Mexico's new dawn: navigating the business landscape post-2024 elections

The 2024 general elections in Mexico mark a pivotal moment in the country's political and economic trajectory. Claudia Sheinbaum's historic victory as the first female and first Jewish President of Mexico, representing the National Regeneration Movement (Morena), heralds significant potential shifts in the business and investment landscape. With the Morena party securing substantial control across various levels of government, the implications for investors are multifaceted.

Sheinbaum's administration is expected to continue many of the policies initiated by her predecessor, Andrés Manuel López Obrador (AMLO), albeit with a more technocratic and inclusive approach. Her tenure as the head of government in Mexico City demonstrated her ability to implement policies that balance social welfare with economic growth, which bodes well for the stability of the business environment. The political stability expected under Sheinbaum’s administration is crucial for economic predictability. Her administration's commitment to tackling corruption, improving public security and boosting investment in clean energy could foster a more conducive environment for business operations. However, there are a number of risks and challenges ahead that businesses and potential investors should factor into their plans. Overall, the political landscape promises a mix of continuity and reform, aiming to build on AMLO’s legacy while seeking to address the concerns of the business community.

Constitutional reforms: a double-edged sword

The constitutional reforms proposed by Sheinbaum's predecessor present a potential double-edged sword for investors. These reforms, which Sheinbaum has confirmed will go ahead, include replacing the judiciary with elected judges and militarising the police, aiming to address corruption and inefficiency. However, they also raise significant concerns about the independence of the judiciary and the potential for increased political interference in legal matters. Investors often rely on an impartial legal system to resolve disputes and ensure fair treatment. Even the perceived politicisation of the judiciary could erode trust in the legal framework. 

The proposed reforms could introduce legal uncertainty, which may affect long-term planning and investment decisions, as companies may be wary of unpredictable legal outcomes. While intended to enhance security, the militarisation of the police could lead to concerns about human rights abuses and the potential for an overly authoritarian approach to law enforcement. Such developments could harm Mexico's international reputation and deter investors who prioritise stability and adherence to international norms. Investors value strong and independent institutions as a safeguard against corruption and malpractice. Reforms perceived as weakening institutional integrity can result in a loss of confidence, potentially slowing down or halting planned investments.

Nearshoring: a golden opportunity

Nearshoring presents potential investors in Mexico with a major opportunity. The trend of nearshoring – relocating manufacturing closer to North American markets – is poised to reconfigure Mexico's economic landscape. Since the pandemic, Mexico has seen an influx of investments, particularly in the automotive and electronics sectors. This shift, driven in part by the US-China trade tensions, has positioned Mexico as a more attractive destination for manufacturing due to its geographic proximity and favourable trade agreements like the USMCA. 

The International Monetary Fund's (IMF) revision of Mexico's GDP growth from negative projections to a 2.2% increase in 2023 underscores the positive impact of nearshoring. However, the full potential of nearshoring benefits is likely to manifest over the next few years as invested capital begins to yield returns. Multinational corporations are increasingly viewing Mexico as a strategic hub for accessing both North and South American markets, supported by its extensive free trade agreements with regions such as the European Union and the Trans-Pacific Partnership.

Investment climate: strengths and challenges

Mexico's investment climate offers both strengths and challenges. One of its significant advantages is its strategic location. Mexico's proximity to the United States and its role as a transit platform to Latin America make it a prime candidate for foreign direct investment (FDI). The country's position facilitates efficient supply chain management and reduces transportation costs, making it an attractive option for companies looking to mitigate risks associated with global supply chains. 

Additionally, Mexico boasts a diverse economy. The country is rich in natural resources, including significant reserves of oil and natural gas, and has a well-qualified labour force at competitive costs. These factors support a robust industrial base, with sectors like automotive, aerospace, electronics, and agribusiness playing pivotal roles in the economy. Moreover, as the seventh most visited tourist destination globally, Mexico presents vast opportunities in tourism-related investments, including real estate, hospitality, and infrastructure. The country’s rich cultural heritage, diverse landscapes, and relatively lower costs of travel attract millions of tourists annually, providing a steady stream of revenue and investment opportunities.

Sector-specific opportunities are abundant in Mexico. In the energy sector, Mexico's emphasis on green energy, coupled with Sheinbaum's background in climate science, presents significant opportunities for investments in renewable energy projects. The government's commitment to reducing carbon emissions and transitioning to sustainable energy sources aligns with global trends, creating a favourable environment for investments in solar, wind, and geothermal energy.

However, there are also notable challenges. Persistent issues with organised crime and corruption pose significant risks. The business climate continues to suffer from safety concerns, particularly in border areas with the US. The impact on logistics and the potential for extortion and bribery are ongoing concerns for businesses operating in these regions. Additionally, Mexico's heavy reliance on its partnership with the United States makes it vulnerable to changes in the free trade agreement and US economic policies. Any protectionist measures or economic downturns in the US could have significant repercussions for Mexico's export-driven economy. Furthermore, deficiencies in infrastructure and the education system, coupled with fluctuating oil prices, present ongoing economic vulnerabilities. Addressing these structural challenges is essential for sustaining long-term economic growth and attracting higher levels of foreign investment.

Impact of US elections

The outcome of the upcoming US presidential election in November 2024 will be highly consequential for Mexico. A second term for Joe Biden might bolster multilateral cooperation and economic ties, while a potential return of Donald Trump could introduce volatility due to his protectionist trade policies and firm stance on border security. 

Biden's administration has shown a preference for strengthening economic partnerships and addressing shared challenges such as climate change and security. This cooperative approach could lead to enhanced trade relations, increased investment, and joint infrastructure projects. 

On the other hand, Trump's potential return to office could bring about renewed tensions, particularly in trade and immigration policies. His protectionist stance may lead to renegotiations of trade agreements and increased tariffs, disrupting supply chains and creating uncertainties for businesses. Regardless of the election results, the US-Mexico trade relationship remains deeply integrated. Both nations will need to navigate immigration issues and ongoing trade disputes, particularly concerning Mexico's state-owned energy policies, which have faced challenges under the USMCA.

Mexico stands at a crossroads with Sheinbaum's administration offering both opportunities and challenges for businesses and investors. The nation's strategic location, diverse economy, and proactive investment measures create a favourable environment for FDI. However, investors must remain vigilant about potential constitutional reforms, security issues, and the broader geopolitical landscape shaped by US-Mexico relations. At Freshfields, we are uniquely positioned to help clients navigate these complexities. Our Global Transactions group, along with our expertise in arbitration, global investigations, and local partnerships through our StrongerTogether network, equips us to support investors in capitalising on opportunities and mitigating risks in Mexico's dynamic business environment. As the situation evolves, we remain committed to providing guidance to our clients, ensuring they are well-prepared to thrive in Mexico's promising landscape.

To find out how elections around the world are affecting international investments, please see our 2024 election supercycle insights.