Are US tariffs good for Mexico? You would not expect so. Yet Mexican exports to the US grew by 6.5% between January and July of 2025, an almost 18 percent increase over the same period last year under the Biden administration. As noted previously in SIGnal, the tariffs imposed by US President Donald Trump to date have not yet produced their intended results. Fentanyl use seems to have been unaffected (see “The New Pessimism,” 31 Oct. 2025). Manufacturing employment has not improved (“The Jobs Conundrum, Part Two,” 2 Aug. 2025). A new report from Deloitte found that US manufacturing construction spending has been going down as the cost of intermediate goods used in manufacturing has climbed. Now there is a growing Mexican trade surplus with the US, and it is based mainly in manufacturing.
How did this happen? The main reason is of course that Mexican exports to the United States are most often duty-free under the US-Mexico-Canada free trade agreement known as USMCA in the US, T-MEC in Mexico and CUSMA in Canada. (Each nation wanted to put itself first in the local acronym…) Roughly 85 percent of Mexican exports to the US are unaffected by the various tariffs the Trump administration has placed on Mexico.
It is also relevant that Mexican exports in general have been thriving, not just those destined for the US. Mexican exports as a whole have jumped 4.3 percent in 2025. Mexico’s manufacturing sector is simply improving, with happy results for its exports.
But the US is by far Mexico’s biggest market, the destination for 80 percent of its exports. Mexico’s trade surplus with the world is mainly its surplus with the United States. There have to be reasons other than the USMCA — after all, Canadian exports to the US, equally covered by USMCA, have gone down over the same period — and general improvement in Mexican manufacturing.
One explanation is that Mexico has taken market share from China. While Mexican exports to the US were going up by 6.5 percent China’s went down by 18.9 percent. Part of the Chinese decline was in intermediate manufactured goods, that is, manufactured products that are inputs for final products made elsewhere. This is the big sweet spot of Mexican manufacturing exports and China’s loss is Mexico’s gain. In addition, intermediate goods from, say, Vietnam that, in a pre-tariff-war world, went to China for further incorporation into products that went on to the US are now sent to Mexico. This has the double benefit for Mexico of placing its manufacturing higher in the value chain and protecting it from being penalized by political actions the US takes against China. The Sheinbaum administration has made it policy to de-risk Mexico’s economy from exposure to US-China struggles. Given Mexico’s dependence on US demand, this is the only sensible path.
Intermediate goods are central to another explanation for Mexico’s manufacturing trade surplus with the US, in two ways. The first is that US companies like Ford and General Motors manufacture a significant portion of each “US” car in Mexico, and as long as 40 percent or more of such a US car is made in the US then only the remaining 60 percent or less will be subject to the tariff. Other, non-US auto manufacturers who build cars in Mexico for the US market — Japanese and German companies mainly — cannot take advantage of this in the way US companies can, which redounds to the benefit of Mexican auto factories working directly with US companies. And autos are the biggest sector for Mexican exports to the US.
The second way in which intermediate goods affect the surplus is inflation. There is excellent reason to think that cost increases caused by tariffs result in an inflation of intermediate-good prices more than consumer prices. In other words, the prices of Mexican-manufactured intermediate goods that are then used in US production — and they account for a great deal of Mexican exports to the US — go up, increasing the value of Mexican manufactured exports to the US while Mexico also benefits from the reduction of competition by China and others, a reduction that is itself caused by tariffs. In this peculiar way, US tariffs are a win-win for Mexico.
US tariffs do have negative effects for Mexico, notably a reduction in inward investment. But on the whole tariffs seem to have made Mexican exports to the United States stronger, and in industries (autos and other vehicles, electronics) that, in the US, were supposed to be helped by tariffs.
The reduction in foreign investment into Mexico is driven in large part by the unpredictability created by US trade policy. That policy is not likely to become more predictable any time soon. The US Supreme Court will rule on the question of the president’s arrogation of tariff authority before the end of the year. Whichever way that decision goes, it will not mark the end of the struggle between the White House and Congress over tariff and budgetary authority. And then the USMCA will go through a mandated review in July 2026. There is actually a striking optimism in Mexican (understandably) and Canadian (less so) circles about being able to manage the USMCA review. That may yet lead to more investment in Mexico as its manufacturing sector grows.