Trump’s day-one tariffs could tip Mexico into recession

Donald Trump’s tariff threats for day one of his new presidency would have a heavy impact on the Mexican economy and ripple effects on the rest of Latin America. We think the probability of this tariff scenario is low at around 10% due to the emergency powers required.

What you will learn:

• A 25% US tariff on all Mexican exports starting this quarter could push Mexico into a technical recession from Q4 2025. Tariff retaliation and peso weakness would raise inflation to 6%, while Banxico would be under pressure to hike or significantly slow its easing plans.
• The rest of Latin America would feel the heat from a slowdown in their trading partners. Trump’s threats also include 10% tariffs on imports from China, so economies most exposed to Chinese demand would suffer the most – we estimate Chile and Peru’s GDP would be close to 0.5% below our baseline forecast over 2026-2027.
• We believe that tariffs targeting Mexico would later be removed alongside the 2026 USMCA review. This would limit the economic damage: Mexican output would subsequently recover, but with some long-term scarring, while inflation would fall sharply. Long-term effects for other major Latin America economies would be minimal, even though tariffs on China are permanent.
• In a less severe scenario, the US implements 25% tariffs only on key sectors. For Mexico, we think this would include steel, aluminum, and re-exports of Chinese-made electric vehicles. However, due to just 3% of Mexico-US trade being targeted, we think the effects would be minor: Mexico’s growth is at most 0.1ppts lower, and the rest of Latin America is barely impacted.

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