On March 9, Mexican President Claudia Sheinbaum called for a massive rally in Mexico City’s central square, the Zócalo, to celebrate her administration’s response to the latest US tariff disputes. El Financiero, a major Mexican newspaper, dubbed the event the Arancel-Fest, a play on the word arancel, meaning “tariff.”
Why celebrate? Just days earlier, US President Donald Trump had taken a firm stance: there would be no reversal of the 25% tariffs imposed on imports from Canada and Mexico. However, following a meeting with Sheinbaum, Trump agreed to delay the implementation, reopening negotiations on April 2. In Mexico’s eyes, that’s a major political victory.
Trump’s demands from Mexico were clear: greater cooperation in stopping the flow of fentanyl into the US and stricter measures to curb illegal immigration. As a self-proclaimed “Tariff Man,” Trump has often used trade restrictions as a bargaining tool to pressure other countries into adopting certain policies.
The Economic Cost of Tariffs
Tariffs primarily hurt consumers. Douglas Irwin, a prominent trade economist, notes that import taxes inevitably reduce a country’s ability to export. Trump’s proposed tariffs would negatively impact US citizens’ welfare as analyzed in detail here and here.
But what about Mexico?
Roughly 80% of Mexico’s exports—ranging from agricultural goods and manufactured products to automobiles—are destined for the US. Among the most vulnerable sectors is the automotive industry, where supply chains are deeply intertwined. Individual car parts often cross the US-Mexico border multiple times before final assembly.
Tariffs would instantly raise the cost of Mexican-made goods, triggering job losses in key industries. The Peterson Institute for International Economics estimates huge losses for Mexico if the tariffs are enforced. Exports account for nearly 40% of Mexico’s GDP. Tariffs would be particularly damaging, given that Mexico’s previous administration oversaw near-zero economic growth.
Mexico’s Fragile Economic Outlook
Beyond the tariff threat, Mexico also faces deeper institutional challenges. Recent judicial reforms have weakened key democratic checks and balances. Meanwhile, the government’s stance toward economic openness is increasingly skeptical, reflecting a broader nationalist trend that prioritizes self-sufficiency—a shift that could lead to greater economic isolation.
History suggests that protectionism would be the wrong response to a weak economy. For much of the 20th century, Mexico pursued import-substitution industrialization (ISI), a strategy that led to economic stagnation, state-controlled monopolies, and an eventual debt crisis in the 1980s. By the 1990s, Mexico reversed course, embracing free trade through the North American Free Trade Agreement (NAFTA).
The economic benefits of this shift were significant. Research by Aguayo et al. (2010) found that trade liberalization particularly benefited Mexican women, increasing their access to a wider variety of goods and services tailored to their preferences:
We find that women’s relative wage increased, particularly during the period of liberalization… Finally, we find suggestive evidence that household bargaining power shifted in favor of women. Expenditures shifted from goods associated with male preference, such as men’s clothing and tobacco and alcohol, to those associated with female preference such as women’s clothing and education.
Economic openness has been a blessing for Mexico.
A Risky Step Backward
Reversing Mexico’s economic integration with the US would be costly for both countries. For Mexico, it would mean losing access to its most important market, disrupting industries and eroding its comparative advantages. Meanwhile, the tariffs would provide Sheinbaum’s government with a convenient scapegoat, allowing it to blame external forces for domestic economic failures rather than addressing the root causes of stagnation.
Instead of responding to Trump’s protectionist policies with more protectionism, Mexico would be better off doubling down on economic openness. A retreat into economic nationalism would only repeat past mistakes, ones that Mexico can no longer afford to make.
