Thoughts

June 06, 2025 | 15:03

Mexico: Is the ‘Shein’ Wearing Off?

Economist

Senior Economist and Director
Economics

Sarah Howcroft conducts risk analysis across a range of countries and industries in which BMO has strategic inte... (Read more)

Sarah Howcroft , CFA

Senior Economist and Director
Economics

Sarah Howcroft conducts risk analysis across a range of countries and industries in which BMO has strategic inte... (Read more)

While the doubling of U.S. steel and aluminum tariffs to 50% took most of the attention this week, it was just one of a number of recent headlines stoking concern in Mexico. Although the economy avoided a technical recession in Q1 after a negative print in the prior quarter, Bloomberg polling for real GDP currently sits at 0.0% overall for 2025, in between the IMF’s April projection (-0.3%) and the OECD’s June outlook (+0.4%). Recession or not, it’s clear that most forecasters expect Mexico’s economy to sustain a relatively big hit this year and underperform both its North American and major emerging-market peers.

Prior to this week’s hike in steel and aluminum levies, estimates of the average effective U.S. tariff rate on Mexican exports ranged from around 5% to 15%, up from effectively 0% in 2024. Assuming no additional major policy changes, lowering the effective tariff rate depends on increasing export compliance under the USMCA trade agreement. In 2024, just under half of the country’s exports to the U.S. were certified under the USMCA, reflecting the administrative cost of proving rules of origin. Recent trade data suggest that significantly more exporters are opting in to avoid tariffs (as they are in Canada). Still, the effect of tariffs on Mexico’s economy is already visible, particularly in the auto sector where vehicle exports fell 10.9% y/y in April.

Beyond the trade turmoil, the Trump Administration is also exerting pressure on Mexico through its extensive migrant population. Workers’ remittances (predominantly from the U.S.) plunged 12.1% y/y in April, marking the steepest drop since 2012. The decline points to deteriorating job prospects for migrants who are increasingly wary of being deported. Remittances are an important source of income for Mexican consumers, amounting to 3.7% of GDP on average over the last five years (and significantly higher in some states). These flows will likely be further dampened after the expected passage of President Trump’s “One, Big, Beautiful Bill”, which includes a 3.5% tax (effective January 2026) on all outbound remittances by non-citizens.

Finally, this week saw the first results trickle out from Mexico’s inaugural judicial elections. Recall, the judicial system was overhauled in 2024 with constitutional amendments requiring direct election of all judges up to the Supreme Court and establishing a judicial discipline tribunal. Only the results for the Supreme Court have been certified and, as expected, all nine of the winning candidates are closely aligned with the ruling Morena party. Voter turnout was very low, at around 13%, reflecting widespread voter confusion and dissent. Nevertheless, the outcome will have consequences for businesses and investors, who will face an inexperienced and less efficient judiciary, at least until the new system is fully in place. Moreover, the loss of judicial/regulatory independence could affect Mexico’s standing with the U.S., particularly around the upcoming USMCA review.

Bottom Line: Despite the firmer global backdrop after the U.S.-China trade truce, Mexico’s economy continues to face significant headwinds and uncertainties. While President Sheinbaum is expected to forge ahead with the AMLO-inherited judicial overhaul, once the impacts of U.S. tariffs and deportations become clearer in the months ahead, she will likely be forced to respond.