Mexico’s currency fell to a two-year low on Tuesday and stocks fell after US President-elect Donald Trump threatened to slap a 25% tariff on imports from the country’s top trading partner and Mexican President Claudia Sheinbaum warned of damaging trade with tit-for-tat. conflict.

At her daily news conference, Mexico’s leader urged investors to remain “calm” and said she had already sent a letter to Trump calling for talks. Sheinbaum described the proposed tariff action as “unacceptable” and warned that it would lead to inflation and job losses in both countries.

She spoke after Trump announced on Monday that he would move to punish imports from Mexico when he takes office in January if the country does not stop the flow of drugs and migrants across the border. He also promised to impose tariffs on imports from Canada and China.

“President Trump, it is not with threats or tariffs that we will address the phenomenon of migration or drug use in the United States,” Sheinbaum said, reading from his letter.

“One tariff will be followed by another in response and so on,” which will be harmful to American automakers such as General Motors, Stellantis and Ford Motors, she said, adding that the companies’ Mexican subsidiaries are the country’s biggest exporters to the United States.

The trade threatens to hurt Mexican imports after the country overtook China as the leading supplier of goods to the United States for the first time in two decades. Imports from Mexico rose nearly 5% in 2023 to about $475 billion, while imports from China fell 20% to $427 billion, according to the U.S. Commerce Department.

FINANCIAL DAMAGE

Mexico is one of Trump’s top targets and is particularly vulnerable because of its strong trade and investment ties with the U.S. economy, Moody’s Ratings said Tuesday in a report forecasting Mexican GDP growth of 0.6% next year, a decline from 1.3% expected. for this year.

“Weakness in the economy will worsen in 2025 as the country’s negative trade gap will widen due to US tariffs, reducing demand for Mexican exports, but also because the US economy will grow more slowly in 2025,” the report said.

Moody’s added that Mexico may respond with retaliatory tariffs, as it did in 2018 under the first Trump administration.

Together with Canada, the countries signed a new free trade agreement in 2020. The treaty must be revised in 2026.

Ahead of Trump’s announcement, HR Ratings said on Monday it had revised its outlook for Mexico’s sovereign debt to negative from stable, citing weakened economic growth prospects, slower budget deficit reduction and the “uncertainty” caused by Trump’s victory in the Nov. 5 presidential election.

STRATEGIC DIPLOMACY

Álvaro Vértiz, country manager and partner at US-based consulting firm DGA Group, said strategic diplomacy was now of paramount importance to Mexico.

First, it must “let the United States know, without losing objectivity, how its population would be affected in the event of the implementation of a generalized tariff,” he said.

The Mexican government must seek ways to negotiate with the United States as equals, focusing on what is best for both countries, Vértiz said.

In addition, the country needs “a very coordinated strategy with the United States around the issue of migration and the issue of fentanyl trafficking” to understand the problem, he added.