BriefCASE: Tariff trouble - Will Mexico's auto investment engine splutter?

We can be more certain about Trump's "America First" approach. In his first administration, this meant imposing tariffs or threatening them as a negotiation lever. The target of these tariffs depended on the direction of travel and the size of the US trade deficit with various partners. For reference, the three biggest contributors to the US' US$1.14 trillion deficit are — in order — mainland China, the EU and Mexico.

As documented previously, Mexico has achieved great success in attracting foreign direct investment (FDI) into its automotive sector, according to data from Directorio Automotriz. In the first three quarters of 2024, auto investment has continued to flow into Mexico, albeit at a slower rate (a decrease of 13.6%) compared to 2023. During this period, the value of auto FDI from mainland China has increased by over 86% to US$3.5 billion.

Given where the future administration's gaze is likely to rest, the increased mainland Chinese investment will raise concerns. Thus, it is not surprising that on the campaign trail, Trump raised the prospect of rewriting the United States-Mexico-Canada Agreement (USMCA) trade agreement. Additionally, while campaigning in North Carolina, Trump posited a 25% to 75% tariff on all Mexican goods — not just light vehicles — if the country did not assist the US in curbing illegal immigration. This threat is implicit in requiring a rewrite of the USMCA.

A six-year renegotiation provision is included in the original USMCA, meaning that renegotiations are scheduled to begin in July 2026. However, there will be much more horse-trading and public pronouncements before then.

And therein lies the problem. Tariff or no tariff, large capital expenditure projects—such as automotive investments—require certainty in the business environment and clarity of policy before any dollars are committed. Thus, much of the focus on the USMCA renegotiation will be on Mexico due to the trade deficit. It will be revealing to see whether Mexican automotive FDI is sustained.

To date in 2024, the volume of investments has slowed compared to 2023, even though the value of FDI peaked in the third quarter of 2024, with over US$3.5 billion invested.

Cumulatively, mainland China is the largest source of FDI for Mexico's automotive sector. Interestingly, the country contributing most to its cumulative investment in the third quarter of 2024 was the US, which may indicate that companies want to secure investments before USMCA rules are changed—something the Democrats also vowed to review during the campaign.