August increase in Mexico tariffs could strain Texas economy

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Importers and exporters based in Texas have so far avoided the harshest effects of the trade war sparked by President Donald Trump’s tariffs on imports from a host of countries, but they could be in for a rude awakening come Monday.

Mexico, Texas’ largest trading partner, has been largely exempt from tariffs due to a March agreement that allowed an estimated 85% to 90% of all Mexican goods to avoid the 25% tariff the Trump administration placed on its imports.

However, Trump earlier this month informed Mexico, two dozen other countries and the European Union that their exports will face an increase in the tariffs on their goods unless they quickly negotiate new trade deals with the U.S. Trump’s letter to Mexican President Claudia Sheinbaum Pardo promises to raise the rate against the country to 30% on Aug. 1 and makes no mention of extending the spring agreement exempting most Mexican imports.

“When we talk about the possibility of a 30% tariff, that is a game changer,” said Dante Galeazzi, CEO and President of the Texas International Produce Association. “It’s vastly different from where we are at today.”

Galeazzi’s organization represents 400 Texas companies throughout the produce supply chain that grow or import $13 billion worth of produce annually. Galeazzi said the relationship between Texas and Mexico is particularly close in the produce industry because most large farms have a footprint in both places to be able to grow year round.

Two-way trade between the U.S. and Mexico totaled $840 billion last year, making Mexico America’s largest trading partner. Texas traded a total of $281 billion with Mexico in 2024, according to the Office of the United States Trade Representative.

At issue is the United States-Mexico-Canada Agreement, negotiated by the three countries during Trump’s first term, which aimed to eliminate trade barriers and level the playing field between the three countries’ labor and manufacturing sectors.

In March, two months into Trump’s second term, U.S. trade policy with its two biggest trading partners has see-sawed dramatically, briefly putting in place a 25% tariff on Mexican and Canadian goods before a deal was announced two days later to exempt all USMCA-compliant goods from the tariff.

Those two days saw financial markets tumble and sent shockwaves through the economies of all three nations. Caught in the middle of the trade war was the Texas economy.

“Back in March was super difficult, super stressful, lots of preparation getting ready for it,” said Craig Slate, CEO and president of Arizona-based Mexican produce importer SunFed, which operates in Texas. “We’ve already been through a dress rehearsal, let’s say, so the preparation is kind of already in place.”

Trump cited the flow of fentanyl across both the northern and southern borders as the basis for the tariffs in March, arguing neither country was doing enough to stop it. Mexico and Canada promised retaliatory tariffs. Then, the deal was announced to exempt most goods traded between the three countries from the tariffs for 30 days and later extended a further 90 days in April.

That 90-day extension is now coming to an end, and Trump is promising to bring the tariffs back on Monday. Economists fear the economy could again face difficulties like those seen in March because the tariff rate for most trade in North America could effectively jump from 0% to 30% if the USMCA exemptions are not kept in place.

“It’s going to be devastating to U.S.-Mexico trade,” said Ed Hirs, an economist and energy fellow at the University of Houston. “This will be a very, very difficult realignment because the companies in the U.S. that depend on Mexican suppliers are going to have to make some hard decisions.”

Tariff costs could be spread between supply chain and consumers

For SunFed, the effect of the jump in tariffs could be painful, Slate said. As the “importer on record” for farmers in the Mexican states of Sonora and Sinaloa, SunFed is the company that pays the tariff to the U.S. government on its imported goods, which includes watermelons, squash, bell peppers, cucumbers and cantaloupe.

The nature of the produce supply chain will likely allow the cost of that tariff to be partially spread among SunFed, the Mexican farmers it works with, the grocery stores SunFed sells to, and the consumers who buy the produce, Slate said.

Rather than shoppers seeing large price increases at the grocery store if the tariffs remain in place for an extended period, Slate said he believes it’s more likely they will see shortages of certain products in the future because farmers or importers will decide it’s not worth the financial risk of importing products to the U.S.

Meanwhile, a 50% tariff on aluminum and steel in place since early June is driving a “notable pickup” in cost in Texas’ manufacturing sector, according to the Federal Reserve Bank of Dallas’ July report on the health of the region’s economy.

Trump announced a 50% tariff on copper that will go into effect on Aug. 1, which is expected to further increase manufacturing costs, Hirs said.

Some in Texas are supportive of Trump’s trade war, arguing the tariffs have been effective at bringing other nations to the negotiating table for better trade deals.

“I’m very focused on the Aug. 1 date. What that means is President Trump has given us a couple weeks to try to come up with a solution, and I’ve seen Mexico … change, from months ago basically being allowed to do whatever they want to … all of the sudden, they’re coming to the table,” U.S. Rep. Tony Gonzales, R-San Antonio, told CNN’s State of the Union earlier this month. “They’re negotiating more. President Trump has mentioned this. They’re moving in the right direction. We absolutely have to do more.”

Glenn Hamer, president and CEO of the Texas Association of Business, cited Texas’ status as the eighth largest economy in the world, arguing the state is better able to weather economic uncertainty than most and is a market international trading partners want access to.

“We’re going to be a net winner no matter how things sort out because of the strength of our economy and our attractive policy, infrastructure that is very stable, that both parties have supported the key ingredients of the Texas miracle,” Hamer said.

A spokesperson for Gov. Greg Abbott told Fox Business the trade war is an opportunity to “reset” global supply chains.

"Texas is an economic development powerhouse, and we welcome new jobs and manufacturing from global businesses looking to expand American operations," Abbott’s press secretary, Andres Mahaleris, said.

Hamer, trade war opponents and Texas businesses also say a 30% tariff on goods currently covered by the USMCA could be difficult for the Texas economy.

“If that were pierced, it would really hurt the business community in the United States and Texas simply because we build a lot of products together with Mexico and Canada,” Hamer said.

Tariffs could have long-term supply chain effects

Even a short disruption of the supply chain could have long lasting effects.

“We learned firsthand and painfully during COVID that once you disrupt the supply chain, it never returns to exactly how it was,” Galeazzi said.

The Texas business sector is now watching to see if a new deal is announced before Monday.

Canadian Prime Minister Mark Carney on Tuesday downplayed the possibility of that happening, telling reporters “it’s not our objective to have an agreement at any cost.”

Mexico, which has taken a more diplomatic tone than Canada throughout trade negotiations this year, has remained optimistic an agreement can be reached.

“We believe … we are going to reach an agreement with the United States government and, of course, achieve better terms,” Sheinbaum said on July 12.

The uncertainty is bad for business, regardless of if a deal is reached, Hamer said.

“We’d like to see predictability and stability in our tariff policy as soon as possible,” he said. “For our businesses small, medium and large, getting to that point of certainty on tariffs is very important.”

Disclosure: The University of Houston has been a financial supporter of The Texas Tribune, a nonprofit, nonpartisan news organization that is funded in part by donations from members, foundations and corporate sponsors. Financial supporters play no role in the Tribune's journalism. Find a complete list of them here.

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