When policies fail, scapegoating is all too common: deflecting blame to past or foreign administrations. Mexico faces both a recession and stiff US tariffs—25 percent across the board plus 25 percent more on steel and aluminum—and President Donald Trump has become the cover-all boogeyman.
Placing blame squarely on the tariffs skirts the reality that Mexico was already on track for lackluster growth. Further, such deflection distracts from both necessary reforms at home and nearshoring opportunities on offer with the right diplomacy.
The latest tariffs are set to exacerbate domestic policy blunders that made Mexico vulnerable. The Bank of Mexico and Fitch Ratings have revised down what were poor growth projections for 2025: 1.3 to 0.6 percent and 1.1 to 0.3 percent, respectively.
The good news is that domestic policies can change and tariffs can be negotiated away. The bad news is that the tariffs could hang around and hasten a downward spiral. Combine tariffs with a recession, and one outcome will be reduced tax revenues. With less ability to service debt, Mexico could lose its BBB- rating, the lowest tier of investment grade.
Overreliance on the United States
Mexican President Claudia Sheinbaum has started negotiations with Trump to reduce these tariffs. As a preliminary concession, Trump postponed until April 2 the tariff imposition on products covered by the United States-Mexico-Canada Agreement (USMCA). This suggests potential for a positive outcome.
Regardless of Trump’s actions, though, Mexico would best strengthen its negotiating position and diversify its trading partners.
Due to proximity and purchasing power, the United States has been Mexico’s crucial trading partner—too crucial. In 2024, the United States bought 83 percent of Mexican exports, accounting for 30 percent of Mexican GDP. Correspondingly, 43 percent of Mexican imports came from the United States.
For more than two decades, from 1994, the North American Free Trade Agreement (NAFTA) facilitated trade between the two countries. This became the USMCA in 2020, during Trump’s first term.
During the post-COVID era, Mexico also benefited from US nearshoring efforts. Chiefly, this meant a shift of manufacturing away from China to Mexico and other neighboring countries. During 2022 and 2023, Mexico experienced an economic boost from nearshoring—achieving annual growth rates above 3 percent—and expected to grow at the same pace for five more years.
However, this momentum slowed to 1.2 percent in 2024 and highlighted Mexico’s overreliance on US policies and sentiments.
Digging Mexico’s Own Grave
Former Mexican President Andrés Manuel López Obrador (AMLO, 2018–2024) accelerated public spending during his final year in office, using taxpayer money and public debt to complete large infrastructure projects. These included flagship projects: the Maya Train and the Dos Bocas refinery. They exceeded their initial budgets by US$33.7 billion.
This spending surge, aimed at boosting his party’s electoral prospects, resulted in a historic budget deficit of 5.9 percent of GDP by 2024. Sheinbaum, who succeeded AMLO, has pledged to reduce the deficit to 3.9 percent by cutting expenditures on infrastructure, health, education, and security. Given the large size and popularity of these budget items, though, her proposal appears to be hollow rhetoric.
In addition, reforms conducted at the end of the AMLO administration have harmed investor confidence. The most controversial reform has been the constitutional amendment to replace state and federal judges with judges elected by popular vote.
According to the Stanford Law School, the reform is unconstitutional, since it violates judicial independence and due diligence and jeopardizes the separation of powers. Carlos Herrera, chief economist at BBVA Mexico, argues that the election of judges set to take place on June 1 is a major source of uncertainty, along with US tariffs:
“No one knows what will happen with Trump’s tariff threats or what kind of judicial system we will have after this electoral process. The longer the uncertainty lasts, the greater the impact on investment and, therefore, on economic growth.”
Mexico’s 2024 electoral results have intensified concerns about concentrated governmental power. The Morena political party not only secured another six-year term for its presidential nominee; the party also gained significant majorities in the federal Congress and the state legislatures and executives.
To make matters worse, upon her inauguration, Sheinbaum eliminated seven autonomous agencies that used to be checks on the executive branch. Among them was the Federal Economic Competition Commission, which monitored competition nationwide. This responsibility now falls under the Economy Ministry, which is under the executive’s discretion. Such Morena control portends more pronounced crony capitalism.
Living with the Mistakes
Judicial reform and the removal of autonomous agencies have harmed investor confidence, which is pivotal for nearshoring. Such reforms are already in force, and undoing them does not appear to be on the Morena-Sheinbaum agenda. Unfortunately, an out-of-the-blue and rapid turnaround could undermine trust even more.
Within the Overton window, Mexico could at least have more fiscal discipline and promote entrepreneurship. Reducing bureaucratic hurdles for businesses, offering tax incentives for innovation, and investing in tech manufacturing could stimulate growth and open the door to non-US investment and trade. Further, Mexico has a vast population and could have markedly more productivity and dynamism at home.
Measures friendly to entrepreneurs and investors could even become a bargaining chip between Sheinbaum and Trump. Mexico, for instance, could emulate the China-sponsored special economic zone in El Salvador. This zone aims to distribute Chinese products into Central America. Offering similar special regimes to the European Union and the United States would broaden nearshoring opportunities and be welcomed by both jurisdictions.
