How Trump tariffs in Mexico indirectly affect the European economy

A mine for the European Union economy is the new package of Americans which – by Trump’s decision – comes into effect tomorrow Tuesday (4.2.2025) in addition to Canada and China. For Mexico, the US punitive tariffs 25% announced by US President Donald Trump, on products from Mexico and Canada and 10% on products from China were put into effect late Saturday night (1.2.2025) represent the worst case scenario that the government and businessmen feared, but it will hurt badly and the giants of the European car industry, namely Volkswagen and Stellantis who are active in the centre-American economy and therefore also the EU economy. Trump has announced similar measures for products from the EU. CORVERSE With the increases, the entire Mexican economic model is in danger and Latin America’s second largest economy is facing recession, analysts say. Mexico’s President, Claudia Shinbaum (Claudia Sheinbaum) reacted with rage on Saturday night (1.2,2025) and announced “tax and non-reward” retaliation. “The problems are not solved by imposing duties, but by dialogue, as we have done in recent weeks,” he said. For many of the 2,100 companies with German capital participation, special contributions constitute a “hard blow and harm Mexico’s attractiveness as a place of production”, as explained by the German-Mexian Chamber of Industry and Commerce (AHK Mexico). However, the specific effects of the tariffs cannot yet be foreseen. The majority of German companies supply the US market from Mexico, particularly the car industry. Mexico has long been the most important investment site for the German economy in Latin America. Only since the millennium change, companies have invested more than $45 billion in the country. The German Automobile Association (VDA) warned about the effects of protectionism on Germany: companies should increasingly serve their respective sales markets at local level. “This will not be without consequences for jobs in Germany and Europe,” said one representative. “ Sooner or later, isolation in all countries creates only losers! » ADVERSE Therefore, the VDA uses new tariffs as an opportunity to require further free trade initiatives from the EU: “The EU is on the right track supporting the conclusion of free trade agreements rather than the recent facilitation of trade between the EU and Chile”. could be a model. VW is particularly affected in Mexico According to Moody’s rating agency, the two Volkswagen and Stellantis car companies will be particularly affected by the measures announced now. According to Moody’s, more than 15% of EBIT is at risk only in the Wolfsburg-based DAX group, which, after adjustment, amounts to around EUR 3 billion. According to Christian Koenig, who runs an electric engineering consultancy in Washington, the Volkswagen Group will be hit even more by other German companies. “VW is therefore more exposed than, for example, BMW and Mercedes, because the Wolfsburg-based company imports much of its vehicles from Europe and Mexico into the US,” he said. VW has a lot of problems right now. “After significant sales losses in China, the US market no longer offers the promising relief for the VW Group,” Koenig said. “Volkswagen is concerned about the damaging economic impact the US government will have on American consumers and the international car industry,” said a VW spokesman in response to a question from Handelsblatt prior to the announcement of the Trump decision. “We remain strongly committed to free and fair trade”. The US is “a key element of our development strategy”. VW emphasized its own investments in the region as a precautionary measure. Over $5 billion will be invested in the Tennessee plant, another $5 billion in the consortium with American electric car manufacturer Rivian and the revival of the Scout brand. VW employs “tens of thousands of people directly and indirectly” in the US. In Mexico, the company manufactures the Jetta and Tiguan models popular in the US and Audi manufactures its Q5 SUV in the North American country. As reported to Handelsblatt several people who know the plans, the group is now considering the production facility of the premium brand in the US. Porsche could also identify part of its production in the US. However, no decision has yet been taken on this. Bosch car supplier is also likely to be affected by Trump’s measures. The German group operates eleven production plants in Mexico, including seven for mobility solutions. Bosch exploits the long-term potential of the North American market and continues to expand its activities in the region, reported the company’s headquarters. “We are constantly checking the flow of our goods in the light of changing trade legislation,” said a representative of the company. However, at the moment it is too early to comment on the possible impact of the US duties announced. Cars on the US market become by many thousands of dollars more expensive Experts of the Standard & Poor’s rating house had calculated the effect of tariffs before being imposed. The 25% duty now introduced will increase the price of an average vehicle imported into the United States by $6,250. “The importers are likely to transfer most, if not all, of this increase to consumers,” S&P said. To date, about 5.3 million passenger cars are manufactured annually in Canada and Mexico, according to S&P, of which about 70% are intended for the US market. In addition, many vehicles manufactured in the United States use drive systems and components from Canada or Mexico. Almost no car manufacturer or supplier is immune to the effects. For decades, “a largely stable environment allowed the development of a commercial ecosystem”, but this is now being challenged by Trump’s plans. Ford and GM have produced cars in Canada and Mexico for about 100 years, Volkswagen in Mexico since 1967 and Nissan since 1992. Mexico faces recession Punishing duties are a violation of the North American Free Trade Agreement (USMCA), which unites the three US states, Mexico and Canada. Mexico’s economy is fully north-oriented. For both sides, the other neighbor is the most important and largest trading partner. The United States makes more than 15% of their purchases in Mexico. Both economies are closely interrelated, particularly in the automotive sector. Before final assembly, the components of a vehicle often cross the border many times, which makes the application of the new US tariffs extremely complicated. Trump justified harsh penalties against his most important trading partner arguing that Mexico had negligence in the fight against organised crime and the immigration crisis. In addition, the state and drug cartels entered into a “unbearable alliance”. This accusation particularly angered Mexico. “We categorically reject the defamation of the White House,” said President Sheinbaum. Since this weekend, Mexico and the US have not only been in a customs conflict, but also in the midst of a serious diplomatic crisis. The Mexican government had actually assumed that Trump would simply threaten but would not eventually impose customs duties. Sheinbaum instructed Economy Minister, Marcelo Ebard, Marcelo Ebard to adopt a Plan B in response to US decisions, which would also include special tariffs on US imports. However, he did not name specific percentages or say which products would be affected. Embrad had previously described Trump’s decision as a “mistake” that would primarily affect American consumers. Mexico is the main supplier of cars, car parts, computers, screens and refrigerators on the US market. Furthermore, 57% of Mexico’s oil exports go to the United States. Overall, Mexico produces an annual $490 billion profit from exports to the United States. The US trade deficit with Mexico, which increases every year, now amounts to $176 billion and is, according to Trump, the main reason for customs duties. He also claims that Mexico is doing too little to combat the production and smuggling of synthetic fentanyl in the United States. The Mexican government also does not do enough to stop the migration of hundreds of thousands of people from South America to the United States. Mexican analysts and economic experts warn that punitive tariffs are likely to lead to an increase in interest rates and peso depreciation (Mexican currency). US bank JP Morgan estimates that the Mexican currency could drop up to 12% as a result of the punitive tariffs. In addition, the effects of special contributions could affect Mexico’s credit capacity of foreign debt and direct investment. Moody’s Analytics had estimated that at a total duty of 20%, Mexico’s growth would slow from 1.3% in 2024 to 0.3% this year. A higher duty, as has now been introduced, would plunge the economy into recession, says Alfredo Coutiño, director of Moody’s Analytics for Latin America. If the 25% duty was applied throughout the year, the Mexican economy would shrink by up to two percentage points.