In today’s Finshots, we explain why Mexico, one of India’s key trade partners, is imposing tariffs on India starting 1st January, 2026.

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Now, on to today’s story.

The Story

Picture a local food street where you and two of your friends are each running your own food truck. Each of you make different dishes, but at the base of it, some core ingredients remain the same. So, your two friends decide to make an agreement: Whenever they need to buy supplies from each other, they agree not to add any extra charges or restrictions. That way, the trade is smoother and cheaper.

Now this doesn’t necessarily mean they dislike you or that you can’t buy ingredients from them. But if you do, there’s probably an extra fee tied to it. The quality could be the same, even your truck could be allowed to do business there but you’d still have to pay the surcharge simply because you don’t have a written agreement with your two friends.

As time passes by, that extra cost quietly creeps into your menu prices. Customers don’t always see it, but they feel it. This is essentially how free trade agreements (FTAs) work. Two or more countries agree to make trade between themselves easier and cheaper by reducing or removing tariffs, quotas, and other restrictions on goods and services they trade with each other. At the same time, each country is free to keep its own trade rules when dealing with countries that are not part of the agreement.

And Mexico recently announced tariffs on India, China, South Korea and Thailand, all countries without FTAs. The only difference this time is that we’re not alone, as nearly every major Asian country is facing tariffs of up 35–50% across well over 1,400 products.

Effective from the 1st of January, 2026, all the goods being imported to Mexico from India and other Asian countries will be hit with the steep tariffs and products ranging from automobiles and steel to textiles and plastics are part of the list.

The move has raised eyebrows for two reasons:

1. Mexico itself is a developing economy like India, and
2. It comes at a time when Mexico has faced trade pressure from the United States, and now appears to be tightening its own trade barriers in response.

Which leads us to the next question: Why is Mexico imposing tariffs on India at all?

At the heart of the issue is a simple fact. India sells more to Mexico than it buys, causing a trade surplus for us. On paper, that looks like a win for Indian exporters. But from Mexico’s perspective, persistent trade deficits translate into pressure on domestic industries, jobs, and political accountability.

And when you are a developing economy trying to protect local manufacturing while staying aligned with powerful trade partners, trade agreements and tariffs become tools of control, not just revenue.

India and many other Asian countries do not have trade agreements with Mexico, and that puts them at a structural disadvantage. A large share of their exports is automatically exposed to higher duties once the new tariffs take effect in 2026. India’s total exports to Mexico are valued at around $5.3 billion, of which roughly $1 billion comes from automobiles alone. This makes Mexico India’s third largest auto export market, and a critical destination for manufacturers that use the country as a gateway to Latin America.

Industry bodies have long flagged this vulnerability. The Society of Indian Automobile Manufacturers (SIAM) had earlier urged the government to engage with Mexico to maintain the status quo, warning that higher tariffs could hurt India’s auto exports and disrupt carefully built supply chains.

But, to understand how and why this is happening now, it helps to look at how Mexico evolved into what it is today. Instead of competing head on with Asia purely on cost, Mexico positioned itself as a manufacturing base located close to the United States, the world’s largest consumer market. This strategy is known as nearshoring.

Nearshoring works because companies can manufacture goods at lower costs than in the US, while still benefiting from shorter supply chains and access to the American market. But this model only holds if manufacturing, job creation and value addition genuinely take place within Mexico. By 2023, this strategy had paid off, with Mexico becoming the United States’ largest goods trading partner, and over the three decades since the North American Free Trade Agreement (NAFTA), large parts of the country transformed into manufacturing hubs.

NAFTA was replaced by the United States Mexico Canada Agreement (USMCA) on July 1st, 2020, which preserved free trade within North America but introduced stricter rules of origin and stronger enforcement mechanisms. But in recent years, enforcement under the USMCA has become more stringent, increasing pressure on Mexico to demonstrate that it is a true manufacturing base rather than a pass-through for goods produced in Asia. For instance, cars and electric vehicles now have to use more parts and labour from North America to qualify for duty-free trade. So factories in Mexico can’t just assemble parts imported from Asia and ship the finished cars north without paying duties. Because of this, Mexican exporters now face stricter checks and paperwork to prove that their vehicles are genuinely made in North America. In short, “Made in Mexico” now has to mean real manufacturing, not just putting together imported parts.

The SIAM have contested this by stating that the cars they manufacture and import to Mexico are for the Mexican market itself, given their smaller engine and overall size. This is a part of their argument as to why they would like the Mexican government to not impose tariffs on India’s automobile exports.

But for Mexico, these tariffs are the most straightforward path to comply with the USMCA, which is coming up for review in 2026, without singling out any single exporter. It also reduces the incentive for any country from using Mexico as a relabelling hub and signals that only substantial manufacturing activity will be welcomed under its trade framework.

Beyond trade compliance, there is also a financial incentive. Analysts estimate that the new duties could generate roughly $3.7 billion in additional revenue for the Mexican government in 2026. At a time of budget constraints and rising public spending pressures, the tariffs offer Mexico a way to strengthen its finances.

This also explains why the tariffs apply broadly to countries without FTAs rather than being targeted at a single exporter. FTAs come with built-in rules of origin and compliance mechanisms. Countries outside that framework do not. Raising tariffs on non-FTA partners allows Mexico to tighten control without reopening existing agreements or inviting immediate disputes with the United StatesUS.

For India, this leaves limited options. One of them is diplomacy, given that the lack of trade agreements is what led to tariffs in the first place. Trade talks, such as those involving a Preferential Trade Agreement (PTA), could restore predictability. A PTA is essentially an agreement to lower tariffs on specific goods — in this case, sectors like automobiles, where Mexico is a key market. Another is diversification, where exporters look beyond Mexico to other Latin American or global markets to soften the impact. Without alternative markets, manufacturers may have to absorb higher costs or pass them on, reducing competitiveness.

Ultimately, the outcome will depend on how negotiations evolve. Mexico is not trying to shut its doors to Indian goods alone. It is trying to protect a manufacturing model built on nearshoring and access to the United States. Whether India can secure a place within that framework will determine how disruptive these tariffs turn out to be. Until then…

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