A U.S multinational corporation has a subsidiary in Mexico. After a Presidential

Question

A U.S multinational corporation has a subsidiary in Mexico. After a Presidential election in the U.S, the U.S renegotiated the North America free trade agreement to incorporate a 15% tariff(tax) on all goods imported to America from Mexico. This makes imports from Mexico more expensive to Americans,all else held constant. What is the net effect on the nominal MXN/ USD exchange rate? What is the net effect on the real MXN/ USD exchange rate? What is the net effect on the US multinational net income in US dollars?

Explanation / Answer

There will not be any affect on the nominal exchange rate as nominal exchange rate is the relative price of currencies of two countries. For example 1USD =19.32MXN, which will not change.

The real exchange rate refers to the relative price of goods of Mexico and USA. As USA as applied tarrif the price of Mexican goods would rise in USA leading to an increase in real exchange rate.

The net effect on the US multinational's net income in US dollar will remain unchanged as it is established in Mexico itself, plus there is no change in the nominal exchange rate.

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