Tariffs on Mexican Goods: Why the Exchange Rate Doesn’t Neutralize Their Impact, and Why Retaliation May Backfire

Introduction

A common argument suggests that the tariffs imposed by the US on Mexican goods have little effect because the exchange rate has adjusted in a way that offsets their impact. However, a closer analysis of the data and economic dynamics reveals that this claim is misleading. While currency fluctuations do play a role, tariffs still introduce trade distortions, uncertainty, and real economic costs. Furthermore, while retaliatory tariffs may seem like a justified response, they could harm Mexico more than help.

The Peso’s Depreciation vs. Tariff Impact

Over the past year, the Mexican peso has weakened against the US dollar. In March 2024, the exchange rate was 16.95 pesos per dollar. As of March 2025, it has depreciated to 20.58 pesos per dollar, a decline of 21.4%. This means that US buyers now get more pesos for their dollars, theoretically making Mexican goods cheaper.

However, the US has also imposed a 25% tariff on certain Mexican imports, adding a significant cost to those goods. While the peso’s depreciation helps offset some of the tariff’s impact, it does not fully neutralize it. The final price of Mexican goods in the US is still likely higher than last year, meaning that tariffs have had a net effect despite exchange rate fluctuations.

Why the Tariffs Still Matter

Even with a weaker peso, tariffs impose additional costs that affect trade and economic dynamics in several key ways:

1. Direct Price Increases: The 25% tariff applies to the post-exchange-rate price, meaning that while the peso’s weakening helps lower the base cost, the tariff still pushes final prices higher.
2. Uncertainty for Businesses: Tariff fluctuations create instability for companies trading across borders, affecting pricing strategies, supply chains, and investment decisions.
3. Impact on Mexican Exporters: A weaker peso benefits exporters in some cases, but tariffs reduce demand by making goods more expensive for US buyers, potentially leading to lower sales.
4. Long-Term Trade Implications: Businesses may look for alternative suppliers outside Mexico to avoid tariffs, leading to a potential decline in Mexican exports over time.

Thus, while currency fluctuations play a role in trade, they do not fully offset the effects of tariffs, which still lead to economic distortions and higher costs.

Should Mexico Retaliate with Tariffs?

While imposing retaliatory tariffs on US goods may seem like a logical response, it could have unintended consequences that harm Mexico’s economy. Here’s why:

1. Mexico Relies Heavily on US Trade

• The US is Mexico’s largest trading partner, accounting for about 80% of Mexico’s exports. Retaliatory tariffs could disrupt this vital relationship.
• Unlike the US, which has a diversified trade portfolio, Mexico has fewer alternative markets to absorb lost exports if tensions escalate.

2. Potential Damage to Mexican Industries

• Many Mexican manufacturers depend on imported materials from the US (e.g., auto parts, machinery, agricultural inputs). Tariffs on US goods would raise costs for Mexican businesses, reducing their competitiveness.
• Retaliatory tariffs could also increase prices for Mexican consumers, particularly for goods that are difficult to source elsewhere.

3. Risk of Trade War Escalation

• If Mexico imposes tariffs, the US could respond with even harsher measures, deepening economic uncertainty.
• Given Mexico’s deep integration with the US under the USMCA trade agreement, a trade war could hurt Mexico’s GDP growth and deter foreign investment.

Alternative Strategies for Mexico

Rather than retaliating with tariffs, Mexico could pursue alternative strategies that protect its economy while maintaining strong trade relations:

1. Diplomatic and Negotiation Strategies:

Strengthen trade negotiations within the USMCA framework to seek a resolution.

Leverage international trade bodies (e.g., WTO) to challenge unfair tariffs.

2. Trade Diversification:

• Expand trade relationships with Europe, Asia, and Latin America to reduce dependency on the US.
• Strengthen agreements with trade blocs like the European Union and China to open new markets.

3. Incentivizing Domestic Industry:

• Support businesses that rely on US imports by offering tax breaks or subsidies to absorb potential tariff-related cost increases.
• Encourage local production of critical inputs currently imported from the US.

Conclusion: A Strategic, Not Reactive, Response

The claim that tariffs on Mexican goods have "no effect" due to exchange rate adjustments is incorrect—while a weaker peso has softened the impact, overall costs for US buyers remain higher than last year. Furthermore, retaliating with tariffs would likely hurt Mexico more than it would pressure the US, given the asymmetry in trade dependence and supply chain interconnections.

Instead of engaging in a damaging trade war, Mexico should take a strategic approach, focusing on diplomacy, trade diversification, and economic resilience. By strengthening its global trade network and reducing reliance on any single market, Mexico can better protect itself from future economic disruptions.

Note: This article has been developed based on human analysis and strategic reasoning, with AI assistance used for structuring, refining, and articulating the ideas. The insights, perspectives, and arguments presented reflect human thought, while AI has facilitated clarity, coherence, and data integration. This collaboration ensures efficiency without compromising the depth of human expertise.