Mexico is in for some painful restructuring if U.S. President Donald Trump follows through with his protectionist threats.
But the nation also faces a unique opportunity to reduce its reliance on its American neighbor and shift its focus to the world's No. 2 economy, China.
Mexico has some key advantages, despite all the doom and gloom since Trump's election, according to Natixis SA in Hong Kong. The peso has depreciated 26 percent over the past two years, making Mexico's goods more competitive; the country has undertaken past structural reforms on labor, energy and telecoms; and it has free trade agreements with 44 countries outside the U.S.
Now it's time for Mexico to woo China, Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis, said in a report.
Mexico's exports to China are low and it's the seventh largest supplier of cars to the Asian nation. About 80 percent of Mexico's exports goes to the U.S.
"The good news is that the level of sophistication of vehicle assemblers in Mexico has increased so much that it is profitable to export to many places in the world, including China," Garcia Herrero said. The challenge is to increase the share of trade to China "as soon as possible so that Mexico can ward off part of the Trump tornado," she said.
A related matter is the boomerang effect on the U.S. economy from protectionism. Research from Oxford Economics shows reductions in production from Mexico and China – the two countries Trump has cited on unfair trade – would hurt the U.S. more than any other country.
Mexico's imports of industrial machinery and electrical equipment from the U.S. amounted to $60 billion in 2015 – more than 10 percent of total U.S. production in the sector, Jeremy Leonard, director of global industry at Oxford Economics, said in a report last week.
"A policy to restrict, for instance, imports of automobiles from Mexico or household appliances from China would immediately reduce demand for the U.S.-sourced machinery and equipment that power the factories that produce them."
Nonetheless, should Mexico manage to pull off this economic diversification, it could set the country up in a much stronger position.
"It seems clear that Mexico must turn to the rest of the world in its export policy," said Garcia Herrero.