Mexico plans to increase tariffs on imports from China as part of its 2026 budget proposal. This step aims to shield local industries from cheaper competition. The sectors impacted by these tariff hikes include automobiles, textiles, and plastics.

Impact on the Mexican Peso

The proposed tariffs on Chinese products create uncertainty for the Mexican Peso. In the weeks ahead, this likely leads to a bearish outlook for the currency, as markets anticipate potential trade slowdowns. Traders might think about buying put options on the MXN to protect against a possible decline against the U.S. dollar. This development is significant because trade between Mexico and China exceeded $130 billion in 2024. The suggested tariffs could jeopardize this trade flow and may disrupt the nearshoring trend, which has raised foreign investment by over 20% in the first half of 2025. Consequently, broad market index derivatives, such as futures or put options on the iShares MSCI Mexico ETF (EWW), become useful for hedging against an economic downturn. The focus is on sectors like automobiles, textiles, and plastics, meaning companies dependent on Chinese supplies may suffer from reduced profit margins. We expect increased volatility in stocks of Mexican auto parts manufacturers who import parts from China. Short-term bearish strategies, like selling call options to earn premium, could be a good approach for these specific stocks.

Historical Context and Market Strategy

We recall the market’s instability during the US-China trade war of 2018, where initial tariff announcements caused significant swings before the tariffs took effect. The current political discussions surrounding the 2026 budget proposal are likely to create similar volatility driven by headlines. Therefore, strategies that benefit from rising implied volatility, such as purchasing straddles on major Mexican equities, should be considered. The goal is to protect homegrown industries from cheaper competition. Mexican steel and plastics producers that compete with Chinese imports may see their market share and pricing power increase if these tariffs go through. Cautious traders might look into buying long-dated call options on these promising domestic companies, preparing for potential gains once the policy details become clearer. Create your live VT Markets account and start trading now.

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