Tariffs: How to Anticipate Economic Shocks

The ongoing threat of new tariffs from the United States (U.S.) on Mexican products has created a wave of uncertainty in the business sector. Beyond the immediate market reaction and official statements, this situation highlights a structural reality that many companies continue to ignore: the global economic environment is highly volatile, and those who fail to anticipate these changes risk losing competitiveness.

Every time Washington decides to modify its trade policy, Mexican exporters face a dilemma: How can they absorb the impact of higher costs without compromising their margins? Should they pass the cost on to customers? Is it possible to redirect production to other markets? These questions cannot be answered on the fly.

In our upcoming book, Macroeconomía Estratégica para los Negocios: Anticipa, Actúa, Crece* (Strategic Macroeconomics for Business: Anticipate, Act, Grow), we analyze how macroeconomic factors affect business decisions and what tools executives can use to anticipate these risks instead of reacting when it is already too late.

Mexico’s Dependence on Foreign Trade

Mexico's economy is highly dependent on foreign trade, particularly its relationship with the U.S., which receives more than 80% of its non-oil exports. While the USMCA has provided a relatively stable framework for bilateral trade, U.S. trade policy can change abruptly based on shifting political and economic interests.

We've seen this before. In 2018, Trump’s administration imposed tariffs on steel and aluminum imports under the guise of national security. Mexican companies had to quickly adjust their cost structures and seek alternatives to remain competitive. Today, history repeats itself with the uncertainty of new tariffs affecting key sectors such as manufacturing, auto parts, and agricultural products. The question is not whether these measures will happen again in the future but how to prepare for them and minimize their impact.

How Would Tariffs Affect Mexican Companies?

Tariffs essentially function as an import tax. When the U.S. imposes tariffs on Mexican products, the cost of these goods rises for U.S. importers. This can lead to several consequences for Mexican businesses:

• Reduced demand: If U.S. customers must pay more for Mexican products, some may seek suppliers in other countries or pressure Mexican exporters to absorb part of the cost.
• Lower profit margins: Mexican companies may have to lower prices to remain competitive, reducing profitability.
• Supply chain disruptions: Many industries rely on U.S. imports for key inputs. If trade restrictions or higher costs affect these imports, Mexican businesses may struggle to operate normally.
• Exchange rate pressure: Tariff announcements often create financial market volatility, potentially leading to peso depreciation against the dollar, making imported inputs even more expensive.

In simple terms, businesses that depend on foreign trade cannot afford to operate without a strategy to address these risks.

Anticipating the Impact: The Key to Business Resilience

The critical question is: How can Mexican businesses anticipate these changes instead of reacting too late? In our book, Chapter 3, we explain how government policies, interest rates, exchange rates, and trade decisions directly impact costs, demand, and investment strategies.

One of the most common mistakes businesses make is monitoring these factors only after a crisis has struck. Instead, we propose three key strategies to get ahead of these risks:

1. Continuous monitoring of key economic indicators:
   Companies must develop the ability to read early economic signals. Some key questions include:
   • What is the U.S. government's stance on trade with Mexico?
   • Which sectors are most at risk of new tariffs?
   • How are trade negotiations evolving under the USMCA?
   • What are the trends in exchange rates and interest rates in both countries?
     In our book, we explore which macroeconomic indicators can help anticipate changes before they occur.
2. Diversification of markets and customers:
   While the U.S. is Mexico’s main trading partner, overreliance on a single market is a strategic risk. Key sectors should consider:
   • Exploring alternative markets in Europe, Asia, and Latin America.
   • Building strategic partnerships with distributors in other countries.
   • Evaluating local production to serve the domestic market in case of trade restrictions.
     Companies like Grupo Bimbo and Cemex have successfully expanded globally, reducing their vulnerability to U.S. protectionist policies.
3. Use of financial hedging and strategic contracts:
   Large companies have learned to use financial instruments to mitigate the impact of currency and trade volatility. Some key tools include:
   • Currency hedging contracts to protect against peso depreciation.
   • Long-term supply contracts that ensure stability in costs and prices.
   • The use of financial derivatives to mitigate the impact of unexpected tariff increases.
     These mechanisms may seem complex for many small and medium-sized enterprises, but implementing them can be the difference between survival and being pushed out of the market in the face of trade shocks.

The Cost of Failing to Anticipate

U.S. tariffs on Mexican products will not be the last protectionist measure affecting bilateral trade. History has shown that trade relations between the two countries are subject to constant adjustments, and the companies that survive are not the biggest but the best prepared to adapt.

The message is clear: companies that do not integrate macroeconomic analysis into their decision-making will remain vulnerable to every new shift in the global landscape.

*In Macroeconomía Estratégica para los Negocios: Anticipa, Actúa, Crece, we analyze real-world cases and key strategies to help Mexican companies successfully navigate these challenges and turn uncertainty into opportunity.

The authors are Consulting Professor in the Department of Finance and Business Economics at EGADE Business School (Jorge Enrique Velarde Chapa) and Research Professor at EGADE Business School, Tecnológico de Monterrey (Rolando Fuentes Bracamonte).