In the run-up to the 2016 and 2020 US elections, it was difficult to have a discussion on policy without Mexico entering the conversation. Former president Donald Trump constructed his first campaign around the ‘Build the wall’ slogan, which he shouted at rallies and printed on T-shirts and caps.
But in 2024, Mexico is the largest trading partner to the US, benefiting from nearshoring trends and higher tariffs on China, the former top trade partner to the States. And now, even in the case of a Trump victory, Mexico could stand to benefit.
Thomas Smith, manager of the Liontrust Latin America fund, says the bipartisan support for higher tariffs on China has put Mexico in the spotlight as a manufacturing location for US goods. “The US election could have significant implications for the Mexican economy and for investing in the country. Higher tariffs on imports from China will boost Mexico’s appeal as a manufacturing destination,” he says.
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“Trump has talked about hiking tariffs on all Chinese imports to 60%. China’s share of US imports has already fallen from a peak of 22% in 2018 to below 14%. Under the current regime its share of imports is expected to fall to 10% by 2030, and if tariffs rise to 60% this could be close to zero by the end of the decade.
“Assuming USMCA [United States-Mexico-Canada Agreement] remains in place, which is reasonable given Trump negotiated and signed it in 2020, trade should continue to grow and Mexico can continue gaining share of US imports.”
Last time Trump was in office in 2019, he put in place a levy against Mexico that would increase by 5% each month to 25%, in an effort to pressure the Mexican government to slow immigration flows into the US. The policy was condemned by the Chamber of Commerce, as well as some Republicans and Democratic speaker of the house Nancy Pelosi. And while the 60% tariff on China has dominated market discussion, Trump has also proposed a 10% tariff across the board in the hope of paying for tax cuts.
Edmund Harriss, chief investment officer at Guinness Global Investors, says the risk to Mexico comes with that possible 10% tariff. “It won’t stop what’s going on in Mexico, there are other benefits. Mexico has improved its industrial network which causes a clustering of skills and supply of materials,” he says.
“So Mexico is still a good place, but it just makes it less attractive. The effect of a 10% tariff worldwide is not the immediate price shift, but what it does to capital expenditure and business investments over time. And that will exert a drag. All export manufacturing economies will feel that over coming years.”
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In addition to the economic advantages Mexico faces through this election cycle, Chris Tennant, co-portfolio manager of the Fidelity Emerging Markets Limited investment trust, adds Mexico is simply flying more under the radar when it comes to its role in US politics. “Mexico is much less of a focus today than it was during the run up to previous elections. I don’t think it’s the most important campaign headline. So whatever party does win the election in the US, I don’t think it will have huge implications for Mexico,” he says.
The US is also far from Mexico’s only trade partner. China has become a prominent business partner for the country, both through exports and building factories for Chinese businesses in Mexico.
Alessia Berardi, head of emerging macro strategy at the Amundi Investment Institute, says: “The nearshoring and trade re-routing following the geopolitical fragmentation/realignment should in principle benefit Mexico due to its proximity with the US and China’s willingness to relocate some business there.
“However, this is still barely visible through foreign direct investment (FDI) statistics. Therefore, it’s difficult to measure the impact on the market. In any case, the Mexican economy has been strong over 2022-23 and only started to decelerate this year.”
Read the rest of this article in the October issue of Portfolio Adviser magazine
