As Mexico turns to higher tariffs to shield domestic industry, Banamex economists warn the strategy could backfire. The bank cautioned that the measures risk deepening economic stagnation, pressuring the exchange rate, and eroding employment rather than strengthening local production.
In a recent report, the bank explained that tariffs are initially designed to protect domestic industries by raising the cost of imported goods, allowing local producers to gain market share and encouraging import substitution. However, economic theory highlights significant costs, including distortions in resource allocation. Tariffs can incentivize production in uncompetitive sectors while increasing costs for industries that rely on imported inputs.
Banamex noted that tariffs have not strengthened domestic production. Empirical evidence from past measures, such as the steel and aluminum tariffs imposed in 2018, shows that while they generated fiscal revenue, they failed to deliver sustained gains in local production.
In the case of agricultural products, tariffs were estimated to have produced negative multiplier effects across interconnected sectors, without price convergence or increases in domestic output. The bank also cited findings from the Mexican Institute for Competitiveness, which reported that tariffs imposed on textiles did not reduce imports. Instead, Chinese transshipment increased, further undermining competition in the sector.
Given Mexico’s deep integration into global value chains, with foreign trade accounting for more than 80% of GDP, Banamex warned that tariffs could further fragment relocation trends by contradicting Mexico’s comparative advantage in low-cost manufacturing.
Mexico Targets Asian Goods
According to Mexican authorities, the broader tariff strategy seeks to strengthen domestic industry, protect jobs, and reinforce the internal market by imposing duties across multiple sectors.
The original proposal covered 1,463 tariff classifications, including both previously taxed and untaxed products. After a review with the Ministry of Economy, 391 items retained their existing tariffs, while others were adjusted based on import volumes and whether they originated from countries with free trade agreements.
Under the revised package, 115 tariff lines were removed, 115 new ones were added, and tariffs on 104 items were reduced to 5% to better align with Mexico’s main trading partners. These measures will enter into force in January and will apply to imports from countries without active trade agreements with Mexico, including China, India, Indonesia, Russia, Malaysia, Thailand, Singapore, and Turkey. The changes will primarily affect products considered strategic, such as textiles, apparel, steel, auto parts, plastics, and footwear, impacting an estimated 6.4% of Mexico’s total imports.
The decision comes amid pressure from the United States for Mexico to curb commercial ties with China, despite warnings from domestic business groups that higher tariffs could raise production costs. Following the announcement, China warned that the measures reflect unilateral and protectionist practices. “China has always opposed all forms of unilateral tariff increases and hopes Mexico will correct such unilateralist and protectionist practices as soon as possible,” the commerce ministry said.
India is also set to be impacted. The Society of Indian Automobile Manufacturers urged New Delhi to engage with Mexico ahead of the decision, warning that higher tariffs would directly affect vehicle exports. Mexico is India’s third-largest auto export market, and the new duties may prompt Indian automakers to reassess export strategies that rely heavily on the country.
Looking ahead, financial institutions expect Mexico’s economy to slow to 0.39% growth this year, according to the latest monthly survey by Banxico.