The widely anticipated introduction of new US steel tariffs exposes fundamental weaknesses in North American industrial integration and raises questions about the region's long-term manufacturing strategy. While immediate attention focuses on the 25% tariff rate, the underlying issues reflect deeper structural challenges in the evolution of the continent's steel industry.

Mexico's position is particularly complex. Despite having developed significant production capacity – reaching 18.2mn tonnes in 2024 – the industry finds itself caught between ambitious expansion plans and limited market options. The planned addition of 5mn tonnes of annual capacity by 2026 appears increasingly misaligned with market realities, especially as traditional export channels face new barriers.

President Donald Trump's argument that Mexico maintains a steel trade deficit with the US, while factually correct, overlooks critical aspects of market dynamics. This trade imbalance reflects historical investment patterns and specialisation rather than competitive advantages. Mexican producers have long focused on specific product categories and quality segments, creating dependencies that now expose them to significant risk.

The timing of Mexico's capacity expansions, including Ternium's 2.5 million-tonne slab mill investment and Deacero's $1bn production increase, raises questions about strategic planning in the face of evolving trade policies. These decisions, made during a period of relatively open borders, may require substantial revision under new market conditions.

The vulnerability of cross-border supply chains becomes all the more clear when examining how steel components traverse the US-Mexico border multiple times during production. This integration, once seen as a competitive advantage, now represents a potential liability under layered tariff structures. The possibility of cumulative tariffs reaching a staggering 50% could fundamentally alter the economics of integrated production systems.

Mexico's limited success in diversifying its export markets – with minimal shipments to Canada (118,000 tonnes) and Saudi Arabia (90,000 tonnes) – indicates a broader failure to develop alternative market channels. This concentration risk, a policy failure of consecutive Mexican administrations, has been evident for years but remains unaddressed. The domestic market, despite ambitious infrastructure plans, lacks the depth to absorb redirected export volumes.

The Mexican government reportedly only learned of Trump's tariffs through media outlets and is now scrambling to set up consultations with US trade representatives. Mexican officials will meet with the US Commerce Secretary and Trade Representative once they receive Senate confirmation to discuss the measures. While industry group Canacero has called for retaliatory tariffs if Mexican exports are not exempted, the government of President Claudia Sheinbaum is playing a long game and has not yet announced specific countermeasures.

The situation extends beyond simple trade metrics. The decline in foreign direct investment to its lowest level since 2014 suggests a wider reassessment of Mexico's role in global supply chains. In this regard, the stalled development of new manufacturing sectors, particularly in electric vehicles, indicates that the challenges facing the steel industry may be symptomatic of a wider industrial policy malaise.

These developments give rise to a paradox: while North American economic integration under USMCA was meant to strengthen the region's global competitiveness – succeeding to an extent, with the total value of trade within the region exceeding $1.88 trillion in 2023 – the current framework has also led to new pitfalls. Most remarkably, the steel industry's struggles highlight how policy misalignment and insufficient market diversification can undermine decades of industrial development.

This raises broader questions about the future of North American manufacturing, where the US naturally plays a leading role. The region's ability to compete globally certainly depends on resolving these structural issues, yet current policy directions underpinned by Trump's autarchic and protectionist vision appear to be exacerbating rather than addressing them. Without a coordinated approach to industrial development and trade policy, the promise of North American economic integration risks remaining unfulfilled.