The US fallout from tariffs on Mexican steel and aluminium

The biggest winner could be the Chinese auto industry.

As seen from the cold eyes of the academic economist, it is good news that the US president has limited tariffs on Mexico from “everything” to “just steel and aluminium.” Of course, it makes the economic damage all the less disastrous, but it also provides a narrower and therefore less muddied view of the ripple effects they could have across the economy.

Donald Trump hasn’t realised he is on the verge of unleashing a storm. He might think there is no problem in applying tariffs on steel and aluminium; he’s done it before. But the world is very different from what it was in 2018.

Back then the cross-border North American auto industry—one that is thoroughly dependent on these metals—may well have been able to withstand the added costs. Today, with China aggressively entering the region’s market via Mexico, these tariffs threaten to destabilise and undermine any industry even tangentially tied to these two metals.

Beyond the incursions of Chinese cars, Mexico has set itself up for failure. In the years since the pandemic, the country’s steel and aluminium industries—that is, production of the metals themselves and their derivatives—have become exposed. Increased dependence on the US as a market for both aluminium and steel instead of its own means the Mexican government’s negotiating stance has been weakened.

War-gaming the implications of these tariffs reveals that these seemingly limited tariffs might ultimately have the effect of dragging down Mexico’s auto industry—its most important export-wise—and by extension the United States’.

The happier times of Trump 1.0

If the US president’s tariffs on steel and aluminium feel like a deja vu it’s because Trump tried this same trick back in his first term. In 2018, 25% tariffs were slapped on steel and 15% on aluminium. Mexico was given exceptions, particularly in the derivatives of these metals that it was specialised in.

Back then, the “enemy” in Trump’s view was China. The North American Free Trade Agreement (NAFTA) had just been renegotiated to become the United States-Mexico-Canada Agreement (USMCA) which proved a boon to Mexican manufacturing.

In 2020, a clause saying that 70% of all aluminium and steel in a vehicle must come from North America came into effect. Mexican industry for both these metals boomed.

In the case of aluminium, since 75% of what’s consumed in Mexico is used in vehicle manufacturing, demand from car parts manufacturers spiked. And, given that Mexico makes no aluminium from scratch, imports boomed—including that of scrap which was recycled back into its raw version. The country became the United States’ number one international customer, importing 30% of its aluminium exports in 2023.

For steel, new investments were made and added capacity came online. Ternium, an Argentine-Mexican smelter, invested close to $100 million in Louisiana. The idea was to integrate manufacturing all across “fortress North America” to the exclusion of China. At this time, the protectionism surrounding US steel actually allowed Mexican producers to increase their competitiveness, allowing them to lower imports by 9% in 2023. Even then, Mexico remained the second global export market for US-made steel right behind Canada.

Trump’s negotiating hand strengthened before he was even elected, when corruption managed to sabotage Mexico’s burgeoning steel industry after Altos Hornos de México (AHMSA)—once Latin America’s largest producer—went under. The collapse happened in just a few years, triggered by bribery allegations linked to the infamous Odebrecht case. The company folded officially in November last year, but had stopped producing since 2022, leaving a 4 million tonne hole in Mexico’s steel supply.

AHMSA’s fall made Mexico even more reliant on imports from the US. Ternium and ArcelorMittal have made investments worth $5.7 billion dollars to make up for lost production, but these won’t be fully operational by next year.

Mexico could try to get its aluminium and steel from its other North American partner, Canada, who is also being threatened by Trump’s tariffs. But not so fast. Supply chains, especially for such unwieldy goods, cannot be changed so rapidly. The US experienced this first hand when Trump’s first bout of tariffs in 2018 saw aluminium and steel imports go up by 1.5%.

Consequently, Mexico is in no real position to hit back at the US with reciprocal tariffs without severely hurting its own industries. What’s worse, this relative weakness might make Trump more cocksure about applying these tariffs on Mexico without feeling he has to worry about any consequences stateside.

He couldn’t be more wrong.

Self-sabotage

The story of both steel and metal production in Mexico shows a similar looking trend: A post-pandemic boom, around when the USMCA’s minimum metal content requirements came into force, followed by a sudden stall in both industries.

Tellingly, the same pattern can be seen in automaking; growth from 2020 with a leveling out at the end of 2022. Growth in exports, nonetheless, didn’t flag and neither did domestic purchases. Where were these extra cars coming from?

At around this time there can be seen a sudden uptick in car imports into Mexico; an increase coinciding with the arrival of Chinese car brands. Not only were they cheaper, they were often better than locally made wares. Thus, from being absent in the Mexican market until 2022, by August 2024, 9% of the cars bought in Mexico were imported from China.

Very high tariffs on China’s cars made it almost impossible for them to enter the US market, but their incursion into Mexico shook up the region’s entire auto industry—and with it, its steel and aluminium sectors.

The statistics tell the story: Mexico wasn’t making any more or any fewer cars but it was making up the loss in its local market through growing imports. Someone in the US might feel that this is irrelevant to their own market until one realises that the Mexico auto industry is a key buyer of US inputs.

There is no viable North American car industry without Mexico, and there is no Mexican auto industry without a free flow of steel and aluminum goods.

The breakdown

The two main assumptions are the following:

1. A large part of steel and aluminium and their derivatives crossing the US-Mexico border are sunk into the auto industry.

2. For the auto industry, 70% of content must come from North America. So, just as Mexico is stuck with US imports, the same is true of the reverse.

Knowing all this, let’s review what would happen if Trump went through with his tariffs:

1. Even if Mexico doesn’t retaliate with its own tariffs, the price of cars will go up, as aluminium and steel parts made in Mexico—often with US metal—are charged for entering the US.

2. This in turn will make Chinese cars even more attractive to Mexican consumers.

3. North American car sales will decline, affecting the Mexican auto industry.

4. US steel and aluminium producers exporting to Mexico would feel the pain, just as much as the auto industry and consumers in the US.

The reverberations would go much further but very few of those other paths lead to positive outcomes, often for the very industries Trump is aiming to protect.

There is an inkling that the US president understands this. That sort of thinking is behind the idea of limiting tariffs to two strategic sectors to limit the downstream effects on inflation and disruption. But as is clear, the effects would not be limited. They would cause damage to the very industries they are trying to protect, with victory for Chinese automakers being just the cherry on top.