A judicial reform that could threaten the legal security of previous years and the result of the presidential elections in the United States would determine the path of the outsourcing of services and the attractiveness of the Aztec country as a destination for foreign investments.
Two weeks after assuming the presidency of Mexico with great fanfare, Claudia Sheinbaum presides over a technocratic government, aimed at promoting foreign investment to a greater extent than that of her predecessor, Andrés Manuel López Obrador (AMLO).
However, questions come from another side. At the end of September, the Morena bench, the ruling left-wing party, approved the Judicial Reform in the Senate, one of the main axes of the “Fourth Transformation” that AMLO initiated and Sheinbaum aspires to continue. Under the new model, the magistrates of the Judicial Branch will be appointed by citizens through elections. This is an initiative that has been criticized for “politicizing” justice and undermining the independence of judges in favor of the Executive.
Complaints from the right-wing opposition were joined by those from the United States and Canada, to the point that AMLO temporarily suspended relations with both North American powers. In the process, nearshoring , the business strategy in which companies move part of their operations or processes to another nearby country, was put at risk. Overnight, Mexico ceased to be an attractive investment destination, as its legal security was put at risk.
“An abrupt change in Mexico's judiciary and regulation puts business confidence at risk, including foreign investment in the country, creating additional bottlenecks that hinder nearshoring , ” warned a report by the Moody's agency, published on October 7.
The stakes are high: in November 2023, Deloitte's investment monitor revealed that, by then, more than 100 nearshoring projects had been announced in Mexico, with a total estimated investment of more than US$30 billion.
“Despite bottlenecks such as electricity supply and transportation infrastructure, nearshoring is still doing well with exports and investment on the rise. Although there is some uncertainty regarding the impact of judicial reform, there are still announcements of important investments, including the new Foxconn plant in Chihuahua to manufacture chips for next-generation artificial intelligence services,” said Jesse Rogers, Head of LatAm Economics at Moody's Analytics for AméricaEconomía .
The states of Coahuila and Nuevo León, located in the northeast of the country and close to the border with the United States, have also been among the regions that have benefited the most. Their economies have seen the arrival of electronics manufacturing companies and car assembly companies.
“Mexico has broken records every year. It is very likely that this year we will end up reaching US$50 billion between foreign direct investment figures and nearshoring . We must take into account that in the first half of this year, we reached US$31 billion and the year is still coming to an end. Investments in the country have broken records in the last decade,” said Alberto Bustamante, director of the National Association of Suppliers of the Automotive Sector of Mexico (ANAPSA) to AméricaEconomía .
THE KEYS TO THE NEARSHORING BOOM
According to Bustamante, there are two important factors that have influenced this flow of investments. The first is the trade war between the US and China, a conflict that has as its main axis a trade deficit of more than US$ 500 billion between Washington and Beijing.
In this context, Section 301 of the US Trade Expansion Act addresses national security and authorizes the US president to take necessary measures to protect his country without consulting Congress. Using this remedy, in May 2024, President Joe Biden decided to increase tariffs on products from China valued at US$ 18 billion in “strategic sectors” such as electric vehicles, batteries, steel and critical minerals. The Asian giant was accused of engaging in unfair practices in technology transfer, intellectual property and innovation.
This is not far removed from the first measures taken by Donald Trump during his time in office. For example, in June 2018, the Republican announced the imposition of 25% tariffs on a list of Chinese products worth US$ 50,000. The reason was accusations of theft of intellectual property from the Xi Jinping regime.
Once this import ban was sealed, Bustamante points out that this caused Chinese companies to decide to relocate their operations to Mexico to continue exporting to the United States and thus evade the high tariffs. A clear example is the Man Wah furniture factory: a Chinese consortium based in Monterrey that makes leather sofas “100% made in Mexico” and exports them to large chain stores in the US, such as Costco and Walmart, as reported by BBC Mundo last May.
According to the Mexico-Hong Kong Chamber of Commerce and the China HomeLife business center, by December 2023, more than 3,000 Asian companies based in Mexico were looking to expand their businesses, especially exporting to the United States under the Mexico-United States-Canada Agreement (USMCA).
The approval of this free trade agreement in July 2020 was favorable for nearshoring, as it raised the regional manufacturing content from 62.5% to 75% to exempt a vehicle from tariffs. In other words, to comply with this benefit, at least 75% of the value of a car must come from materials and parts produced in Mexico, the US and Canada. This is a policy that motivates not only Chinese companies, but also American car manufacturers.
Perhaps the most emblematic case is the construction of the Tesla factory in Nuevo León, a project that Elon Musk put on hold until after the US presidential elections. The South African tycoon knows that a victory by former President Trump would materialize his campaign promise to impose tariffs on vehicles manufactured in the southern neighbor. “It makes no sense to invest in Mexico if that is going to happen,” Musk said last July.
WHAT WILL HAPPEN AFTER THE JUDICIAL REFORM?
Behind closed doors in Mexico, the promulgation of the judicial reform still divides investors, especially since on Monday 15 the secondary laws of the project were approved, which ratify the popular election of judges and call for a first electoral process for June 2025.
The reform also establishes that the three branches of the Mexican State will form an Evaluation Committee to select the candidates for the different bodies of the Judicial Branch. The absolute majority of Morena and its allies in Congress approved these new conditions, despite the claims of the opposition, led by the Institutional Revolutionary Party (PRI) and the National Action Party (PAN).
On the same day, Sheinbaum denied again in her morning press conference that the judicial reform threatens the rule of law in Mexico. “Know that your investments are safe with us,” added the president, referring to business ties with the United States. In turn, she highlighted that the US-Mexico CEO Dialogue will soon be held, a meeting that will include the participation of 240 Mexican and American CEOs. “Let them know that we are interested in investing under a development plan,” she said.
Despite initial criticism from the international community, Moody's believes that the impasse on judicial reform would not be detrimental to nearshoring in Mexico in the long term.
“At the end of the day, we believe the effects would be temporary, but much depends on how the secondary laws are implemented in the coming months and over the next year. How the election process for judges proceeds and the outcome remains to be seen. While we do not believe it will have much impact on trade relations with the US and other major trading partners, there are reasons to think it will,” Rogers said.
Of course, the new Mexican government has other factors that differentiate it from López Obrador's experience. The most important is the technocratic profile of Sheinbaum's cabinet. "Unlike the previous six-year term, the current one has a country plan focused on attracting investments to promote nearshoring . It even has a program to replace Asian imports. So, I think that the current president Sheinbaum is well protected, especially by Foreign Minister Marcelo Ebrard, who is an expert in international trade and is very supportive of the business sector," says Bustamante.
From this perspective, the ANAPSA spokesperson believes that in the coming years, the automotive sector will be one of the main beneficiaries of the arrival of new assembly and auto parts plants. It should also be considered that this industry is the second economic pillar of Mexico, since it generates 5% of the national GDP, 25% of the manufacturing GDP, as well as a positive balance of US$ 107 billion. “If we add together the income from remittances, tourism and oil, it does not reach the contribution of the automotive sector,” says Bustamante.
US ELECTIONS
Naturally, the most important international event for Sheinbaum's government will be the November elections in the US. According to Rogers, Moody's estimates that a victory by former President Trump could delay the advance of nearshoring in Mexico and other countries, but more so because of the tensions between the US and China, as well as the high probability of a trade war between the two superpowers. There would also be good news for Tesla's business in the Aztec country.
“This would represent a setback for the global economy and therefore for Mexican exports and foreign direct investment in nearshoring . Given the full integration of the US and Mexican automotive sectors, we see it as much less likely that Trump will follow through on threats to impose tariffs of up to 200% on cars produced in Mexico, which would have a greater negative impact on the US economy in the short term,” Rogers says.
But so far, most electoral polls tip the balance in favor of the Democratic candidate, Kamala Harris. For example, one of the latest polls, published by TIPP Insights, indicated that 49% of Americans surveyed would vote for Biden's vice president, while 46% would vote for former President Trump. If the Democratic Party finally manages to retain the White House for four more years, no major changes are expected for Mexican interests.
“A Harris victory would be positive for nearshoring , but it does not represent a major change from Biden's policies, who has advocated for greater rapprochement between the two economies through industrial policy. Kamala shares the goal of strengthening the US manufacturing industry in key sectors such as semiconductors and renewable energy, a policy that leaves the door open to greater Mexican participation,” says Rogers, representing Moody's.
