[Economy Pulse] Mexico Seizes the China Gap with Pragmatic Diplomacy

Mexico, which faced comprehensive pressure during the early stages of President Donald Trump's tariff war, is now drawing international attention for having secured significant economic gains in its recent relations with the United States.

Mexican President Claudia Sheinbaum is a leader who opposes neoliberalism, emphasizes the role of the state, and prioritizes addressing social inequality based on traditional leftist values, while also highlighting pragmatism through a focus on market realities and data-driven policies.

Although President Sheinbaum hinted at a confrontational stance toward the United States for domestic political purposes, in practice, she actively engaged in negotiations with the U.S. by addressing President Trump's key concerns. She dispatched a large number of troops to border regions to crack down on drugs and illegal immigration and took steps to block indirect exports of Chinese goods through Mexico.

Currently, over 80% of Mexico's total exports are destined for the United States. As the top exporter to the U.S., Mexico's economy is inseparably tied to that of the United States. If, as President Trump has threatened, the United States-Mexico-Canada Agreement (USMCA) were to be abolished, it is clear that the Mexican economy would plummet. Despite being a leftist politician, President Sheinbaum had no choice but to pursue pragmatic diplomacy and take the lead in fostering friendly relations with the United States.

Starting this year, Mexico decided to impose tariffs of up to 50% on 1,463 strategic items-including automobiles, machinery parts, and steel-from countries without a free trade agreement (FTA). While the official rationale is job protection and import substitution, the real aim is to reduce imports from China. Behind President Sheinbaum's pledge to reduce dependence on Asian imports lies a determination to curb indirect exports of Chinese goods, a demand from the United States since the Biden administration.

Following the signing of the North American Free Trade Agreement (NAFTA), the predecessor to the USMCA, Mexico concluded FTAs with many countries and worked to improve its business environment. It also operated investment attraction programs such as the "Program for the Promotion of the Manufacturing Industry (PROSEC)" and "Maquiladora" (a type of bonded zone where raw materials and parts are imported duty-free to manufacture finished goods for export).

As a result, Mexico's economic growth continued, but the vulnerability of its manufacturing supply chain, dependent on imports, became a chronic issue. In October 2024, President Sheinbaum, upon taking office, set forth the "Plan Mexico," aiming to reduce dependence on imports from Asia (particularly China), strengthen domestic manufacturing, and enhance the "Hecho en Mexico" (Made in Mexico) brand, with the goal of elevating Mexico from the world's 12th largest economy into the top 10.

In mid-2025, President Trump allowed Mexico to export goods that meet USMCA rules of origin to the United States tariff-free. With 85% of Mexico's exports to the U.S. now enjoying zero tariffs, Mexico not only avoided Trump's tariff bomb but also became the country with the lowest tariff burden for exports to the U.S. As a result, Mexico's exports to the U.S. increased significantly. In 2025, Mexico's manufacturing exports to the U.S. rose by about 9% year-on-year. While auto exports, which are subject to item-specific tariffs, declined, exports of other manufactured goods surged, driving overall performance.

There are still political and economic uncertainties, including the USMCA renegotiation scheduled for June, the Supreme Court ruling on the International Emergency Economic Powers Act (IEEPA), the U.S. midterm elections in November, and the threat of additional tariffs. However, Trump's tariff war has actually highlighted Mexico's geographical advantages and the value of the USMCA, making Mexico a key beneficiary in the U.S. supply chain.

In May of last year, Luis Gutierrez, Mexico's Undersecretary of Foreign Trade, visited Korea and explained Mexico's policy of decoupling from China, asking Korean companies to fill the gap left by reduced Chinese involvement through increased investment in Mexico. While Mexico's strengths as a U.S. export base are recognized, higher tariffs on Korean intermediate goods could become a serious obstacle. Trade authorities should negotiate with Mexico to secure tariff exemptions and support the many domestic small and medium-sized enterprises already operating locally, as well as new local investments.

Jung Ing-gyo, Professor of International Trade at Inha University (former Chief Negotiator for Trade)