Takeaways on Politics, Policy, and Pesos during GIC’s Delegation to Mexico City
Excerpt from McVean Weekly Economic Outlook by Michael Drury, GIC Board Member and Chief Economist of McVean Trading
October 12, 2025
The big news this week was China’s tough new stance on trade, just as Xi and Trump were supposed to meet on the sidelines of the APEC meeting in South Korea at the end of the month. The new strategy also comes just ahead of the Communist Party plenum to discuss the next five-year plan (October 20-23) – but apparently that path has already been decided by Chairman Xi. China will adopt Trump’s own strategy of taking global control of its key asset – rare earths and green technology – mirroring the President’s unilateral demands based on access to US markets and technology. Rather than tariffs, China will require licenses to sell any products where rare earths make up more than 0.1% of the value – whether the seller is in China or not. This extra-territoriality illuminates US demands on TSMC and ASML and their impact on sales to China. In addition to rare earths, China set limits on the use of many lithium and battery products – and the technology to produce them. It started an anti-trust investigation on Qualcomm – which gets the majority of its revenue from sales in China (and was used as a pawn in 2018) – about its purchase of the Israeli firm Autotalks. They added firms to their blacklist, including Canada’s Tech Insights, which wrote about foreign content in Huawei’s chips. Trump’s reaction was quick and predictable, as he threatened 100% tariffs on Chinese products – a strategy which failed when he first went to triple digits before Liberation Day.
Bottom line, Xi thinks he knows Trumps vulnerabilities on rare earth and soybeans – because they are so openly discussed in the press, while Xi gets to hold cards closer to his chest. He knows defense applications are near and dear to the President – as are farmers. He also knows that 100% tariffs will likely lead to hefty inflation before the mid-term – or at least unhappy consumers who can’t buy what they want. Xi is using extra-territoriality to make clear to other nations – like Mexico, which is discussing tariffs on China to meet Trump’s demands — that they have to be careful in picking sides as there are monopolies to deal with concerning both the US and China. US monopolies are on technology (the future), and access right now. China’s monopolies are also on technology (via rare earth) and supply for most basic materials.
Lyric Hughes Hale, at Econovue, recently published an article titled “Tariffs, Taiwan, and the Price of a Screw,” pointing out the US’s vulnerability on even the smallest of items. Our newsletter is reprinted by Mike McGuire in his newspaper for the fastener industry – and he notes that over 95% of that global market comes from Taiwan and China. Tariffs make them more expensive — but an interdict from the Chinese side would shut down every manufacturing operation everywhere. Mike has lobbied Washington for aid in training US sources to make fasteners — with no response. While Biden and Trump have put great emphasis on the new chip plant in AZ to reduce US exposure to Taiwan – every switch, fastener, and the wiring likely comes from China. That is what will make it so hard to extricate ourselves from Chinese manufacturing – they are already everywhere, and building anything new largely depends on their products.
Separately, we are told that Trump, who takes a very transactional approach to policy, wants to end the war in Ukraine so that he can free up the oligarch’s money — and buy their allegiance. The oligarchs are growing weary of the war — and even more weary of competition from China, which first replaced the departing Europeans, but is everywhere. This strategy is not much different from Trump’s courting the Latino vote, as those already here legally were angered by the competition for jobs, housing, and frankly significant others by the swarm of illegals allowed in under Biden.
We had the pleasure this week of participating in the Global Interdependence Center’s delegation trip to Mexico City, where we held discussions with the press, politicians, the stock exchange, local financial service providers, and the central bank. Our strongest impressions were:
1) That Mexican’s generally blame Trump for many of the problems currently hurting Mexico — but think that their new President Claudia Sheinbaum has worked well with him and mitigated the impact of Trump 2.0 policies. She had a father/daughter relationship with AMLO, the previous President of Mexico — and most think she is now the Trump whisperer, a smart, savvy, tough businesswoman much like Ivanka. Sheinbaum has a 70+ rating, while Trump’s negative rating in Mexico is 88. Mexico’s Congress does not benefit from the Presidential aura, and is hovering around 50.
2) Mexicans are unhappy about Trump edicts, but don’t think they can do much about it. We often heard that although the new policies are a burden, they are happy to have done better than everyone else — including Canada. Many think there will be bilateral US-Mexico negotiations ahead of the redrafting of USMCA – and then Canada can sign on, or not.(That perception was challenged by Carney’s visit to Washington, but perhaps only temporarily). Autos, in particular, were a significant topic of conversation, as relative costs, tariffs, and Trump’s preference for Sheinbaum (and focus on local car production as a backup for defense production) may lead to a shift away from Canada to Mexico.
3) Perhaps most surprisingly to the US attendees was that the Mexican reaction to immigration reform was essentially that they don’t really care. Mexicans are primarily focused on issues that affect local residents. Moreover, the current flow of immigrants to the US are increasingly not Mexican, but rather nationals from the rest of Latin America and elsewhere who are passing through. Several mentioned that Mexican emigrants had chosen to leave, so any problems they face in the US are their own. Even on remittances, while they admitted they are falling, it was just from $64 billion last year to roughly $58 billion in 2025. With a stronger than expected peso, at 18.5 instead of 20, it works out about the same in spending power for local recipients. However, as more emigrants are pass-throughs, about half of the remittances coming from the US go to those travelers — especially to Venezuelans.
4) For most Mexicans we spoke with the biggest issue was the debt that AMLO built up over 2024 in order to get Sheinbaum elected — and the slashing of cultural budgets she has undertaken to bring that deficit down. Under AMLO, more of budget was shifted to flow directly to the people through transfers, rather than through institutions. Sheinbaum has preserved those direct payments, but that meant gutting payments to museums, etc. Most estimates show debt to GDP falling from here, as real GDP will grow slightly over 1% in 2026-7 with at least a 3% inflation rate. Price hikes are currently closer to 4, with a target of 3. As in the US, goods prices are the problem, while service inflation has cooled. Still, with a deficit of 4.1% of GDP, while nominal GDP growth is still above than 4.5%, debt to GDP falls.
5) The debt issue is compounded by the burden of PEMEX’s outstanding obligations and its late payments to suppliers. Part of the need to cut debt to GDP is the additional debt owed by PEMEX, which is roughly 10% of GDP. AMLO put a ban on fracking in the constitution, but Sheinbaum is looking for ways around that, because they need more money.
6) The last time we were in Mexico City was February 2020, just as Covid slammed the door and just after AMLO took over. We felt it was a much different place today. There was far less English in signage and speech, even in obvious places, like the hotel or at the airport. We found that even when it was clear we could not speak Spanish, many continued though it was clear they spoke English (welcome to the new France). At the hotel, where the vast majority of guests were American (there was a large US-Mexico convention underway) breakfast was 100% Mexican. No bacon, no sausage. Few dishes an American would recognize. This was different than during our visit at same hotel in 2020. It reminded us of the change that we saw in China on our first visit after the Great Financial Crisis in 2009. Mexicans are counting more on themselves, not the US to drive growth. Critically, that will make any windfall in growth as the world moves away from China a bonus that lifts potential even higher.
7) During the discussion with the leaders of the stock exchange, it was noted that there was a steady outflow of capital from locals — but a rising appetite for Mexican investments by foreigners. We asked if it was just money round-tripping through US institutions or off-shore tax havens — but they said no. Bottom line, successful local entrepreneurs don’t trust Morena (the current party in power — which looks to remain for a while). Meanwhile, foreigners see the opportunities arising from the increase in cost caused by Trump’s tariffs, while Mexico continues to benefit from USMCA. Even China is reacting to the new order, with BYD building a factory there — after providing 40% of all car sales via imports last year. Mexicans argue that the actual physical investment from China is relatively small, while there is increasing inflow from literally everywhere else, mostly into manufacturing facilities. We have noted many times; no country suffered more for China’s entry into WTO than Mexico – but now the worm has turned.
8) It was clear that financial investors were more upbeat about the future of growth in Mexico than government officials or local businesses. They had a more positive view, especially on the longer run, and were enjoying a strong stock market run, falling interest rates (with more to come), and a strengthening peso. Returns in dollars on Mexican investments are up about 37%. The most profitable trade has been to be long the peso — at a 10% interest rate in local non-government paper — and short the yen. The unwinding of that trade explains more about recent yen outperformance than anything happening in Japan. The consensus on the longer run view for Mexico is pure upside, as the local manufacturers regain what they lost to China after 2000. Many noted that China is willing to shift manufacturing to Mexico, especially at the low end of technology, as they move up to services, and defense/technology industries.
9) It was pointed out by many that Mexico is more like India and Brazil, than Canada or Europe. It is a non-aligned partner, as Mexico is not part of NATO and never will be. It does not fear invasion from foreign forces (including the US) so it tends to straddle global political issues. Mexico tacitly assumes the US would intervene in a worst case in order to protect the US’s significant interests. There is mixed emotion about Trump trying to impose his will on the cartels by sending US troops to Mexico (much as there is here in Memphis about the National Guard). Bottom line, most locals are worried about local issues — and anything to tamp down cartels and political corruption is good.
10) That make it a key point of contention that some of the politicians in the departing AMLO government are now in scandals involving corruption – but, so far, the taint misses Sheinbaum. AMLO put the military- and especially the Navy,(which historically has high respect in Mexico, because they provide coastal aid after storms and earthquakes) in charge of many institutions like the trains and the airports, and now they are caught with their hand in the cookie jar. The shift in control to the trusted military was part of AMLO centralizing power, but now it is clear corruption follows the money, undermining confidence in government. Sheinbaum will rely on more direct centralized civilian government control (meaning Morena), utilizing military corruption as an excuse to strengthen her hand even more than AMLO could.
11) On our visit to the Central Bank, one chart that stood out showed that a huge surge in electronics exports had been responsible for much of their recent gain in export sales. No mention was made about electronic imports – or where they come from (though that is mostly China and now Vietnam). The domestic industry could not have ramped up production that fast, even if it was a partial beneficiary. Clearly there was a lot of transshipping ahead of the Liberation Day tariffs (and after) that they don’t want to talk about. Bottom line, it may be harder to cut China out of manufacturing supply chains than many hope.
12) Finally, many noted that even with new 30% tariffs on imports to Mexico from China, many products will still be cheaper — at least for now. The interregnum created by Covid allowed China to deeply penetrate many developing world markets with cheaper products. As noted, BYD now accounts for 40% of new car sales in Mexico – a painful point for US suppliers who went there no just for less expensive labor but also to expand sales into the domestic market. As in the US, higher prices directly to the consumer will delay the decline in inflation, and maintain pressure on the government to provide support to the populous. Sheinbaum is just one year into her six-year term – and historically in Mexico that is the honeymoon period. Her high ratings may be vulnerable if the current stagflation continues. Real GDP growth in 2025 is estimated to be less than 0.5%, and inflation is closer to 4% than 3%. Bottom line, she faces many of the same problems as Trump – but with a bit more play in her line relative to upcoming elections. The outcome of the new flare up in US-China trade will be a significant issue for Mexico – but it provides both risk and opportunity.
We are moving on from Mexico – via LA – to Philadelphia on Monday and Tuesday to attend the annual conference for the National Association for Business Economics. It will be interesting to see how economists – who have had a dismal outlook all along – rect to the latest tit for tat trade battle.