Scenarios to Guide Business Strategy Amid Uncertain Trade Ties

Throughout the 21st century, Mexico has been a remarkably resilient and stable economy, but it is now facing a level of uncertainty not seen in decades. In particular, the US-Mexico trade relationship could push the market in very different directions, ranging from a more integrated North America to a nationalistic Mexican economy at odds with its far more powerful neighbor and main export destination, which accounts for 80% of its shipments.

The outcome of the ongoing US-Mexico negotiations will have a profound impact on Mexico’s business environment. Executives often find themselves wondering if Mexico will remain an attractive investment destination or if the USMCA will survive a second Trump administration, but the most pressing question they face is: How can multinational companies (MNCs) plan their operations under such uncertainty?

At FrontierView, we developed three scenarios to assess how the US-Mexico trade relationship could evolve in the next two years. Moreover, we continuously pressure test these scenarios with business executives, helping them make strategic decisions. 

Base-Case Scenario:

Our most likely scenario, labeled “carrots and sticks,” is characterized by periods of disagreement and heated negotiations, but with the eventual ability to find key agreements. We assign it a 60% likelihood. Under this base scenario, the USMCA is extended for another 16 years in 2026. However, the United States imposes stricter rules of origin for automobiles and increases controls against triangulation of Chinese imports via Mexico. It also pressures the Mexican government to impose additional trade barriers on Chinese goods. Therefore, the USMCA is extended beyond the Trump administration, but only after contentious negotiations and more limitations on regional free trade.  

In this scenario, some tariffs (like steel, aluminum, auto, and non-USMCA-compliant products) remain in place, but Mexico avoids the 25% blanket tariff proposed by Donald Trump. 

Mexico’s GDP significantly slows due to trade uncertainty, but also lower government spending, and the investment headwinds caused by the judiciary reform. Thus, GDP grows by 0.3% in 2025 and 1.5% in 2026. 

Under the base-case scenario, companies can expect a marked slowdown in demand in 2025 with a relative recovery in 2026. Besides, trade regulations become more complex due to stricter rules of origin. However, companies would still benefit from trade within North America, even if the environment remains less predictable and more complicated than in the pre-Trump era.

Downside Scenario

Conversely, our downside and second most likely scenario with a probability of 30%, is called “mutual hostility.” This scenario is characterized by a confrontation between the Trump and Sheinbaum administrations, with a highly nationalistic approach to the bilateral relationship. This leads to a failure to extend the USMCA in 2026, but negotiations continue in the following years. 

In the downside scenario, a second Trump administration imposes a blanket 25% tariff on Mexican goods for at least several months. Although Mexico has seemingly overcome this risk, tensions over security, water management, or immigration could reignite it. In response, the Sheinbaum administration implements targeted retaliatory tariffs on products from politically strategic (or “swing”) US states, while carefully avoiding goods that could fuel domestic inflation, such as corn.

This external shock causes significant harm to exports and gives a hard blow to investment. The Mexican government mitigates the damage with social and public spending; however, the tight fiscal situation and the risk of losing its investment grade limit the government’s ability to curtail the shock of tariffs. GDP contracts by -1.9% in 2025 and -0.5% in 2026.  

Under this scenario, MNCs would face a highly challenging environment, not only due to contracting demand and heightened exchange rate volatility, but also because of a growing wave of economic nationalism in Mexico. This could disrupt public procurement at both the federal and local levels and politicize consumption patterns, potentially triggering consumer boycotts against emblematic American brands.

Upside scenario:

Finally, in our upside and least likely scenario, the Trump and Sheinbaum administrations identify their common interests and strengthen their trade ties. We label this scenario “Fortress North America,” with a 10% likelihood. 

In our upside scenario, the USMCA is successfully extended in 2026, easing cooperation in strategic and emerging areas, such as artificial intelligence, semiconductors, and renewable energy. The USMCA becomes a source of stability amid a rapidly changing global trade system and reconfiguring alliances. 

Recognizing the opportunity for strategic cooperation, Trump lifts all tariffs on Mexico. The United States, however, continues its protectionism against other countries, particularly China and emerging East Asian economies, like Vietnam. The United States also pressures Mexico to adopt a strong protectionist approach with countries without a free trade agreement, particularly China. This leads the region to a new era of protectionism, leaving behind the nationalistic approach but introducing a model of regional mercantilism. 

Under the upside scenario, MNCs face stronger demand, with Mexico improving its position as a strategic investment destination. However, economic growth remains slightly above average levels of 1.7%, with structural challenges limiting a fast economic expansion.

In times of high uncertainty, executives are often overwhelmed with vast amounts of information, sometimes contradictory. Emotions may run high, as critical decisions must be made in a short period. 

Scenario analysis is not prediction. It is an exercise that helps business leaders to make informed decisions in a highly complex operating environment. It also helps organize and communicate complex information to reduce uncertainty and capitalize on an unpredictable environment. In the current global trade environment, companies can expect a bilateral relationship characterized by “carrots and sticks,” but they must also be prepared for the possibility of “mutual hostility.”