(Editor's Note: S&P Global Ratings believes there is a high degree of unpredictability around policy implementation by the U.S. administration and possible responses--specifically with regard to tariffs--and the potential effect on economies, supply chains, and credit conditions around the world. As a result, our baseline forecasts carry a significant amount of uncertainty. As situations evolve, we will gauge the macro and credit materiality of potential and actual policy shifts and reassess our guidance accordingly (see our research here: spglobal.com/ratings).)
This report does not constitute a rating action.
Key Takeaways
- If the U.S. implements its proposed across-the-board 25% tariff on imports from Mexico, the resulting economic shock could have mixed effects across Mexican states.
- In our view, given the industries that dominate local production, the economies in 10 of Mexico's 32 states--including those in four states we rate--are highly exposed to the potential implementation of this tariff.
- However, the direct impact on rated Mexican states' economies from the U.S. proposal could be offset by the states' other credit strengths.
We think some Mexican states could potentially be vulnerable to economic and financial losses--as well as credit rating pressures--if the U.S. follows through on its announced across-the-board tariff on imports from Mexico. S&P Global Ratings Economics' forecasts for Mexico don't currently incorporate the tariff, initially announced on Feb. 1; our current view is that the Mexican government will make efforts to avoid tariffs--or minimize their duration if they materialize.
However, if the across-the-board tariff does take effect, and if it remains in place for some time--months or quarters, not weeks--there could be a significant impact on the Mexican economy. Mexican states that rely on export-oriented manufacturing--which are generally in the northern and central parts of the country--appear to be the most vulnerable to a direct economic hit.
In addition, there's the potential for weaker economic growth at the national level, which could indirectly lead to lower federal transfers to local governments. This would likely erode the budgetary performance and the liquidity position of the whole subnational system.
What's Happening
On Feb. 1, the U.S. government announced an across-the-board 25% tariff on imports from Mexico, as well as tariffs on Canada and China. After Mexico and Canada unveiled some border security measures, the White House delayed the tariffs on Mexico and Canada to March 4.
A recently published scenario analysis--considering all of the tariffs the U.S. announced on Feb. 1--arrived at preliminary, high-level estimates of the potential economic impact on the U.S., Mexico, Canada, and China. The outcomes of this analysis showed that the effects on some sectors of Mexico's economy and on the country's overall growth in 2025 would be significant (see "Economic Research: Macro Effects Of Proposed U.S. Tariffs Are Negative All-Around," published Feb. 6, 2025). The scenario assumed the 25% across-the-board tariff on imports from Mexico through 2025, and that Mexico would implement a reciprocal tariff of 25% on nonmanufacturing imports from the U.S.
The scenario also assumed that these tariffs would be lowered to 10% in 2026 as the review process for the United States-Mexico-Canada Agreement (USMCA) kicks off.
Mexican States Most Exposed To The Potential Across-The-Board Tariff On U.S. Exports
Ten of Mexico's 32 states have, by our definition, high economic exposure to the potential across-the-board tariff on exports to the U.S. These states are predominantly in northern Mexico and in the Bajío region (in the central part of the country), and they include the rated states of Queretaro, Aguascalientes, Guanajuato, and Nuevo Leon.
To measure a Mexican state's economic exposure to a potential across-the-board tariff on exports to the U.S., we first identified the industries that are most exposed to the economic shock that could result; we then measured how much of a given state's GDP comes from those vulnerable industries.
Mexican states' economic exposure to the potential tariff varies depending on an individual state's economic structure. Mexican states that derive more than 20% of their GDP from industries that are vulnerable to the tariff's potential implementation are, for the purposes of this analysis, highly exposed. States that derive 10%-20% of their GDP from these industries have moderate exposure, and states that derive less than 10% of their GDP from these industries have only low exposure.
Our choice of 20% for high exposure stems from our "Methodology For Rating Local And Regional Governments Outside Of The U.S." and the negative adjustment for concentration in our economic score, although we're including several sectors within our current classification.
In our economists' scenario analysis of this tariff's potential impact, Mexico would see significant economic effects, since roughly 80% of its exports go to the U.S. and approximately 40% of its exports are in auto manufacturing. The sectors in Mexico that would be most exposed to this shock would be transportation (which includes machines and equipment, motor vehicles, and semitrailers), electrical equipment, and basic metals (which includes steel and aluminum), according to S&P Global Ratings Economics (see "Economic Research: Which Sectors Would Be Most Vulnerable To U.S. Tariffs On Canada And Mexico?," published Jan. 30, 2025).
Our economists' estimate of the output at risk (that is, the potential direct decline in a given sector's output from a tariff-induced demand loss, without taking into account potential mitigating factors) is 8%-15%. Mitigating factors that could limit the actual decline in output include a weaker exchange rate, producers' willingness to absorb higher costs, and the low availability of substitutes.
| Four rated Mexican states are highly exposed to the potential across-the-board tariff on exports to the U.S. | ||||||
|---|---|---|---|---|---|---|
| Issuer | Global scale rating | National scale rating | ||||
|
State of Queretaro |
BBB/Stable/-- | mxAAA/Stable/-- | ||||
|
State of Guanajuato |
BBB/Stable/-- | mxAAA/Stable/-- | ||||
|
State of Aguascalientes |
BBB/Stable/-- | mxAA+/Stable/-- | ||||
|
State of Nuevo Leon |
mxA/Positive/-- | |||||
| Ratings as of Feb. 27, 2025. | ||||||
However, our high national scale ratings for Querétaro, Aguascalientes, and Guanajuato already capture their solid financial results, their relatively robust and historically stable liquidity, and their low levels of debt. Because of these strengths, we think these three states have more capacity than their lower-rated peers to withstand external shocks. (On the other hand, Nuevo Leon is also exposed to a separate U.S. tariff on all foreign steel and aluminum, which is expected to take effect on March 12.)
Furthermore, the sophisticated financial management teams in all four states would be more adept than teams in other states at navigating through stress in their local economies. This could offset the direct impact that the potential tariff could have on our economic assessments for our rated universe. We would also have to consider the potential deterioration of budgetary performance through lower tax collections and, indirectly, lower federal transfers.
Some states with moderate exposure to the potential across-the-board tariff--such as the State of Mexico (unrated) or the State of Hidalgo (rated 'mxA+')--are states that have more diverse economies, even if the vulnerable sectors have some presence. If the tariff is implemented, the impact on these states should be less severe.
Other states with low exposure to the potential tariff have a different economic structure, away from export-oriented manufacturing.
Even if it's implemented, the across-the-board tariff wouldn't necessarily lead to rating changes associated with weaker economic assessments. Our ratings on nine of the 12 Mexican states that we rate already incorporate some of these vulnerabilities--such as limited economic growth prospects, in line with the sovereign.
We also already take into account high economic concentration in some of the Mexican states we rate: Aguascalientes' reliance on the auto sector, Quintana Roo (rated 'mxAA-') and its reliance on tourism, and Campeche (rated 'mxA+') and its reliance on oil-related activities.
Other Potential Impacts On Mexican States
We think uncertainty about tariffs, along with the upcoming USMCA review, could slow private sector investment in Mexico. This could potentially hinder economic growth in states that rely on manufacturing.
As a result, we could potentially take negative rating actions if local economies deteriorate substantially. In this instance, revenue would decline at the local level, or there'd be a material slowdown in the national economy that leads to lower federal transfers.
If the imposition of this tariff affects local revenue collection, we would look at how Mexico's local governments are managing their budgets. Revenue for Mexican states mostly comes from federal transfers--they account for about 90% of Mexican states' total revenue. Therefore, how a tariff-induced shock impacts the overall Mexican economy and, in particular, the distributable federal income (Recaudación Federal Participable, or RFP) would be key to financial performance at the subnational level.
This broadens the group of states that could be vulnerable to a tariff-induced shock beyond those states that are most directly exposed through their economy. There's a possibility that resources from compensation mechanism funds would be used to mitigate budget deterioration--despite the low level of savings currently available for that purpose--if transfers fall below the amount budgeted by the national government. This could potentially affect, to some extent, systemwide budgetary performance.
Related Criteria
- Criteria | Governments | International Public Finance: Methodology For Rating Local And Regional Governments Outside Of The U.S., July 15, 2019
Related Research
- Economic Research: How Might Trump's Tariffs--If Fully Implemented--Affect U.S. Growth, Inflation, And Rates?, Feb. 6, 2025
- Economic Research: Macro Effects Of Proposed U.S. Tariffs Are Negative All-Around, Feb. 6, 2025
- Economic Research: Which Sectors Would Be Most Vulnerable To U.S. Tariffs On Canada And Mexico?, Jan. 30, 2025
- Research Update: Mexico 'BBB' Foreign Currency And 'BBB+' Local Currency Long-Term Ratings Affirmed; Outlook Remains Stable, Dec. 13, 2024
- State of Queretaro, Oct. 10, 2024
- State of Guanajuato, Aug. 7, 2024
- Research Update: Mexican State of Aguascalientes 'BBB' Global Scale And 'mxAA+' National Scale Ratings Affirmed; Outlook Remains Stable, May 15, 2024
- Research Update: State of Nuevo Leon 'mxA' National Scale Rating Affirmed; Outlook Remains Positive, March 12, 2024
| Primary Credit Analysts: | Fernanda Nieto, Mexico City +52 5550814413; fernanda.nieto@spglobal.com |
| Karla Gonzalez, Mexico City + 52 55 5081 4479; Karla.Gonzalez@spglobal.com | |
| Patricio E Vimberg, Mexico City +52 55 1037 5288; patricio.vimberg@spglobal.com | |
| Secondary Contact: | Lisa M Schineller, PhD, New York + 1 (212) 438 7352; lisa.schineller@spglobal.com |
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