discussion for interim enactment. S&P Global reports, “The presidential proclamation signed on April 29 [2025] provides a method for easing the cost of the tariff, if the imported auto parts are destined for assembly in a US-produced vehicle. In addition, the Customs and Border Patrol on May 1 confirmed that auto parts which are compliant with the United States-Mexico-Canada Agreement (USMCA) are not subject to the 25% tariff on auto parts. This relief is available to any automaker completing final assembly in the US, regardless of whether the imported vehicle or part is compliant with the United States Mexico Canada Agreement (USMCA).”
The USMCA entered into force July 1, 2020, and as of that date all NAFTA rules expired except for those relating to automotive products. The USMCA sets new criteria for automotive goods that are not present in NAFTA, including:
As of April 5, 2025, Trump’s one-month exemption on his new tariffs impacting goods from Mexico and Canada for US automakers technically expired. But Reuters reported on May 1, 2025, “Earlier this week, Trump agreed to give carmakers two years to boost the percentage of domestic components in vehicles assembled in the United States. It will allow them to offset tariffs for imported auto parts equal to 3.75% of the total value of the Manufacturer’s Suggested Retail Price of vehicles they build in the US through April 2026, and 2.5% of US production through April 2027.”
President Trump has established a 15% credit (based on the vehicles’ value) to any automakers who choose to assemble their vehicles in the US. These credits could be applied against the value of imported parts, allowing US automakers time to bring supply chains and production back home.
So, in short, the Mexican auto/parts industry is in a state of panic and chaos, and it’s not much better for US automakers who heavily rely on Mexican-sourced components and parts. Volatility and uncertainty in any market tends to drive prices higher, regardless of whether components and vehicles actually merit higher or lower prices based on tariffs, or lack thereof.
President Trump enacted a 25% tariff on Mexican petroleum on March 4, 2025, which was then paused and delayed until April 2, 2025. Mexico is a top-5 producer of America’s petroleum, with the US importing 0.91 million barrels per day from Mexico, amounting to 11% of our total imports.
Tariffs on crude oil imports naturally increase costs for America’s refiners, which inevitably will pass those increases on to US businesses and consumers in the form of higher prices. Some experts estimate that the combined Canadian and Mexican petroleum tariffs could add an average of between 20-30 cents per gallon of gasoline in the short run (though only about a fifth of that increase would be specifically due to the Mexican tariff). The US imports more than half its petroleum from Canada including 60% of its crude oil, and though the US produces nearly all its own natural gas, 99% of US total annual natural gas imports—a small but significant amount—are from Canada.
The likely result of an across-the-board 25% tariff on Mexican petroleum is increased US consumer prices for petroleum products such as gasoline, diesel fuel, and heating oil, as well as a wide range of consumer goods that are made of petrochemicals derived from the imported oil.
Mexican potash has been specifically excluded from the new 25% tariff, and will instead be levied at 10%. However, crop nutrients is still an area where a 25% tariff on Mexican products could have a significant impact. Mexico exported 318,000 tons of DAP/MAP to the US in 2024 (diammonium phosphate and monoammonium phosphate, both of which are commonly included in fertilizers used to supply plants with nitrogen and phosphorus). This accounts for 14% of total US DAP/MAP imports. But According to Argus, “the 25% tariff imposed a month ago will probably stifle this trade flow.”
As farmers and growers see prices rise and supply of nutrients potentially drop, they may have to adjust their prices upward to cover the costs, passing on the bill to American consumers.
This is likely paradoxically exacerbated by the USMCA, which permits tariff exemptions on compliant products imported from Mexico, including fresh fruits and vegetables (which comprise the bulk of qualified imported food from that country). So US growers may not only have to face the competition of cheaper Mexican produce, but they might also be paying more to fertilize and grow their own crops domestically.
Per the terms of the USMCA, dairy products and certain fabrics are not exempt from tariffs, but are subject to a lower rate. Leather goods and wood products are among the imports not included in tariff exemption at all, and will be taxed at the full 25%. The US dairy industry is unlikely to feel any direct impact from a tariff on Mexican dairy imports, since the flow of milk products runs the other direction lately: Mexico is by far the largest importer of American dairy products. California Dairy Magazine reports, “Mexico faces an annual dairy product deficit ranging between 25-30%, and the US supplies over 80% of that shortfall… Dairy exports to Mexico surpassed $2 billion in 2022 under the United States-Mexico-Canada Agreement. US dairy exports to Mexico totaled 1.38 billion pounds in 2023, and the 10-year growth rate for US dairy sales to Mexico is 42%.” By contrast, Mexican dairy exports to the US are a drop in the bucket, primarily consisting of cheeses. However, even a modest tariff has the potential to impact the consumer price of these Mexican products in US supermarkets.
Of greater possible concern would be a theoretical reciprocal tariff on US dairy products exported to Mexico. This kind of tit-for-tat is somewhat common in tariff disputes, and although the current trade war is a somewhat cold one where Mexico is concerned, if tensions increase or President Trump doesn’t see the kind of improvement on the fentanyl and unauthorized immigration issues he desires and implements a full 25% tariff on Mexican goods, there’s a possibility Mexico might start levying a similar tax, impacting US dairy producers to disastrous effect. However, we feel this is probably low on the list of possibilities.
Naturally, any industry reliant on non-exempt Mexican fabrics, articles of leather or composition leather ($32 million annually; by far the largest supplier to the US), or wood products ($705 million annually) will either need to quickly locate alternate sources or face customer vitriol and potentially lost market share as they are forced to raise prices.
Referring to his aggressive new tariffs, President Trump said on April 2, “It’s our declaration of economic independence…Jobs and factories will come roaring back into our country, and you see it happening already.” Regardless of whether you feel tariffs are necessary measures to “right the American economic ship,” so to speak, historically trade wars usually end up costing the countries imposing tariffs the most. As an example, the new tariffs on imported automobiles can result in tariffs as much as $10,000 to $12,000 per vehicle for some luxury SUVs and EVs made in Europe and Asia and imported, according to Reuters. Some studies found that President Trump’s tariffs during his first term reduced real income in the United States, as well as adversely affecting US GDP (Gross Domestic Product).
The Organization for Economic Cooperation and Development (OECD) predicts that overall US inflation, when defined as “an increase in the average price of goods and services in terms of money” will be impacted by increased import costs due to tariffs. The OECD calculates that inflation will hit 2.8% in 2025, up from 2.5% in 2024. The report also forecasts annual real GDP growth in the United States to slow from its very strong recent pace (2.8%) to 2.2% in 2025 and 1.6% in 2026, partially as the result of uncertainty and price hikes due to tariffs.
Deloitte reports, “The University of Michigan’s one-year-ahead inflation figure surged to a 28-month high of 4.9% in March. The Federal Open Market Committee, in its median view in March, expects core personal consumption expenditure inflation—which excludes food and energy prices—to be 2.8% this year, up from its projection of 2.5% a quarter back. A rise in inflation may turn out to be transitory, especially if a onetime tariff hike slows aggregate demand growth in the economy, and inflation expectations remain anchored. But, a series of tariff rate increases, including responses to trade partners’ retaliation, may lead to a more sustained increase in consumer prices over time.”
Historically the US and Mexico have had a somewhat less, shall we say, co-dependent trade relationship than the one between the US and China. And in the current trade war, Mexico has certainly been levied with fewer and lower tariffs than many other countries.
One impact this may have is that countries that do a lot of exporting to the US but are currently hit with higher tariffs, such as Vietnam (46%), South Korea (25%), and Taiwan (32%) might look to move some manufacturing and production facilities or operations to Mexico in an effort to skirt their higher tariffs. By bringing industries to the North American continent and ostensibly then complying with USMCA regulations, these nations’ industries could potentially create a symbiotic relationship with Mexico and share in the tariff discounts.
As things currently stand, since the US imports more goods from Mexico than any other country, The Tax Foundation estimates that tariffs on Mexican imports will cost the average US household an additional $435 per year. For a lot of us, that’s not exactly chump change.
The glass-half-full perspective on the new tariffs is that they have the potential to stabilize US domestic industries, relieve foreign economic pressure on key markets, allow US businesses to reclaim market share, and move jobs and production back inside our borders. There is some evidence that this has been the case in limited instances, particularly the US solar industry’s boom.
However, careful readers of history will mostly find that when the US levies heavy tariffs on countries that provide a significant portion of America’s consumer goods, it’s the average American that ends up paying the heaviest price.
While certain industries may recover some market share and domestic production might grow (whether due to reduced economic pressure from foreign concerns or out of sheer survival), Newsweek has a more pessimistic view, reporting that “Mexico’s current exemption is more of a temporary reprieve than a guarantee—one that could vanish in a single post or policy shift. ‘There are no additional tariffs on Mexico, and that is good for the country,’ President Sheinbaum said, crediting ‘the good relationship we have constructed with the US government.’ But behind that diplomacy lies a clear subtext: Mexico is preparing for a world in which it can no longer rely on US stability.”
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