Labelling cartels ‘terrorists’ could hurt US economy

President Donald Trump’s executive order designating Mexican cartels and other criminal organisations as foreign terrorists could force some American companies to forgo doing business in Mexico rather than risk US sanctions, according to former government officials and analysts — an outcome that could have a major effect on both countries given their deep economic interdependence.

The executive order, which Trump signed on January 20, is intended to apply maximum pressure on Mexico to rein in its dangerous drug trade. The designation, more generally, also gives his administration more power to impose economic penalties and travel restrictions, and potentially even to take military action in foreign countries. Yet, disentangling cartel operations from US interests in Mexico could be immensely complicated. Mexico is the United States’ largest trade partner of goods, and many American companies have manufacturing operations there.

Even more complicated, these criminal networks have extended their operations far beyond drug trafficking and human smuggling. They are now embedded in a wide swath of the legal economy, from avocado farming to the country’s billion-dollar tourism industry, making it hard to be absolutely sure that American companies are isolated from cartel activities.

“This has come up in previous administrations across the political spectrum and from members of Congress who have wanted to do it,” said Samantha Sultoon, a senior adviser on sanctions policy and threat finance in the Trump and Biden administrations.

“But no one has done it because they have looked at what the implications would be on trade, economic and financial relationships between Mexico and the US,” she added. “They have all come away thinking that such a designation would actually be super shortsighted and ill-considered, though prior administrations viewed the US-Mexico relationship far differently than the incoming Trump administration appears to.”

The foreign terrorist designation could lead to severe penalties — including substantial fines, asset seizures and criminal charges — on companies and individuals found to be paying ransom or extortion payments. US companies could also be ensnared by standard payments made to Mexican companies that a cartel controls without the American companies’ knowledge. Some extortion payments, even if made under duress, could be considered “material support” to cartels, said Pablo Zárate, senior managing director at FTI Consulting, an American firm that released a report laying out some of the risks of the terrorist designation.

Former US officials and analysts pointed out that it would be nearly impossible to identify which business may employ or be affiliated with cartel members given the tens of thousands of people involved and operating in various industries, including the hotel and agriculture sectors. Cartels use the legal economy to launder money, which could mean
that unwitting employees working at a resort or an avocado packing company could technically be on the cartel payroll but not know it.

As a result, companies in the risk-averse American financial sector may simply refuse to wire money to a Mexican factory, for example, to facilitate cross-border production and trade, or to wire money between personal accounts.

“Banks may turn away customers, because they may not think they are worth the risk if they have links to Mexico,” said Eric Jacobstein, a former State Department official in the Biden administration.

Banks could ultimately decide to avoid entire sectors perceived as high risk, said Fabian Teichmann, a Swiss lawyer and expert on terrorist financing. Teichmann singled out Mexico’s avocado trade, where cartels have drastically expanded their operations, as one area that could come under greater scrutiny. “Banks might say, ‘We don’t want to be anywhere close to those who are considered to be terrorists, so we want to avoid that risk,’” Teichmann said. “From a banking perspective, that will be a very reasonable decision.”

Other types of financial institutions that facilitate payments between the US and Mexico could also be affected, such as Venmo or PayPal, which Trump’s close confidant Elon Musk helped found.

The terrorist label could also push big parts of Mexico’s economy further into the shadows, where cash is used instead of electronically traceable transactions, making it harder for investigators to examine the cartels’ financial structures, Teichmann said.

“If people can’t bank legitimately, they escape to so-called underground banking systems,” Teichmann said.

In 2024, the American Chamber of Commerce in Mexico surveyed 218 companies and found that 12% of respondents said that “organised crime has taken partial control of the sales, distribution and/or pricing of their goods.”

Multinational banana producer Chiquita Brands was found liable in 2024 for killings by a Colombian right-wing paramilitary group that was designated as a terrorist organisation. Chiquita Brands said that it had been extorted by the paramilitary group and forced to make payments to protect its Colombian employees. Plaintiffs, however, argued that the company had paid the paramilitary group to run out residents to buy land at depressed values.

The terrorist designation would also hurt American companies that are firmly north of the border but rely on Mexican labour. The designation is so broad and vague that ranches in Texas or farms in California could be swept up by the penalties if their employees send remittances to family members in Mexico who are involved in organised crime.

If money transfer companies like Western Union also stop transactions to Mexico over worries about properly vetting Mexican clients, it could affect the remittances the country relies on. That would be devastating for the Mexican economy, which received $63.3 billion in remittances in 2023, nearly 5% of the country’s gross
domestic product.

The foreign terrorist designation could also pave the way for the US to deploy forces inside Mexico against criminal organisations without the Mexican government’s consent, as it did in Afghanistan and Syria.

But Afghanistan was occupied by the US, and Syria’s government lost control over much of its territory in recent years. That gave Washington some cover under international law for the US military to deploy troops and launch special-forces operations to kill or capture terrorist leaders in those countries.

Mexico, however, has built up cooperation with the US for more than 30 years to counter the cartels. Mexico could threaten to halt cooperation if the US is seen to be violating Mexico’s sovereignty. When the US federal prosecutors office arrested Mexico’s former defence secretary during Trump’s first administration, the Mexican government halted all cooperation with the US Drug Enforcement Administration. “Unilateral action would be catastrophic,” said Craig Deare, a former US military attache at the US Embassy in Mexico in the 1990s. “It would dismantle any collaboration and decades of Republican and Democratic efforts to build a defence relationship with Mexico,” he said, adding, “If you don’t like cooperation now, wait until Mexico cuts all ties.”

On Jan 21, President Claudia Sheinbaum of Mexico issued a stern warning to Trump during her daily news conference. “We will always defend our sovereignty,” she said. “We all want to fight the drug cartels. We have to coordinate efforts; we have to collaborate,” she said.