Mexico City, Mexico. Alex Wolf/AdobeStock.com

In recent years the Mexican government has bet on nearshoring – here, the practice of moving manufacturing and/or other functions of an Asian, European or North American company to Mexico – to boost the country’s economy. However, Mexico’s recent judicial reforms – which have led to rule of law concerns and, consequently, have implications for business confidence – may now threaten the nearshoring boom.

Nearshoring allows companies to bypass US tariffs on China, plug holes in the supply chain caused by the Covid-19 pandemic and war-related disruptions, pay lower prices for labour and have physical proximity to consumers in the US as well as time zone alignment with other parts of the business. The rise in companies nearshoring to the country since 2022 has been called ‘the new Mexican miracle’.

The border closures in Asia and shipping slowdowns of the Covid-19 pandemic ‘showed that you have to be closer to your trading partners’, says Emilio Arteaga, Conference Quality Officer of the IBA International Trade and Customs Law Committee and a partner with the Mexican trade law firm Vázquez Tercero & Zepeda. Further, with the imposition of tariffs on China by the first Trump administration in the US, ‘Mexico became the United States’ biggest trading partner’. 

For investors, the benefits of nearshoring must be, as always, balanced with the risks of doing business in a certain jurisdiction. Business risk analyses between 2021 and 2023 included a high level of concern about public security and government inefficiency in Mexico – and an increasing worry about legal uncertainty and the concentration of executive power.  

Concerns about the latter have intensified in recent months, with the credit agency Moody’s downgrading the Mexican government’s debt outlook from ‘stable’ to ‘negative’ in mid-November, citing the potential weakening of the judiciary and of checks and balances as a result of reforms passed before the end of AMLO’s term in October. The government’s ‘Judicial Reform’ includes the appointment of judges by popular election and a reduction in the capacities and oversight of the Instituto Nacional Electoral, the country’s electoral commission. The goal of the reforms, according to the government, is to target corruption and make the judiciary more responsive to the will of the people.  

However, critics have spoken out against the reforms. For example, in his opening address at the IBA Annual Conference in Mexico City in September, Ernesto Zedillo, President of Mexico from 1994–2000, referred to the changes as ‘a set of constitutional reforms that will destroy the judicial branch and, with it, bury Mexican democracy and what remains of its fragile rule of law’. 

A weakened rule of law can increase the exposure of businesses to complicity in organised crime, explains Yussef Nuñez, a policy analyst at advisory company Emerging Markets Political Risk Analysis and a lecturer on economic globalisation at Mexico’s Anahuac University. In regards to the move to have judges appointed by popular election, ‘there’s a fear that criminal groups could push their own candidates’ in order to exert control over territory, as they’re known to do at local levels of government in Mexico. 

Further, the Mexican judiciary is now prohibited from issuing general injunctions against laws and regulations in response to constitutional challenges. ‘It may be more difficult’ for businesses to lodge or contest injunctions brought against them, if judges are popularly elected and required to make decisions in the name of ‘the will of the people’, as opposed to on points of law, Nuñez adds. 

Luis Armendariz, a partner with the cross-border business and transactions firm De Hoyos Avilés in Mexico, says that any ‘reduced independence or increased politicisation’ of Mexico’s judiciary ‘might compromise the fair and impartial resolution of disputes’. He adds that ‘these factors could lead to concerns about the predictability of outcomes in commercial disputes, affecting investor confidence’. 

Rule of law concerns are one of a matrix of elements that businesses consider in making the jump to Mexico, says Armendariz. He highlights that it’s still very early in the process and that he and his colleagues will be watching closely to ‘see how the reform is implemented’. He explains that the firm is ‘advising clients that in this case the predictability of outcomes in judicial proceedings is going to be more complex, and [the firm is advising] on the measures they can take to address such risk’. These measures include ‘strategies that limit exposure to domestic judicial processes’, arbitration clauses to ‘maintain control over legal aspects’ and ‘neutral jurisdictions for dispute resolution when possible’. 

Arteaga expects that ‘companies will continue to do business in Mexico’ despite concerns about the impact of the Judicial Reform. He says this is particularly the case in the manufacturing sector, which is ‘the industry receiving the highest amount of foreign direct investment’ and, being subject to less regulation, ‘may not see the reform as a huge risk’.  

At the same time, Arteaga believes that any increased exposure to corruption as a consequence of the Judicial Reform will be of concern to ‘foreign investors that have anti-corruption laws that go beyond their borders’, such as the UK. For them, it may become ‘very important for those companies to be fully compliant.’ 

For Nuñez, maintaining cheaper labour costs in Mexico will be key to nearshoring’s future success. ‘This is still why some companies prefer to come here’, he explains, weighing it up against ‘public security risk, lack of energy, electricity and water resources, and any political uncertainty that we’re currently facing’ – a reference to the incoming second Trump administration in the US.