Mexico’s exchange rate policies have played a crucial role in shaping its trade relations with the United States and Canada, first under the North American Free Trade Agreement (NAFTA) and later under its successor, the United States-Mexico-Canada Agreement (USMCA). As a major export-driven economy, Mexico’s ability to maintain a stable and competitive exchange rate has been essential in fostering trade, attracting foreign investment, and ensuring macroeconomic stability. However, fluctuations in the Mexican peso (MXN) against the US dollar (USD) and the Canadian dollar (CAD) have impacted trade balances, manufacturing costs, and investment flows, influencing Mexico’s role in North American trade dynamics.

Since 1994, when NAFTA was implemented, Mexico has shifted from a fixed exchange rate system to a managed floating system, allowing market forces to influence the peso’s value while the central bank intervenes to prevent extreme volatility. This transition was crucial following the Mexican Peso Crisis of 1994-1995, which resulted in a 50% devaluation of the peso and a severe economic recession. By 2024, the peso remains one of the most actively traded currencies in the world, with daily foreign exchange transactions exceeding $120 billion.

As NAFTA evolved into USMCA in 2020, Mexico’s exchange rate policies became even more critical to regional trade, particularly in industries such as automobiles, electronics, and agriculture, where pricing and production costs are heavily influenced by currency fluctuations. A weaker peso generally benefits Mexico’s exports by making them cheaper for US and Canadian buyers, while a stronger peso can reduce inflationary pressures but potentially hurt export competitiveness.

This case study explores how Mexico’s exchange rate policies have influenced trade flows, investment decisions, and regional economic stability under NAFTA and USMCA, analyzing both the benefits and challenges associated with currency fluctuations in North American trade.

How Mexico’s Exchange Rate Policies Shaped NAFTA Trade

During the NAFTA years (1994–2020), Mexico’s exchange rate played a pivotal role in shaping its trade surplus with the US and Canada. Following the peso’s devaluation in 1994-1995, Mexican exports became significantly cheaper, leading to a 20% increase in manufacturing exports to the US in just two years. The automobile industry, in particular, benefited from lower labor costs, as car manufacturers relocated production from the US to Mexico to take advantage of cost savings. By 2010, Mexico was the world’s fourth-largest automobile exporter, with US companies such as General Motors, Ford, and Chrysler expanding operations in Mexican production hubs like Monterrey and Puebla.

The peso’s gradual depreciation over the years made Mexico an attractive manufacturing base, as labor costs remained low compared to the United States and Canada. Between 1994 and 2020, Mexico’s share of North American manufacturing exports grew from 12% to 26%, with industries such as electronics, aerospace, and textiles benefiting from favorable currency conditions.

However, exchange rate volatility also posed risks. During the 2008 Global Financial Crisis, the peso depreciated by over 30% against the US dollar, causing sharp increases in import costs for machinery, technology, and energy, which temporarily hurt Mexico’s industrial output. Additionally, sudden currency swings raised concerns among foreign investors, leading to capital flight and increased borrowing costs for Mexican businesses.

To manage these risks, Banco de México (Mexico’s central bank) implemented currency stabilization measures, including foreign exchange interventions and inflation-targeting policies. These measures helped Mexico maintain macroeconomic stability while ensuring that trade competitiveness remained strong, positioning the country as one of the leading low-cost manufacturing hubs in North America.

The Shift to USMCA and Its Impact on Mexico’s Exchange Rate Strategy

When the USMCA replaced NAFTA in 2020, Mexico’s exchange rate policy became even more critical, particularly due to new trade rules affecting the automobile and labor markets. The agreement required that 75% of auto parts be produced in North America and that at least 40% of cars be assembled by workers earning $16 per hour. These provisions pressured Mexican manufacturers to increase wages and sourcing costs, raising concerns about Mexico’s cost advantage in trade.

Between 2020 and 2023, the peso appreciated by nearly 12% against the US dollar, driven by rising foreign investment, nearshoring trends, and remittances from Mexican workers abroad. While a stronger peso helped reduce inflationary pressures, it also made exports more expensive, leading to slower growth in trade surpluses with the US.

USMCA also introduced new currency manipulation clauses, preventing member states from deliberately devaluing their currencies to gain an export advantage. While Mexico’s exchange rate policy remained largely market-driven, concerns emerged over how future peso fluctuations might affect trade relationships. The auto industry, for instance, has seen some manufacturers shift production to the US to comply with labor cost rules, reducing Mexico’s competitive edge.

The rise of nearshoring in Mexico—where companies relocate production closer to the US to avoid China-US trade tensions—has contributed to a surge in foreign direct investment (FDI), reaching $38 billion in 2023, the highest in a decade. This trend has supported peso stability but has also made Mexico more vulnerable to global monetary policy shifts, particularly US Federal Reserve interest rate decisions.

Challenges and Future Outlook for Mexico’s Exchange Rate in Trade

One of the biggest challenges facing Mexico’s exchange rate policy is balancing trade competitiveness with economic stability. A depreciating peso benefits exports but can increase inflation and import costs, making industrial production more expensive. Conversely, a strong peso improves price stability but can reduce export growth, particularly in price-sensitive industries like textiles and agriculture.

Another key challenge is rising US protectionism and potential future trade disputes under USMCA. The US has frequently raised concerns over Mexico’s labor policies, energy sector reforms, and trade imbalances, leading to speculation about future adjustments to USMCA trade terms. If Mexico faces currency appreciation pressures, it may become less attractive for low-cost manufacturing, forcing companies to seek alternative strategies to maintain competitiveness.

Additionally, global financial conditions, including US interest rate hikes and China’s economic slowdown, could create unexpected peso fluctuations, impacting capital flows and trade balances. As Mexico’s economy becomes more integrated with North American supply chains, its exchange rate will remain a critical factor in shaping investment decisions and trade outcomes.

Looking ahead, Mexico may need to adjust its monetary policies to ensure exchange rate stability, potentially increasing central bank interventions if volatility threatens economic growth. Additionally, investments in high-value industries, infrastructure, and digital trade could help offset future currency risks and strengthen Mexico’s role in North American trade.