Exchange Rate Trends

• In 2024, the Mexican peso depreciated by 23% against the US dollar, ending the year at 20.82 MXN/USD, down from 16.97 MXN/USD at the end of 2023 (Reuters, 2024).
• The depreciation makes Mexican goods cheaper for US buyers, which offsets a portion of the 25% tariff imposed by the US.

Impact on Trade

• If a product exported from Mexico cost $100 in 2023, it now effectively costs $77 due to peso depreciation.
• This means that 23 percentage points of the 25% tariff impact are effectively neutralized, leaving only a 2% net increase in cost for US buyers.
• However, peso depreciation also increases imported input costs, which may raise production expenses for specific industries.

Consumer Spending Trends

• The US economy remains resilient, with GDP growth of 2.5% in 2024 and strong consumer spending, particularly in sectors reliant on Mexican imports (U.S. Bureau of Economic Analysis, 2024).
• Many Mexican imports—such as automobiles, electronics, and produce—have inelastic demand, meaning US consumers will continue purchasing despite price increases.

Price Absorption and Demand Impact

• If US consumers absorb 50% of the tariff cost by accepting higher prices, then the net demand decline could be halved.
• However, substitution effects may reduce Mexican exports for price-sensitive goods (e.g., textiles).

Challenges in Relocating Supply Chains

• Mexico’s proximity to the US provides a logistical advantage that is challenging to replicate in Asia or elsewhere.
• The US relies on Mexico for automotive parts, electronics, and steel, and shifting production would involve significant time and financial investment.
• 70% of Mexico’s supply chains cannot be easily relocated within 1-2 years, sustaining demand for Mexican exports.

• Accounts for 25% of Mexico’s total exports.
• Without mitigation, exports could drop by 15-20%.
• Due to supply chain rigidity and peso devaluation, the effective export decline is estimated at 8-12%.
• Potential loss: $12-18 billion.

• Represents 16% of Mexico’s exports.
• High reliance on imported components increases production costs.
• Without mitigation, exports could drop by 12-18%.
• Peso devaluation and supply chain rigidity reduce the impact to 6-10%.
• Potential loss: $8-14 billion.

• Mexico is the top supplier of fresh fruits and vegetables to the US.
• Tariffs increase costs, but US consumers have limited substitution options.
• Without mitigation, exports could drop by 10-15%.
• Peso devaluation and demand rigidity reduce the impact to 4-7%.
• Potential loss: $2-3 billion.

• Price-sensitive market with strong competition from Asia.
• US retailers may switch to Vietnam, Bangladesh, or China.
• Without mitigation, exports could drop by 20-25%.
• Peso devaluation reduces impact to 12-18%.
• Potential loss: $1-2 billion.

• The US has alternative suppliers (Canada, Brazil).
• Without mitigation, exports could drop by 15-20%.
• Peso devaluation reduces impact to 8-12%.
• Potential loss: $3-5 billion.