This is an audio transcript of the Rachman Review podcast episode: ‘Mexico hopes to stave off Trump tariffs’
Gideon Rachman
Hello and welcome to the Rachman Review. I’m Gideon Rachman, chief foreign affairs commentator of the Financial Times. This week’s podcast comes from Mexico City. My guest is Luis de la Calle, widely regarded as Mexico’s leading trade economist. De la Calle played a major role in negotiating the North American Free Trade Agreement (Nafta) in the 1990s, which reshaped the economy of Mexico and the whole of North America. But now Donald Trump’s threatened to hit Mexico with swingeing tariffs. So what does that mean for the political and economic stability of Mexico?
[MUSIC PLAYING]
Donald Trump voice clip
We’re gonna be changing the name of the Gulf of Mexico to the Gulf of America, which has a beautiful ring. That covers a lot of territory, the Gulf of America. What a beautiful name.
Gideon Rachman
That was, of course, Donald Trump. As I flew into Mexico last week, I couldn’t help noticing that the moving map on the plane still read Gulf of Mexico. But trying to change names on a map is much less threatening to Mexico than the economic changes that Trump wants to make, which could wreck the USMCA, the free trade agreement that succeeded Nafta. Trump has gone backwards and forwards on tariffs, imposed heavy duties on Mexican imports, then partially lifted them. Claudia Sheinbaum, the president of Mexico, hailed that pause in the tariffs as a victory, in a speech earlier this month in the central square of Mexico City, before a crowd estimated at 350,000 people.
Claudia Sheinbaum voice clip
(Speaking in Spanish)
Gideon Rachman
President Sheinbaum is head of the leftwing Morena party, and some of the party’s policies have been heavily criticised by liberal economists, in particular, a plan to fire Mexico’s judges and to replace them with elected figures. However, Sheinbaum has also been widely praised for skilfully handling Donald Trump, who has called her “a wonderful woman”. Partly as a result, her poll ratings at home are now at a sky-high 80 per cent.
But well-informed Mexicans know that it’s far too soon to celebrate. Along with the rest of the world, Mexico’s now waiting for April the 2nd, when the US president has threatened to impose a new round of tariffs on the whole world. The stakes are particularly high for Mexico, since almost 80 per cent of the country’s exports go to the USA. So I began my conversation with Luis de la Calle by asking him how he assessed the threat of Trump’s tariffs.
Luis de la Calle
It’s a very significant threat. I mean, Mexico made a wager 30 years ago to change the economic model we were following and engage a country with which we have a very difficult historical relationship, as a partner. And the USMCA now, the Nafta before that, was predicated as a tool to make sure that Mexico would keep its economy open and lock in the modernisation reforms that we’re entertaining. And 30 years later, the news is that we’ll see whether the USMCA will lock in the president of the US. So it’s a very significant change. I mean, Mexico made a gamble based on the assumption that the US will keep its side of the deal, and we’ll see whether that happens now.
Gideon Rachman
And how much — if you took the worst-case scenario, even a sort of middling scenario of what Trump is doing — how much would it unpick free trade with Mexico, if he really follows through? Is that just an adjustment to the current system or its destruction?
Luis de la Calle
Well, eventually we might destroy the system, not only the USMCA, but also the international trading system WTO. The problem with that is that Mexicans and Mexican politicians and the Mexican government might draw the wrong conclusion, which is that maybe we should go back to the statist, government-controlled economy that we used to have in the 1970s. But the decision we took to open up the economy and become a more globalised society and economy was probably not the right one.
Gideon Rachman
And in fact, the ruling party and Morena and President Sheinbaum and before her, President López Obrador, were quite tempted by that anyway, aren’t they?
Luis de la Calle
Yes, they were. We went through a revolution to such an extent that you had the first president from Morena, Andrés Manuel López Obrador, defending the trade opening and the second president of Morena and Mexican Senate controlled by Morena, approving the USMCA and speaking on behalf of free trade. Even in large gatherings in Mexico to the main plaza defending free trade. That’s quite a change.
Gideon Rachman
But you’re worried that if it goes wrong, they’ll go back to their old instincts.
Luis de la Calle
Correct.
Gideon Rachman
And just give us a sense of how dependent is the Mexican economy on that trade with the United States?
Luis de la Calle
Well, exports to the US are 32 per cent of Mexico’s GDP. So it’s quite large. And not only that, the best jobs in Mexico, the better companies in Mexico have a larger dependence or codependence with the US in terms of sales or ebitda or job creation or investment that is very much linked to the US, and the successful states in Mexico. I mean, Mexico is a country that in the last 30 years has been moving at three different speeds. The central northern part of the country, something we could call the USMCA states . . .
Gideon Rachman
So that’s around Monterrey and . . .
Luis de la Calle
Well, from Querétaro to the north, Querétaro is north of Mexico City. And they’ll be growing at rates similar to Asia and countries. Then central Mexico City — Mexico City and the surrounding states — they’ve been growing at European rates, and southern Mexico has not been growing a lot at all. So if we lose what gave central and northern Mexico the compass to that growth, which is integration with the US, that would be a significant blow. We will be losing the most attractive part of the Mexican economy. I don’t think it’ll happen.
Gideon Rachman
Yes, we’ll come to that why you don’t think it’ll happen. But let’s describe where we are now. I’m conscious, we’re talking now on March the 13th. And, you know, in a week’s time or two weeks’ time, it could be very different because Trump changes his mind rapidly. But explain what has Trump done so far and what are the decisions that are to come?
Luis de la Calle
Well, I mean, Trump has imposed three kinds of duties so far. Duties on China. He had imposed duties on China for 25 per cent years ago. Those remain under Biden. And after the inauguration, he imposed 10 per cent more and then more recently, 10 per cent more. That is bad news for the world economy, bad news for the Chinese economy, but positive news for Mexico in the short term because it makes Mexico more attractive. So the imposition of Chinese duties has been good for Mexico under Trump.
Second types of duties that he has imposed is the 25 per cent duty on Canada and Mexico, conditional on Mexico and Canada helping on fentanyl and migration. He imposed that across the board for all products. That lasted two days. In two days, he made an exemption to goods that qualify under the rules of origin of USMCA.
Gideon Rachman
Which is the trade agreement . . .
Luis de la Calle
A trade agreement that we have — Canada, Mexico and the US. And then on March 12th, he imposed duty on aluminium and steel, 25 on steel and 10 on aluminium for all countries around the world. Something that he did years ago when he was president the first time. Those are the duties he’s imposed. And he has announced a set of other duties that would enter into force on April 2nd.
Gideon Rachman
Right. And that sounds like, as he’s saying, you know, him retracting after two days obviously sounds like good news, but it’s a bit more complicated than that, isn’t it? Because something like half of Mexico’s exports to America don’t come under the USMCA. Is that correct?
Luis de la Calle
Yes. I mean, this arrangement of 25 per cent on products from Mexico and 25 per cent on products that comply with USMCA, North American products (inaudible), means that for this fraction of Mexican exports, we just have to pay now 25 per cent duties and we’ll see what happens on April 2nd. The Mexican government will have to take a decision as to whether to challenge that 25 per cent duty before WTO. It’s a violation of WTO, and whether we retaliate. Canada has taken the decision already not to remove the retaliation that it did at the beginning when Trump imposed duties on everything and has taken the case to WTO. So, yes, that’s a problem.
Gideon Rachman
Why do you think Mexico has taken a softer line?
Luis de la Calle
Well, because we have more complex issues on fentanyl and migration than Canada does. That’s reason one. Reason two is that Canada and the US looks, viewed from Mexico, as a fight between brothers and the Canadians have a level of familiarity with the US, and we don’t have, not as yet, and therefore family type of feuds are deeper, more complex. So you see some of that. And the third reason is that the Canadian and the US economy are very much similar, and they compete in many sectors much more than the US and Mexican economy. They tend to complement each other more. So we call the stronger cards at the negotiating table that kind of deals.
Gideon Rachman
Right. So Claudia Sheinbaum has been lauded here, I think, for handling Trump relatively well. But you’re saying in a sense, her main decision is not to retaliate because the treatment of Mexico and Canada’s not that different.
Luis de la Calle
Well, I mean, in terms of the duties that be in charged of Mexico and Canada, the treatment is exactly the same. So you have two very different strategies, Canada and Mexico, and we have obtained the same result. But I mean, this is only the first days over a long-term battle with the US. And we’ll see how it ends up.
Gideon Rachman
Yeah, well, I’ll come to that in a minute. How do you think this is going to play out? Because I think you probably have a better idea than most. But tell me, I mean, you have a lot of Mexican business clients. How concerned are they or does it vary sector by sector?
Luis de la Calle
Well, they were more concerned eight years ago. When Trump came to power eight years ago, there was a lot of nervousness as to what Trump might do to the Mexican economy and to Mexico. I mean, the best indicator of that is the peso-dollar exchange rate. When Trump came to power eight years ago, the peso depreciated quite significantly more than now.
Gideon Rachman
Yeah.
Luis de la Calle
In this situation, the depreciation happened before Trump won and before Trump made the threats and duties. The position of the peso was linked more to the reforms that the Mexican government undertook in 2024 that made Mexico less competitive.
Gideon Rachman
What kind of policies?
Luis de la Calle
Well, the policies under the so-called Plan C that López Obrador pushed for at the beginning of 2024, that reduces the independence of the judiciary branch. So the economy is in a position that is potentially more vulnerable to bad news. I mean, we are closer to the abyss, if you wish.
Gideon Rachman
Because the budget deficits . . .
Luis de la Calle
Because the budget deficit is much larger and because we have made Mexico less competitive. And the risk premium for Mexico, if you look at the spread between the 10-year bond, the Mexican and US, is now trading at 530 basis points, because there is a lot of pressure on Mexico.
Gideon Rachman
And you said in some ways a Mexico is in a more advantageous position than Canada, but socially you’re much more vulnerable because you’ve got many more people who live in poverty or on the breadline. It could be, you know, a small adjustment to the economy that are in trouble.
Luis de la Calle
Absolutely. But maybe Mexicans have a higher threshold of pain because of that than Canadians have. And Americans.
Gideon Rachman
Yes. And so we come to America. One of the reasons I think that you’re relatively optimistic is that you think that the whole vision that Trump has of the re-industrialisation of America and forcing all these factories that are currently in Mexico to move to the US is never going to work.
Luis de la Calle
Well, I mean, if you look at manufacturing employment, Mexico, US, and you chart that in a graph, the correlation between US and Mexico’s manufacturing employment is 90 per cent. So when you have more production in the US, you get more production in Mexico, and conversely. So is Trump’s aim is to reindustrialise the US, he will industrialise Mexico because we move together. And the US is in no position to have a successful industrialisation process without the help of Mexico and also Canada.
Gideon Rachman
So explain to me, what is it that Peter Navarro and Trump and Jamieson Greer, all these people who are driving US trade policy, who seem to believe that they can have these factories in the US? Why are they wrong?
Luis de la Calle
Well, because they don’t have clients, as you said before. I mean, when you talk to people that actually do investment in the US on assembly line processes and they try investing in the main states of the US that do manufacturing, what they all find is that in the US there is a very significant scarcity of skilled workers to do manufacturing, and therefore they always end up relying on Mexico participating in part of the process.
Gideon Rachman
And why is that shortage of skilled workers? I mean, is that something that they can’t get around through training or high wages or …
Luis de la Calle
Well, you can try all those things, but it’s difficult to convince Americans to work in assembly lines these days.
Gideon Rachman
And you have this story about the plant that Trump eight years ago hailed that. Yeah.
Luis de la Calle
Foxconn announced a large investment to please Trump. Foxconn is a Taiwanese company, the largest in the world that produces electronic goods from TV sets to computers to tablets and mobile phones. They began the construction of a large plant in the state of Wisconsin. And that plant today is not working. Eight years later, it’s closed. And at the same time, Foxconn in Mexico has now 30,000 employees, and they have 200,000 in China.
Gideon Rachman
And is that something that basically manufacturing is now a low-wage activity or a lower wage activity, and that if you were to pay Americans, the goods would just be so much more expensive?
Luis de la Calle
I mean, maybe the wage level is one of the reasons, but I mean, no matter how much you increase a wage in the US, you will not find enough workers doing. The same thing happens in the agriculture side. In 2024, 27 per cent of the US total imports of food came from Mexico, 12 per cent from Canada. So between the two of us it’s close to 40 per cent. So when you think about it, is it credible at the same time, to impose a 25 per cent duty on food coming from Canada and Mexico and prevent migrant workers to work in the fields in the US? Well, I mean, that will be probably the most ambitious program to reduce obesity in the US.
Gideon Rachman
Yeah. Somebody told me that 60 per cent of America’s fruit and vegetable comes from Mexico.
Luis de la Calle
Well, in terms of imports, not total production. Our average market share is 27 per cent. (Inaudible) is 60 per cent, and fruits and vegetables in the wintertime is probably close to 70 per cent.
Gideon Rachman
So if Trump was really serious and he keeps up with this 25 per cent tariff, there has to be a big inflationary effect in the US really quite quickly.
Luis de la Calle
Yes, eventually will.
Gideon Rachman
Eventually or fast?
Luis de la Calle
Well, I mean, at the beginning you can negotiate, but I mean eventually in a few weeks you will have a price impact that would be shown up in supermarkets.
Gideon Rachman
And in fact, I think televisions, they’re also produced here, largely in Mexico.
Luis de la Calle
Well, yeah, Mexico. We export everything to the US from medical devices. I mean, if you go to an operating room in the US, in a US hospital, half of the equipment is from Mexico, the other half is from China. If you want to keep Medicare in check. Well, do you need a lot of medical devices? And many of them come from Mexico, from scalpels to stents to respiratory machines. So everything.
Gideon Rachman
So is that why you think thinking it through, this is not going to last.
Luis de la Calle
I mean, people sometimes say that we make the rational argument. And I always say, well, I mean, if you want the irrational arguments, ask somebody else. But the rational arguments in the end will win. I mean, reality will impose itself.
Gideon Rachman
But you also said to me that, you know, if it was purely a trade argument, you thought reality would impose itself quite quickly. But there’s also these other things you referred to — the argument about illegal migration and the argument about fentanyl, which is this highly powerful drug, a lot of which is produced here in Mexico via precursors that come from China and so on. So explain to me why those issues make the trade stuff much harder.
Luis de la Calle
Well, I mean, Mexico has always tried successfully, for the most part, to separate the difficult issues that we have in the bilateral relationship — drugs and migration — from trade. But Donald Trump has insisted in mixing them up. So the 25 per cent duty that he imposed on Canada and Mexico is not a unilateral duty. It’s a conditional duty, conditional on Mexico and Canada collaborating on fentanyl and migration. So that raises three questions. Question one is: are Mexico and Canada want to collaborate? And the answer is yes. Second question is: is that collaboration enough to please President Trump? The answer is probably no, because he would like to have always the ability to threaten that thing again, so he will never be fully satisfied. He might postpone the duties, but not entirely eliminate them. But then the third question is: is it credible that the US will only impose duties on Canada and Mexico that are the US’s largest trading partners? And the answer to that is probably not, unless the US imposes duties across the board on every country, then the discussion begins to be whether Mexico and Canada will have a preference with respect to other countries into the US market. Now, if we don’t . . .
Gideon Rachman
Which is what they have at the moment.
Luis de la Calle
Which we have at the moment with the (inaudible). So without collaboration on fentanyl and migration, I think that the probability of finding an amicable solution to trade is close to nil. But once you have collaboration on those two issues, then the relevant question becomes in US trade policy is the US going to give Mexico and Canada a treatment a little better than it will give to other countries? And the answer to that is probably yes, because the trade that Canada and Mexico do with the US is more centred around inputs and intermediate goods as opposed to final goods. So when we export to the US and the US complains about having a trade deficit vis-à-vis Mexico, the things we export to the US have a lot of US content. So that produces a network of people in the US, particularly in Trump territory — the Midwest, the Corn Belt, Texas, Oklahoma — that will argue in favour of Canada and Mexico because the poor guys only have as neighbours Canada and Mexico. The people in the East Coast, we have England. In the West Coast, we have Japan. But I mean the guys in the middle, they have, for good or bad, only Mexico and Canada.
Gideon Rachman
Right. You said earlier that people accused you of making the rational argument. It’s a nice accusation to have, but I guess one of the concerns is that there’s a lot of emotion and arguments that don’t necessarily make sense. I mean, the Canadians say we’re not a source of fentanyl. What’s going on here? And one of the things that I picked up that Mexicans are very worried about is this talk in the US of actually using military force against drug cartels. What do you hear on that? How serious is it?
Luis de la Calle
Now, the risk of all this is, of course, better not to have any of this. Mexico was already very competitive in the US market as things stood before. The risk of this and President Trump pushing the envelope too far, is that some red lines might be crossed, and therefore the rational arguments don’t work any more because people become emotional. And so, yes, you cannot dismiss the probability of some red lines being crossed.
Gideon Rachman
And that would be like, say, a drone strike inside Mexico …
Luis de la Calle
A drone strike, or some sort of military operation on the Mexican side, or something on trade that is difficult to reverse. It is possible. And that’s why keeping the heads cool on every side is extremely important.
Gideon Rachman
But when the Trump people say as they do, well, look, Mexico is a narco state. You know, the drug barons are just too powerful there to infiltrate in the state. The Mexicans aren’t serious. What’s the response to that?
Luis de la Calle
Well, the US government has three concerns about Mexico. There are trade, migration and drug trafficking. And the irony is that for the three of them, the US needs Mexico’s collaboration. So that produces a sort of equilibrium that you can blame on, fingerpoint to each other. With Mexico, we always say, well, I mean, the problem is that you sent us too many arms and that your citizens consume a lot of drugs. Why don’t you stop consumption? And so finger-pointing has some political use. But, I mean, in the end, I think Mexicans realise that on drug trafficking and trade and migration, we have to collaborate with the US. And the same realisation happens on the US side that even though you may have a lot of noise about this, they know that Mexico is crucial for the security of the US — economic security and security in the security sense.
Gideon Rachman
And some Mexican business . . . a Mexican businessman said to me, you know, actually, if Trump puts pressure on us to really go after the drug cartels, that may not be such a bad thing.
Luis de la Calle
Well, I mean, Trump becomes a mirror for Mexico because it forces us to take some hard decisions. Not only Mexico, also Europe and other places. And yes, it might have that beneficial aspect to it.
Gideon Rachman
I mean, how serious a problem is it for regular business, the drug cartels? Or is it just something out there in the countryside but doesn’t affect the real economy? Was the real economy badly affected by the size of the drug problem?
Luis de la Calle
I mean, it depends on the region and the products that you work on. I mean, for the most part in export activity, there is almost no relationship with organised crime of any type. But it makes Mexico less attractive for investment, Mexican investment to begin with. So if we have a safer environment and the rule of law, the trade deficit with the US would be much larger because Mexico will be much more competitive. So it has an impact.
But I mean, in spite of that, that gives you an idea of how competitive Mexico is. I mean, if you look at border towns like Reynosa in the state of Tamaulipas, it’s neighbour of McAllen, Texas. Reynosa has a reputation of being a dangerous town because there is a lot of drug trafficking in that area. I mean, if you see that the factories that exist there, the level of sophistication, the robotics and the things they do, you say, Jesus, if these guys did not have these security problems, this could be multiplied many times over. So yes, there is some good out of Donald Trump forcing countries to do what’s right.
Gideon Rachman
Right. I mean, you said and you’ve made quite a convincing case, that in the end, reason will prevail and the trading relationship will have to be restored. I wonder what kind of timescale you put on it? And in the meantime, it must have a very freezing activity on investment, because with policy changing every week, nobody can make an investment, surely?
Luis de la Calle
Yeah. I mean, we closed 2024 with investment over GDP at 25 per cent, which is quite high for Mexico. And in 2025 it will go down, maybe to 23 per cent. It’s a significant drop, and that’s due not only to Trump, but also to the policies implemented by the Sheinbaum government. So yes, there would be some drop in investment.
The challenge for President Sheinbaum is to bring that back up to 25. And she announced a program for her term of six-year term that she wants to end up with 30 per cent investment over GDP by 2030. But given that the government investment will amount to maybe 2 per cent in 2030, that means a 28 per cent private sector investment over GDP, which would be compared to levels you will see only in Asia and the largest in Mexico’s history. So this is quite interesting that a president with her ideological background, she’s supposed to promote the largest infusion of private investment in Mexico’s history.
Gideon Rachman
You sound a bit sceptical that’s going to happen.
Luis de la Calle
Well, we’ll see how it goes. The Trump episode on duties will be very significant in that process.
Gideon Rachman
Yeah. Going back to where we started, I mean, you were one of the architects of Nafta. And as you said, Nafta was obviously crucially important economically, but it was also part of a political process where it was associated with the end of one-party rule in Mexico and a more liberal, more open society. Are you worried about not just the impact on the economy, but the impact on society and on democracy if you really go backwards in terms of trade?
Luis de la Calle
Yeah, I mean, the revolution of opening up the economy and the revolution of moving away from a single-party system with limited liberties in Mexico, run parallel to each other, and they feed into each other. So, yes, we lose the open trading nation Mexico now has that will reinforce the centralisation of power that has become so prevalent in many countries around the world.
Gideon Rachman
Well, let’s hope it doesn’t happen.
Luis de la Calle
Well, we’ll have to work because we are not only observers, we have to be active as citizens to make sure that that doesn’t work.
Gideon Rachman
But it does seem a bit like there was some domestic momentum in that direction anyway under López Obrador. I mean, he was an old-style leftist . . .
Luis de la Calle
Yes, his reforms were meant to re-centralise power in the way the PRI used to have it in the 1950s. That’s what López Obrador is all about. But when President Trump was in many ways very similar to that.
Gideon Rachman
Yeah, kind of strongman, populist figure.
Luis de la Calle
Strongman, yeah, with few checks and balances.
Gideon Rachman
So does it feel like the whole liberal era, economically and politically, is in danger?
Luis de la Calle
Well, Claudia Sheinbaum grew up in a family and professional and the student environment that was very much against that and very much in favour of democracy. So her roots deep down are over a very democratic person. And we’ll see whether in her presidency she can rediscover her true roots.
Gideon Rachman
Yeah. But again, in the US, the backlash against Nafta made this argument — the Biden people even accepted to some extent — that neoliberalism, as they called it, had gone too far, that the free trade had damaged America.
Luis de la Calle
And they lost the elections.
Gideon Rachman
Yeah, but Trump, is that argument on steroids?
Luis de la Calle
Well, I mean, if President Biden had, when he came to power, said, listen, I am going to rethink the duties on China and I’m going to rejoin the Trans-Pacific Agreement. Maybe he would have a different electoral result in 2024. This is impossible to corroborate but I mean, the thing he did, which was to try to imitate Donald Trump on trade, did not work.
Gideon Rachman
But what about here in Mexico, is there also a group of people who say, actually, even though people like Luis de la Calle, they kind of say this has been transformational for Mexico in a great way. Actually, it was all a mistake.
Luis de la Calle
Not now, because even the Mexican government is now making the argument. Listening to the daily press conference from Claudia Sheinbaum and her cabinet is quite interesting these days because they are defending free trade. That’s quite a revolution.
But I mean, if things go south and we have a big fight with the US and the whole agreement collapses, then there is a risk that Mexico will look inwards again and will impoverished ourselves once more. It wouldn’t be the first time that we’ve done.
Gideon Rachman
Yeah, but also there would be a risk to the livelihoods of ordinary people. And somebody said to me, look, if Trump is really serious, this wouldn’t just be a recession for Mexico, it would be a depression.
Luis de la Calle
Potentially, yes. So the end result for Trump would be higher prices in the US, less production in the US, and much more migration from Mexico into the US.
Gideon Rachman
Because people would have to move.
Luis de la Calle
People will move and they’ve been crossing that border for thousands of years. They’ll cross it again if need be.
[MUSIC PLAYING]
Gideon Rachman
That was Luis de la Calle, consultant and economist, speaking to me in Mexico City. Thanks for listening and please join me again next week.
