Bottom-Line: The Trump administration will proceed with a 25pp across the board tariff on all imports from Mexico (also on imports from Canada; with energy levied a lower 10% tariff) and a 10pp additional tariff on imports from China. The Feb 1 Executive Order directs the Secretary of Homeland Security to inform the President of any circumstances that indicate that the government of Mexico “has taken adequate steps to alleviate the illegal migration and illicit drug crisis through cooperative actions”, and upon the President’s determination of sufficient action to alleviate the crisis, the tariffs will be removed. In our assessment, the new tariffs on Mexico may not become a permanent feature of US trade policy, though how long they would last is uncertain.

The Mexican authorities expressed deep disappointment with the US tariff action and will announce on Sunday countervailing tariff and non-tariff measures. In the meantime, the Mexican authorities stated that they are open to dialogue with the US. We expect the authorities to continue to be pragmatic and cooperative in order to avoid a major escalation that disrupts the trade relationship with the US and narrows the window for a negotiation. The specifics of the Mexican countervailing measures are not yet known, but we expect the Mexican tariff retaliation to be measured (well short of tit-for-tat) and strategically focused on a narrow set of products that are also politically sensitive. We highlight that from a comparative-advantage standpoint, the fact the MXN has depreciated 21% since March 2025 and that the main Mexican competitors in the US market (China and Canada) were also subject to import tariffs reduces the loss of external competitiveness/profitability by Mexican exporters. Overall, we expect the Mexican authorities to remain engaged, and:

Increase cooperation on immigration and border control.

Commit more resources and step-up operations to disrupt the production of fentanyl and smuggling channels into the US;

Broaden the cooperation with US law enforcement agencies, to disrupt the smuggling of people and drugs into the US by Mexican cartels, and;

Tighten the screening of Chinese investment in Mexico, which based on recent reports and actions could include additional tariffs/barriers on Chinese imports, and to monitor and restrict the transshipment of Chinese goods to the US via Mexico. We note the Mexican authorities have recently announced a number of incentive measures (Mexico Plan) to attract FDI, reduce Chinese imports, and increase value-added in US-Mexico-Canada supply-chains.

Our analysis shows that trade policy uncertainty (TPU) in isolation can generate a ½-1% drag on Mexican GDP as uncertainty leads to more defensive investment and spending decisions.

Beyond TPU, in our model tariffs impact growth through the drag from real personal income and a reduction in exports to the US, which are only partially offset by currency depreciation and the domestic monetary policy response. Our model estimates show that in a scenario with partial retaliation the combined impact of the TPU drag and an across-the-board 25pp increase in US tariffs would lower Mexico's GDP by around 3.0%-3.5% and would lift prices by 80bp.

The global economy is set to reach a staggering $115 trillion by 2025, according to recent projections by the IMF. This visualization reveals not only the scale but also the distribution of economic power across nations and regions. Here are some key takeaways:

Highlights:

1. U.S. and China Lead the Pack

The U.S. dominates as the world’s largest economy at $30.3 trillion.

China follows with $19.5 trillion, cementing its role as a global economic heavyweight.

2. Asia’s Growing Influence

With Japan ($4.4 trillion), India ($4.3 trillion), and South Korea ($1.9 trillion), Asia continues to rise as the world's economic hub.

3. Europe’s Steadfast Role

Germany ($4.9 trillion), the UK ($3.7 trillion), and France ($3.3 trillion) demonstrate Europe’s enduring economic significance.

4. Emerging Markets Expand

Nations like Brazil ($2.3 trillion) and Indonesia ($1.5 trillion) are driving growth in their regions.

5. Africa’s Gradual Rise

Economies like Nigeria and South Africa showcase steady growth, signaling potential for the continent’s future.

What Does This Mean?

As these projections unfold, the economic powerhouses of the world will continue to drive innovation, trade, and policy. At the same time, emerging markets are poised to play a larger role in shaping the global order.

Explore these trends and more insights into the global economy on Chaganomics.com. Stay informed, stay ahead.