Over the weekend, Mexico and the US announced they had reached agreement on a number of issues, thereby "indefinitely" delaying the imposition of tariffs on Mexican exports to the US. The tariffs had been expected to kick off today; 5% initially, stepping up by 5% each month to 25% in October.
Both governments hailed the agreement as a victory for their respective countries, but Mexico appears to be worse off. The Mexican authorities have agreed to commit to deploy c6,000 troops from the recently created National Guard to Mexico’s southern border (to make it harder for citizens of other Central American countries to enter Mexico) and, perhaps more importantly, to keep asylum seekers in Mexican territory while the US processes their applications.
Along with this, Mexico has agreed to provide such asylum seekers with housing, health care and food; President Andrés López Manuel Obrador and Minister of Foreign Affairs Marcelo Ebrard (who led the Mexican delegation throughout the negotiations) did not disclose the cost of this provision in their press conference today.
The signed agreement stated that the issue of the tariffs would be revisited in 90 days, but Ebrard said at the press conference that an initial progress assessment will take place in 45 days. If it is deemed that the measures Mexico is taking to curb immigration at its southern border have not been successful, the country might have to take additional steps.
The announcement of the agreement led to a recovery of MXN and, of course, a sigh of relief from the private sector, especially export-oriented companies. However, we believe the possibility of the tariff threat re-emerging cannot be discounted given that it seems to have been, at last in part, driven by US domestic political factors that are not going away anytime soon; namely, US President Trump’s campaign for re-election, which formally launches on 18 June.
Moreover, it is unclear what precisely the US would deem a success – neither party has defined the benchmarks that the Mexican government would have to meet to prevent the threat of tariffs re-emerging. Mexico has been placed in the difficult position of having to hit an undefined target, meaning there seems to be a strong chance that it will have to return to the negotiating table if the Trump re-election campaign falters.
In sum, Mexico appears to have dodged a bullet, but this by no means implies that the agreement is not at risk of being repudiated at a future date if the US concludes that it is unsatisfied with Mexico’s efforts. We are, however, cautiously optimistic as we believe that, at the very least, Trump has demonstrated that he is prepared to walk back on his threats if his counter-party agrees to his conditions, and that Mexico is willing to do whatever is necessary (within limits) to keep its northern neighbour (and main trading partner) satisfied.