Trump's tariffs would reverse decades of integration between US and Mexico

When Dennis Nixon started working at a regional bank in Laredo, Texas, in 1975, there was just a trickle of trade across the border with Mexico. Now, nearly $1 billion of commerce and more than 15,000 trucks roll over the line every day just a quarter mile from his office, binding the economies of the United States and Mexico together.

Laredo is America's busiest port, and a conduit for car parts, gasoline, avocados and computers. "You cannot pick it apart anymore," Nixon said of the US and Mexican economies. Thirty years of economic integration under a free trade deal has created "interdependencies and relationships that you don't always understand and measure, until something goes wrong," he said.

Now that something has happened. On Saturday, President Donald Trump slapped 25 per cent tariffs on Mexican imports as he looks to pressure Mexico's government to do more to stop migrants and drugs from coming across the border. Trump also hit most Canadian goods with a 25 per cent tariff and imposed a 10 per cent tax on Chinese imports.

A longtime proponent of tariffs and a critic of free trade deals, Trump seems unafraid to upend America's closest economic relationships. He is focusing on strengthening the border against illegal immigration and the flow of fentanyl, two areas that he spoke about often during his 2024 campaign.

But the president has other beefs with Mexico, including the economic competition it poses for US workers. The president and his supporters believe that imports of cars and steel from Mexico are weakening US manufacturers. And they say the United States-Mexico-Canada Agreement, the trade deal Trump signed in 2020 to replace the North American Free Trade Agreement, needs to be updated -- or perhaps, in some minds, scrapped.

Many businesses say ties between the countries run deeper than most Americans realize, and policies like tariffs that seek to sever them would be painful. Of all the world's major economic partners, the United States and Mexico are among the most integrated -- linked by business, trade, tourism, familial ties, remittances and culture. It's a closeness that at times generates discontent and efforts to distance the relationship, but also brings many benefits.

"Our countries have a symbiotic relationship," said Juan Carlos Rodríguez, managing director in Tijuana for Cushman & Wakefield, one of the world's biggest commercial real estate companies.

"Our economies are so intertwined that it would take decades to decouple," Rodríguez said. "Such a scenario would have a catastrophic impact on Mexico."

A natural partner

Mexico's immense reliance on trade with the United States dates back at least to the 1960s, when manufacturers began opening factories just across the border as a response to climbing labor costs in the United States and Japan.

Trade picked up when NAFTA took effect in 1994. For many Americans, that trade pact is now synonymous with offshoring and decimated factory towns. But economists calculate that many parts of the United States benefited as the agreement increased trade and economic activity.

Other parts of the United States were severely hurt as manufacturers moved to Mexico in search of cheaper labor. As factory towns hollowed out, that ended up fueling a trade backlash, helping pave the way for anti-trade candidates like Trump to win office.

In an interview, Peter Navarro, the president's senior counselor for trade and manufacturing, called NAFTA a "catastrophe" and bad for both Mexico and the United States.

"The fact of the matter is China was so much worse that people tend to forget how bad NAFTA was," he said.

In his first term, Trump threatened tariffs on Mexico over border issues, but instead settled for a deal. He also repeatedly threatened to withdraw from NAFTA, but instead decided to renegotiate it. His advisers added provisions to the pact they believed would bolster US steel and auto manufacturing, but some now say they have fallen short.

Since Trump was last in the White House, Mexico's importance to the US economy has grown. The COVID-19 pandemic disrupted global supply chains and started a "nearshoring" boom.

Companies were already looking to move out of China, to avoid tariffs Trump imposed there, as well as rising costs and political risk. Manufacturers rushed to open plants in Mexico, seizing on the country's low-cost industrial base and proximity to the United States.

Those changes helped make Mexico the United States' top trading partner in goods in 2023. As trade between the countries has expanded, so has the bilateral trade deficit with Mexico, a metric that Trump is particularly focused on.

American consumers may be as reliant on foreign products as ever. But economists argue that imports from Mexico can have quite different implications for the US economy than imports from China.

That's because there are many integrated supply chains that run back and forth across North American borders. Goods such as cars, electronics and bluejeans are volleyed back and forth among the United States, Mexico and Canada as they are turned from raw materials into parts and then final products.

According to economists at S&P Global, of the imports coming into the United States from Canada and Mexico, more than 18 per cent of their value was created in the United States, before being sent to those countries. That's far more than the proportion for other countries, and a sign of how closely the economies are integrated.

Proximity creates other benefits: Research by the Federal Reserve Bank of Dallas has found that a 10 per cent increase in factory output in Ciudad Juárez, Mexico, leads to a 2.8 per cent in total employment in El Paso, Texas, concentrated in areas such as transportation, retail and real estate.

"There's this perception that the border is all about walls and illegal crossings," said Diego Solórzano, the founder of Desteia, which helps companies making supply chain decisions. "This line in the sand is actually the most powerful economic corridor on Earth."

Roughly $800 billion worth of goods were transported across the border last year, Solórzano said, an amount that would position the US-Mexico border in striking distance of the world's 20 largest economies.

The two economies rely on each other for their energy needs. Mexico, which depends on the United States for an estimated 70 per cent of its natural gas consumption, is more vulnerable to any disruptions.

But the United States also imports about 700,000 barrels of crude oil a day from Mexico. Imposing import taxes on such cargoes could produce increases in fuel prices, particularly diesel, energy analysts warn.

Food production is also closely integrated. Mexico supplies roughly half of America's fresh fruit and vegetables, and that proportion rises in winter months. Mexico also emerged last year as the top market for American agricultural exports, totaling $30 billion.

Bob Hemesath, a fifth-generation farmer in northeastern Iowa, said that Mexico was the biggest buyer of American corn and also a big purchaser of hogs, both of which he produces.

Tariffs would "put an added cost on a product that doesn't need to be there, and it'll drive those countries to go look somewhere else," Hemesath said. He spoke by phone from his farm on an unseasonably warm day, where he had just finished power-washing a hog facility.

"It puts me as a farmer at an economic disadvantage," he said. "Although I understand wanting to use tariffs as a negotiating tool, what harm do you do?"

Some Trump officials think corn exports haven't been entirely benign. Navarro said NAFTA had kick-started America's illegal immigration problem, because when the United States began exporting corn to Mexico after the trade pact took effect, that put Mexican agricultural workers out of jobs, sending some of them into the United States.

"That's where that began, our illegal immigration problem," he said.

Trade irritants

Trump and his supporters have other criticisms of the US-Mexico relationship. Some argue that Mexico has violated the terms of an agreement it made to limit its steel exports to the United States. They say Mexican shipments of steel to the United States have exceeded the levels set by that agreement, which was signed alongside the USMCA.

(The Mexican steel industry has its own complaints. On Tuesday, Canacero, a Mexican steel organization, claimed in a statement that it had seen a significant surge in exports of finished steel products from the United States that did not comply with the agreement.)

There are also growing concerns about Mexico's trade with China, particularly in the auto sector. Chinese car exports to Mexico have soared, and some Chinese car companies have been scouting for Mexican factory sites.

That has fueled concerns that Chinese companies will use Mexico as a jumping off point to export to the US market at much lower tariff rates than if they were shipping goods from China.

Brad Setser, an economist at the Council on Foreign Relations, said that Mexico's role as a conduit for Chinese goods to the United States had been overstated, but that "there absolutely is an issue in the autos sector." One in three cars sold in Mexico last year came from China, he said. That means Chinese exports are now meeting Mexican demand for cars, rather than exports from the United States, a blow to the USauto industry.

Other business owners argue that the United States and Mexico should work together to limit imports from China -- but say that doesn't call for high tariffs on Mexican products.

Greg Owens, CEO of Sherrill Manufacturing, a flatware manufacturer in Sherrill, New York, said he would like to see tariffs structured in a way that inhibits China from using Mexico as a back door to the United States. But he opposes putting tariffs on Mexico outright, saying China is a much larger threat.

"China packing up a flatware factory in Guangzhou, setting up shop in Mexico just to circumvent tariffs -- that needs to be dealt with," he said. "But you can't destroy your trade relationship with Mexico."