Mexico’s High-Stakes Gamble in Dealing With Trump

0:00Hello, I'm Stephen Carroll. I'm in Brussels where many of Europe's biggest decisions get made. And I'm Caroline Hepker in London with the hosts of the Bloomberg Daybreak Europe podcast. We're up early every weekday keeping an eye on what's happening across Europe and around the world. We do it early so the news is fresh, not recycled and so you know what actually matters as the day gets going. From Brussels, I'm following the politics, policy and the people shaping the European Union right now. And from London, I'm looking at what all that means for markets, money and the wider economy. We've got reporters across Europe and around the globe feeding in as stories break So whether it's geopolitics, energy, tech or markets you're hearing it while it happens It's smart, calm and to the point And it fits into your morning You can find new episodes of the Bloomberg Daybreak Europe podcast by 7am in Dublin or 8am in Brussels, Berlin and Paris On Apple, Spotify, YouTube or wherever you get your podcasts

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1:16I'm Stephanie Flanders, Head of Government and Economics at Bloomberg, and this is Trumponomics, the podcast that looks at the economic world of Donald Trump, how he's already shaped the global economy, and what on earth is going to happen next. Well, this week, we're looking at how the country with the most to lose from Donald Trump's trade wars is trying quietly to win them. In the world of Donald Trump, you don't always want to be where the action is. As I record this on Tuesday 28th of October, most eyes are on Asia as the president tours the region making deals and headlines wherever he goes.

1:54And at least as of now, he'll be meeting the Chinese president later in the week to seal what has already been billed as a great victory in his trade war with that country. In fact, it's China who probably now has the upper hand in that conversation and future ones. And if you want to understand why, just listen to the last episode of Trumponomics with Arthur Krober. So instead, my focus this week is on a country which has largely avoided the headlines since President Trump came back to the White House, but as one of America's largest trading partners has arguably even more at stake than China and a lot weaker cards.

2:30Mexico sends a whopping 83 % of its exports to the US on some measures. And every time the president talks about blanket tariffs on the country, its economy shudders. Yet somehow that hasn't happened. There have been continual reprieves, and most of the credit goes to Mexico's president, Claudia Scheinbaum, now entering her second year. So how exactly has Mexico's first female president navigated the Trump era seemingly so skillfully? And what's at stake in her continuing to pull it off? Those are the questions we're answering in this episode. And because we're Bloomberg Economics, we've brought numbers.

3:11By our estimate, the difference for Mexico, for President Scheinbaum, between managing this right and managing it wrong over the next few years, we reckon comes down to more than$4 ,000 worth of additional economic growth for every man, woman and child in Mexico between now and 2030. So on the good scenario, Mexico could even end up growing faster than the US for the first time since 2008. Probably won't want President Trump to notice that. But as we're going to be hearing, that rosy outcome is indeed far from guaranteed. So let's get into it. Alex Vasquez is one of our economy and government reporters in Mexico City.

3:51Joining me now, Alex, welcome. Thank you. Thank you for having me. And in New York is Felipe Hernandez, who covers Latin America for us at Bloomberg Economics. He's got more than 15 years experience covering Latin America for Bloomberg, but also at firms including Banco Santander and Deutsche Bank.

4:15I think it's the first time for both of you. How has it taken me so long? I guess that's another sign that Mexico has quite happily been staying out of the headlines over the last few months. Alex, remind us where we are in the negotiations between the US and Mexico. As I mentioned, it seems like no news has been good news. Yeah, I think Shane Baum has managed to, I think the big achievement is to stay away of confrontation with Trump. She doesn't speak much, and I think that's something Trump appreciates. And she has given him what he wants. She has helped to stop migration by sending the National Guard to the border.

5:00She has handed the U.S. some important drug traffickers that were jailed in Mexico. Right now, Mexico, I think, is the best country position regarding tariff and regarding trade with the U.S. Because even compared with Canada, which is also part of the U.S., Mexico, and Canada trade agreement, I think Mexico doesn't have reciprocal tariff. It only has 25 % tariff related to fentanyl trafficking. but most of the Mexican goods are free of tariff thanks to the trade deal. So she has managed to do pretty well. Canada has higher tariff. And she announced in a press conference that we had a deadline for November 1st to raise tariff on Mexico.

5:49And she announced that it was extended again. I spoke with President Trump on Saturday, and we are going to give it a few more weeks to be able to close the issue that is already very advanced regarding the 54 non-tariff barriers. So we agreed to speak again in a week or so because we are practically already closing this issue because ultimately on November 1st, that deadline closes that we had both set for ourselves. Trump has mentioned that he has a lot of respect for her And you can tell that when she is the one that announces in a press conference that they had a phone conversation and they reached a deal to continue negotiating.

6:37But that means no more tariffs. So I guess the big win is never engage in a confrontation and she never retaliated with tariffs from Mexico. But obviously, there's a lot at stake because Mexico sends to the U.S. more than 80 percent of its exports. So she has to have a good relationship with Trump. I mean, we do tend to think about this in terms of a sort of balance of power. And some of the countries, certainly the countries with very little leverage, I'm thinking of some African economies and others that are facing very high reciprocal tariffs. That does seem to be about America sort of using its raw force to impose things on other countries.

7:19whereas we pointed out last week with China, China's been very good at using the leverage it has, particularly its control over these key parts of the global supply chain, these rare earth magnets. If you look at Mexico on the face of it, it's a much smaller economy, it has much less to bring to the table in these negotiations. You say she's given him everything he wants, but she hasn't given him anything on the trade front, which is obviously the most important for Mexico. Are there hidden forces that are tipping the balance economically in favor of Mexico in these negotiations? How has she managed to have this ongoing reprieves when, you know, when China, they had to actually threaten all this other stuff to get there?

8:01Mexico is next to the U.S. and both economies are highly integrated. Sometimes to make a car or even an auto part, the same piece goes through the border several times. So I think a lot of U.S. companies have operations in Mexico. We know the labor force is cheaper here. Mexico has a pretty good manufacturing. So I think Trump has faced a lot of pressure from different interests in the U.S. They pretty much don't want to have a bad relationship with Mexico because there's a lot of economic interest in Mexico. Does she ever talk about that? Does she ever say, speak directly to these big car manufacturers and others and highlight the stake?

8:51Or is she just letting them do the talking? Yeah, I mean, she always mentions like we have great car manufacturers in Mexico. Even U.S. companies are here for General Motors. They have big plans here in Mexico. So it's not that easy to move production to the U.S. in four years or in a year. So I guess a lot of people in the U.S. know that. And that's why he's getting in the speech. It sounds good. The companies are coming here and they're leaving other countries and we're going to produce more in the U.S. But in reality, you need to have factories in Mexico. And she knows that. I guess that's her leverage, even if he wants to.

9:32It's not that easy to move that production to the U.S. in one, two, three, four years. So Felipe, we were quite interested in what was at stake for Mexico over the next few years in managing to dodge this particular bullet and indeed get some of our other policies right. And you've helped Bloomberg reporters, Alex and others, write a big piece that's coming out about Mexico being at a half trillion dollar crossroads. So talk us through a little bit how much is at stake for Mexico in the next few years. Well, as you mentioned, we started by saying or acknowledging that Sheinbaum has been forced to deal with two very strong forces.

10:14One external, which is dealing with all of Trump's immigration, security and trade policies. And one which is domestic, which is Sheinbaum having to deal with AMLO's legacy. And AMLO's legacy has to do with his social programs. That's the previous president, López Obrador, who was known as AMLO. Correct. So she has had to deal with what he left, which were big social programs and state-centric economy and a couple of reforms that have concentrated power in the executive branch and taken away some power from both Congress and more recently the judiciary power. The exercise that we did was look at different scenarios about where would the Mexican economy would be five years from now under different assumptions.

11:09One assumption would be a positive scenario. That would be a scenario in which Mexico manages to avoid higher tariffs on its exports to the U.S. and in which President Sheinbaum implements economic policies that are more market-friendly than those implemented by her predecessor, President López Obrador. And a negative scenario in which Mexico ends up with tariffs that are in line with those with the reciprocal tariff imposed on other countries. So that's a reciprocal tariff on 10 % on top of the 25 % fentanyl-related tariff. And in which President Schoenbaum implements domestic economic policies in line with those that were implemented during the term of López Obrador in power.

12:01And the results that we found is that assuming that an average economic growth in the U.S. of around 2%, over the next five years, Mexico would grow by an average 2.2 % every year, so slightly above U.S. growth. That, by the end of that five-year forecast period, would imply that Mexico's GDP would be roughly 4.8, almost five percentage points higher than in the status quo scenario. On the other hand, if Mexico ends up with reciprocal tariffs and economic policies that are fairly rated as market-friendly, then average economic growth over this five-year period could be close to zero. And Mexico's economy by the year of 2030 would be almost six percentage points lower than otherwise.

12:50life. Basically, it's a choice between going up and going down in a very sophisticated economic way. And the difference in terms of additional growth is half a trillion dollars. Felipe, we should say, I mean, so although she's managed to avoid the headlines, we do still have this uncertainty hanging over the economy, thanks to these sort of continual reprieves, but also the times where the president decides to talk tough. If he's still talking about these blanket tariffs, That uncertainty must be pretty corrosive for the economy right now. You can't carry on indefinitely like this. Absolutely.

13:24And actually, when you look at the figures for economic activity and the exports so far this year, when people think about tariffs, they always think about what will happen with trade and exports. When you look at the exports numbers so far this year for Mexico, They show that despite tariffs, the fentanyl-related tariffs imposed by the U.S. administration, exports to the U.S. are still growing and are still growing at a healthy pace, I would say. the real big negative impact so far on the Mexican economy from tariffs has been on the investment side. And that is actually exactly in line with the point that you are making.

14:08And it's the drag from this uncertainty about what will happen with trade and tariffs in the future and how that has forced a lot of companies that had investment plans in Mexico to put those on hold. And there's a lot of companies with projects that they are ready to start deploying that have decided to just wait and see until they have real clarity about what is going to happen in the bilateral relations and bilateral trade between the two governments.

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16:13Felipe, if you just look at the way things have gone this year and the way that President Scheinbaum has managed to navigate this so far. Would you say that the friend-shoring model was still alive and you wouldn't count it out just on the basis of what actually happened this year as opposed to just the rhetoric of Donald Trump? Yeah, I would say that there's a big pipeline of investment projects, a lot of them that were born under the near-shoring boom and all of the expectations about how Mexico could benefit from these. There's a lot of these projects that are now on hold. I would say that they are still on hold.

16:54They have not been completely ruled out. And basically what many of the companies that have these projects are waiting is for some clarity regarding what is going to happen going forward in the bilateral relations between Mexico and the U.S. As soon as they have some clarity about that, they will make a decision if they want to go ahead with these projects or not. And I would say that going ahead with these projects doesn't necessarily imply that Mexico will not face some tariffs on their exports to the U.S. There's a lot of projects that as long as Mexico has more attractive tariffs than the rest of the world, including Canada, will imply that maybe Mexico will end up seeing the inflows and the investment flows tied to those projects.

17:45As long, of course, as those tariffs also leave Mexico in a position where it makes more sense for the companies to invest in Mexico than in the U.S. But given the differences in costs, mainly labor costs, but other costs as well, these are some projects that I would say are still viable, even with some tariffs in place, which I think it's likely to be the final outcome of all of these. But to answer your question, it means that, yes, Mexico is in a position where a lot of these nearshoring projects could still be developed. Alex, I'm interested in how this is going down with the Mexican public because President Scheinbaum's got another five, five more years.

18:30So she's got a while, but you started the podcast by saying she's given the president everything he wants. Is there a perception that she's played this well or that has been too quiet and meek with regard to the president? How's her popularity? She's entering her second year and she remains highly popular. She has more than 70 % of approval ratings. Sometimes, according to some polls, around 80 % of approval rating. So quite a lot more popular than President Trump. Or indeed, most other leaders. Yeah, even than Lopez Obrador, which is crazy, right? So I guess she has managed to have two speeches, one for the U.S.

19:14public, the economies, the politicians, where she's discussing these trade issues. She's pretty much recognizing that she has to have a good relationship with Trump. But she also has another speech for the base. That's pretty much Mexico is a sovereign country. The U.S. will never enter Mexico to try to dismantle fentanyl laboratories or to detain drug traffickers or stop migration. She's very careful. And we can see that when she's doing like a rally in a state around the country, she goes to this beach. And that goes pretty well with the base. I'm not trying to assume that the base don't understand what she's doing.

19:58They do. And when you talk to people, they tell you she has handled Trump pretty well. The peso is good. The peso is stronger. We don't have more tariff. She's raising the minimum wage and that kind of stuff. We're getting the pension. So people see that, I guess, they're happy. And there's a more philosophical question, or you may say it's not a question at all. Ever since NAFTA, which is now more than 30 years ago, the country has made a bet on being closer and closer to the US. And as you described, Alex, the integration of the supply chains has probably gone further than anyone might have expected back when that treaty was signed.

20:39These days, we talk a lot about countries looking to diversify, being concerned about the US being so uncertain and being an unreliable ally, these constant threats. He seems to be particularly rude often to his friends. Is anyone questioning that? I mean, you would look at Mexico and say, wouldn't be so bad to be a bit more diversified in your exports, to not be so dependent on the US. But is that even an option for Mexico? In a normal scenario, this would be an option. But we're in a moment that you just cannot upset Trump. Mexico is improving a free trade deal with the European Union. They've been working on that.

21:20They're trying to have more cooperation and more trade with Brazil, for example, which is a huge country. But they're pretty shy about it. Even Canada, McCartney has sent to Mexico his main ministers trying to reach a better bilateral deal between both countries to be stronger for trade negotiations. And what has been the U.S. response has been like, oh, maybe the USMCA negotiation will be bilateral instead of trade lateral. because he knows that they're stronger together. So I guess that's one of the complicated issues. Everybody knows that Mexico should diversify its economy. I think the government is trying.

22:02It's being shy, but it's trying. But it's hard because if you're sending 80 % of your exports and you're a manufacturing country, you cannot upset your northern neighbor. If you allow me, adding one more thing about that, and is that, yes, as Alex mentioned, government officials and people in Mexico would like to have a better diversified trade. As you mentioned, and as Alex was explaining, it's now probably not the best time to do it. And there's like serious worries about what would happen to Mexico if you jeopardize at all the trade relations with the U.S. And because of all of those constraints and concerns, Actually, along with the budget for 2026, the government submitted a proposal to impose tariffs on imports from China and other countries into Mexico, countries with which Mexico doesn't have a free trade agreement.

22:58Was that far after U.S. pressure, do you think? What do you think was driving that? It's well known that the U.S., as part of negotiating with Mexico, wants to make sure that Mexico implements some trade barriers with China in order to make sure that China is not using Mexico and third countries to circumvent the tariffs that the U.S. has imposed on China. There's a lot of talk and actually some evidence that shows that exports from China to Mexico have sharply increased in the last couple of years, which coincides with the increasing U.S. tariffs on imports from China. And that has all inspired or points to some triangulation of exports from China through Mexico that finally end up in the U.S.

23:49to avoid U.S. tariffs. The U.S. is aware of these and has asked to Mexico to take steps in order to prevent these. And the initiative for Mexico to impose tariffs on their imports from China is pretty much aligned with that. I think it's part of Mexico's attempt to have something to show to the U.S. about their willingness to cooperate and their hope that with steps like those, they are showing the commitment that they have to the bilateral relationship with the U.S. And then they are willing to compromise in order to secure that the free trade agreement with the U.S. will remain in place once it's reviewed next year.

24:32Yeah, and I'm glad Felipe mentioned that, if I may, because she sent this proposal to Congress. We're talking about like more than a thousand categories of products, including steel, toys, textiles, shoes, you name it. We have a lot of stuff. But this, you would expect that Congress would pass it like right away because they have the majority. They decided to delay the discussion. And I've been talking to several lawmakers from the ruling party. And I guess this is when, you know, these old school groups from López Obrador, they're not that happy to raise tariffs on China because they want to have a good relationship.

25:15You're cutting off your options. Yeah, that's right. And they want to keep a good relationship with China. So this is a perfect example that maybe she doesn't have a strong real opposition, but within the party, she's not free to do whatever she wants. So they're discussing this, trying to move the numbers a little bit so this doesn't look too bad for China. Still places Trump. So that's the balance. Both of you, just very quickly, if people who are not tuning in to Mexico very often, maybe occasionally see President Sheinbaum come in a viral clip when she's talking about the Gulf of Mexico versus the Gulf of America, are there potential flashpoints in the next few months that we should look at?

25:59Because we've talked about a very narrow line that she has to walk between some of this kind of internal opposition, not very much, but some concern and instincts versus the pressure from the US and the vital importance of that trading relationship. What are the things to watch out for over the next few months to know how this is going to go? I would pay attention to two things. Or basically, one, acknowledging that the external front is very important. But on that front, the final decision really, or I would say 75 % of the decision or the outcome on that front, is not under Sheinbaum's control, but on the White House and President Trump.

26:43So yes, keep an eye on that, but be aware that Trump is still probably the one that will decide the end result of that. With some input from Sheinbaum and, of course, a lot based on how Sheinbaum deals with Trump, which until now she has done fairly well. And therefore, I would assume she will continue to do. And I'll be not so worried about what Sheinbaum does about the trade relation with the U.S., but more about what Trump does on that front. I would pay more attention to what Sheenbaum says regarding domestic economic policies, how much Sheenbaum really moves away from the attacks from her predecessor, López Obrador, attacks against the private industry and private investment.

27:25how, at least from what we have seen so far, she keeps moving forward with a more market-friendly economic policy framework, which is starting to generate a little bit more of confidence and optimism domestically among private investment investors. As long as she keeps moving in that direction, I would say investors and people that follow Mexico could be a little bit more optimistic about Mexico's outlook. And as we have discussed so far in this podcast, she still has to strike a balance between the more market-friendly economic policies and those policies that her predecessor was implementing, which were not that friendly, but that she needs to make sure that she keeps his support to make sure that governability doesn't turn into an issue for her.

28:23Yeah, I agree with what Felipe is saying. I think in the external front, the only thing we should expect probably for the next three years is uncertainty. We don't know what's going to happen. I think markets are reading pretty well what's going on. We're seeing the peso very strong, the Mexican bonds. So I think the market is reading that. But I think the current deal we have is good for Trump. That's why it hasn't changed. It seems like he came to power yesterday, but it's been almost a year. So I don't think things are going to change much for Mexico. Obviously, we have the free trade review and we should keep special attention to that.