This week, US President Donald Trump announced plans to slap tariffs on Mexico over a 75-year-old water dispute. The proposed 5% tariff is intended to pressure Mexico to deliver more water as accorded by a 1944 treaty. This action illustrates Trump’s dedication to fortifying the US economy and standing by American manufacturers. More importantly, it brings to light the intricacies of our global international trade relations and the importance of complex resource management.
His claim rests primarily on the assertion that Mexico owes the United States 800,000 acre-feet of water. Between the U.S. and Mexico, a bilateral treaty manages the sharing of water from the Colorado, Tijuana, and Rio Grande rivers. This duty comes straight out of that treaty. The president’s announcement comes amid a robust national dialogue on the fate of America’s water rights and agricultural resources. American agriculture relies on these same water bodies to sustain irrigation for US farmers.
Economic Implications of Tariffs
The resulting argument against the possible imposition of such tariffs has been growing even more controversial, especially among economists. Advocates contend that tariffs are a necessary tool to protect American industries and bring production back to the U.S. They insist that tariffs are an effective bargaining chip. This strategy holds other countries’ feet to the fire to live up to their commitments and improve their trading behavior.
Critics have long cautioned against the use of such tariffs. They oppose tariffs because they worry the tariffs would lead to retaliation and increase prices for consumers. A number of economists cautioned that these measures could lead to longer-term damage by disrupting established supply chains. They would further damage US companies that depend on Mexico for imports. The spat sheds light on the often tricky nature of economic policy tradeoffs, especially in a globally interconnected economy.
The special economic relationship between the U.S. and Mexico supports the most productive trade corridor in the world. Mexico is the US’s number one overall exporter, with an astounding $466.6 billion in trade value. As of 2024, the combined exports from Mexico, China, and Canada made up nearly 42% of all US imports. Tariffs on Mexico would dramatically change these dynamics, creating new and different trade flows as well as unfavorable economic projections for both countries.
The Current State of Currency Exchange
Against the backdrop of all these positive advances and deals made, the USD/MXN exchange rate has performed with muted volatility. At the time of writing, the pair is up 0.07% on the day to 18.27. Currency traders are paying really close attention to this development, because any movement in US trade policy can move exchange rates a mile. Just as quickly the markets respond to good news on tariffs and other trade negotiations. This is leading to massive swings in the forex markets.
The intricate relationship among tariffs, trade agreements, and currency valuation highlights how crucial it is to keep stable diplomatic relations. Higher tariff rates might lead investors to reconsider their investments in Mexican assets. As if the economy weren’t churning enough, this transition will introduce new layers of complication.
Historical Context and Future Outlook
The 1944 treaty between Mexico and the United States governs their water-sharing arrangements. For the last several decades, both countries have largely abided by this agreed-upon structure. Trump’s accusations that Mexico is violating this treaty signal a shift in how such agreements may be viewed in the current political climate.
As negotiations continue, each country must refine their respective priorities and weigh the costs against a tit-for-tat return to worsening relations. The administration’s focus on tariffs against Mexico, alongside its broader strategy involving China and Canada, suggests a robust approach to trade policy that may redefine relationships in North America.