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How do group boundaries in a society evolve? Does the appearance of a new out-group foster or hinder the incorporation of previously excluded groups? We introduce a conceptual framework of context-dependent group categorization and derive predictions for how exposure to one minority affects the majority’s views of other minority groups. We test these predictions by studying how Mexican immigration to the US affected native whites’ attitudes towards African Americans. We combine nationally representative survey data with a difference-in-differences design, and predict changes in the share of Mexican immigrants across states relying on the historical distribution of ethnic enclaves. Consistent with the theoretical framework, Mexican immigrants reduce whites’ prejudice against blacks, and shift racial policy preferences in a more liberal direction. Immigration of groups perceived as less distant than Hispanics does not lead to similar effects. Our findings have broader implications for inter-group relations in racially and ethnically diverse societies.