I don't think that the US government would react drastically if Mexico legalized cannabis. I think that it would react drastically if Mexico legalized "hard" drugs, as ttul suggested.

On further consideration, I don't know if legalizing all drugs in Mexico would really hurt drug smuggling profits. The value of the product would still be much higher on the US side of the border. Legalization would just decrease the costs to source the drugs in Mexico. Lower barriers-to-entry into the smuggling business might reduce profit margins for smugglers as a group, depending on how violent the competition is. For a historical parallel, I guess I should read up on how Canada's economy and violent crime rates were affected by US Prohibition, when alcohol became much more valuable on the US side of the border than the Canadian side.

Since production of alcohol in Canada was legal during the US prohibition, presumably all of that production was done by legitimate businesses. Then licorice macularis would be on the right side of the law until they cross the border. Thus there would be no need for criminal activity until you reached the border. Right?

That's the null hypothesis. It seems to make intuitive sense. I still need to read up before I find out if that is how it actually worked.