The Tariff Escalation Between the US and China Reshapes Risks and Opportunities for Mexico
The potential for the United States to impose 100% tariffs on products originating from China has once again triggered alarms across markets and North American supply chains. President Donald Trump acknowledged that a tariff of that magnitude would not be sustainable in the long run, although he justified it as a response to China’s tightening of export controls on rare earth elements. The proposed package also includes new restrictions on critical software exports and is unfolding in a tense negotiation environment, with a potential meeting with President Xi Jinping on the agenda.
For Mexico—the United States’ second-largest trading partner and a hotspot for production realignment due to nearshoring—this protectionist shift could have mixed effects. In the short term, the substitution of Chinese imports in the US market opens a window for Mexican manufacturers of auto parts, appliances, electrical equipment, furniture, textiles, and certain capital goods. This diversion of trade could strengthen investment flows to existing plants in the north and the Bajío region, as well as to new projects seeking clarity under the USMCA.
The less favorable side lies in Mexico’s deep integration with Asian inputs. A significant portion of Mexico’s exports to the US incorporates Chinese components—ranging from electronics and circuit boards to plastic parts and machinery. If Washington tightens rules of origin or limits the use of technologies and software involving Chinese inputs, companies in Mexico could face higher costs, stricter customs reviews, and possible disruptions. In addition, tougher scrutiny against transshipment could extend logistics times at the border, precisely when competitiveness relies on fast deliveries.
The rare earths issue adds another layer of complexity. China dominates the processing of these key elements for magnets, turbines, electric vehicles, and electronics. Mexico currently does not have an established supply chain for rare earth extraction and separation, so the local industry remains exposed to global supply shocks and price swings. Initiatives to diversify suppliers outside Asia could open up new niches for Mexico in final manufacturing stages or recycling of components, but would require investment, technology, and clear rules concerning environmental and permitting matters.
On the macroeconomic front, broad-based tariff hikes in the United States would tend to raise input and finished goods costs, with potential spillover to prices in Mexico through higher import costs and currency effects. In a context where domestic inflation has eased but remains above the central bank’s target, additional external pressures could prolong a restrictive monetary stance. Exchange rate volatility could also spike, raising hedging and financing costs for the private sector.
Beyond the immediate shock, the trajectory will depend on whether bilateral talks can contain the escalation. A partial agreement would reduce uncertainty and help consolidate nearshoring with fewer frictions. On the other hand, if broader tariffs and stricter technological controls come into play, Mexico will need to accelerate its adjustments: substitute critical inputs, strengthen origin verification, modernize customs, and expand energy and infrastructure capacity to support new investments. All this is unfolding ahead of the USMCA review in 2026, which adds further incentive to advance regulatory certainty and implementation.
In summary, the trade confrontation between the United States and China is reshaping the landscape for Mexico: it offers opportunities for greater production and capital inflows, but also raises risks related to costs, compliance, and supply. The final outcome will depend on how well companies can adapt their supply chains and on public policies that facilitate infrastructure, energy, and certainty—key factors to capitalize on this realignment without sacrificing resilience.
Final note: Mexico stands to benefit from trade diversion toward North America, but the current environment demands that bottlenecks be resolved, dependence on critical Asian inputs be reduced, and regulatory scrutiny be anticipated. The right mix of business pragmatism and pro-investment policies will be decisive over the coming quarters.
