MEXICO: An Introduction

Current Highlights in Economic, Political and Legal Issues

The best way to describe Mexico's current situation is through the so-called Chinese curse: "May you live in interesting times". Mexico's economy has faced several challenges in the last few years. Inflation has been a significant concern in recent years, affecting both consumers and businesses, as well as the country’s vulnerability derived from its heavy reliance on exports, mainly to the United States, that makes the country susceptible to shifts in global trade dynamics and policy changes such as tariffs and trade agreements.

Following the COVID-19 pandemic, like many other countries, Mexico experienced a surge in inflation. This was driven by a combination of global supply chain disruptions, rising commodity prices and domestic factors. Economic recovery, post-pandemic, the measures adopted by the Bank of México (the Central Bank) and efforts to stabilise the supply chain have contributed to a more balanced inflation outlook. However, external factors like global commodity prices and the US Federal Reserve's monetary policies continue to influence inflationary trends in Mexico.

Additionally, the nearshoring phenomenon has had a significant impact on the Mexican economy in recent years, as the country is a top choice for relocating value chains under this model. This shift is driven by global supply chain disruptions, Mexico’s proximity to the world's largest market, skilled labour at lower costs than in the United States, geopolitical considerations and a large network of trade agreements. These all make Mexico the leading option for the full or partial localisation of companies. Some of the most important aspects regarding nearshoring in Mexico are:

• an increase in direct foreign investment mainly related to manufacturing and industrial growth;
• the creation of new jobs and labour market impact (increase in salaries in the country);
• a reduction in supply chain vulnerabilities and faster lead times;
• a reduction in production costs in the medium term; and
• economic diversification.

2025 is shaping up to be a pivotal year for Mexico, influenced by the transition of administrations following the 2024 elections in both Mexico and the United States. This change is expected to bring about a political and economic landscape marked by potentially significant adjustments. For this year, the Mexican Ministry of Finance estimated that gross domestic product (GDP) will grow between 2% and 3%. However, the Organisation for Economic Co-operation and Development (OECD) offers a more conservative projection, forecasting growth of just 1.2%. Trade and geopolitical tensions could also disrupt global value chains and reduce global growth, leading to adverse effects on production, exports and inflation in Mexico. It is likely that President Trump will impose 25% tariffs on Canada and Mexico as well.

On the other hand, Article 34.7 of the United States-Mexico-Canada Agreement (USMCA) requires the parties to conduct a joint review of the agreement six years after its entry into force, scheduled for 1 July 2026. The timing of the USMCA review is an open question and could be dramatically accelerated if the parties deem it necessary to address concerns and actions taken by the Trump administration. Currently, the three USMCA parties are beginning domestic consultations in preparation for the 2026 joint review, which could lead to changes in the agreement.

In response to the foreign tensions, on 13 January 2025, President Sheinbaum unveiled a USD277 billion strategy aimed at positioning Mexico as a regional leader in economic development and social equity, as well as boosting national and regional content in strategic sectors, creating well-paid jobs, increasing value in local supply and global chains and promoting regional integration across the continent (known as Plan Mexico). Spanning 2,000 projects across key sectors like textiles, automotive, aerospace and electromobility, Plan Mexico aims to elevate Mexico to the world’s tenth largest economy by 2030, boost investment to 28% of GDP and reduce poverty while creating 1.5 million specialised manufacturing jobs. Key initiatives include incentives for:

• company relocations;
• industrial park construction;
• streamlined investment procedures; and
• digitalisation efforts, alongside measures to increase domestic product consumption and improve irrigation systems.

Plan Mexico also seeks to deepen North American integration, leveraging the USMCA to reconfigure supply chains and reduce reliance on China, potentially increasing Mexico's GDP by 1.2%.

Legal Perspective

In the Mexican legal arena, one of the most relevant issues is undoubtedly the judicial reform approved in 2024. One of the main aspects of the judicial reform is how local and federal judges, magistrates and Supreme Court justices will be appointed. This reform has generated uncertainty given that judges will now be selected by popular vote, a development that for some could imply a significant risk to judicial independence, the rule of law and the protection of human rights. Undoubtedly, this reform has encouraged the use of alternative dispute resolution methods which are now much more common than before and, above all, opened the door to arbitration procedures and to some extent the diversification of judicial workloads.

Legal reforms aside, Mexico has also had significant labour reforms in recent years and 2025 may bring further changes to improve workers' rights at the cost of employers. This could include expanding protections for workers in the gig economy, addressing labour conditions in informal sectors and ensuring compliance with international labour standards as part of trade agreements like the USMCA.

The Morena-controlled Congress is also proposing several significant reforms affecting workers’ pay and benefits that could significantly increase the cost of doing business for employers in Mexico, such as:

• reducing Mexico's working week from 48 hours to 40 hours;
• eliminating the three-month limit on mandatory profit sharing (PTU);
• increasing the Christmas bonus to the equivalent of 15 or 30 days' pay; and
• increasing workers' vacation bonus to an additional 25% to 50% of normal pay.

The Mexican President is also about to file a law initiative containing the secondary laws of the energy reform to lay the groundwork for necessary energy investments in Mexico. The initiative is being filed to fully capitalise on nearshoring, by adding more than 37.8 GW of electric capacity over the next five years, which requires an investment of approximately USD41.5 billion, according to the Mexican Energy Association (AME).

Elsewhere, Mexico has been increasingly focused on fighting corruption in recent years. In 2025, there may be more reforms aimed at strengthening transparency in government, improving the effectiveness of anti-corruption agencies and holding public officials more accountable for illicit activities. This could include changes in laws regarding the prosecution of corruption cases or the enforcement of anti-money laundering regulations.

From a tax perspective, there have been a couple of tax reforms which have been focused on improving tax collection efficiency, increasing transparency, simplifying the tax system and addressing income inequality. The goal has been to enhance tax revenue, reduce evasion and ensure the sustainability of public finances while addressing critical issues like corporate investment and environmental sustainability. These reforms are also designed to help Mexico stay competitive on the global stage and promote long-term economic growth.

Conclusion

Given the current situation in Mexico, doing business in Mexico offers a range of opportunities and challenges, shaped by the country's economic environment, political landscape and social dynamics. Some drivers for investments into Mexico are as follows.

Proximity to the United States

Mexico's location makes it a key player in trade, especially with the United States and Canada. Mexico and the United States share a continental border of 3,145 km (1,954 miles) with 47 ports of entry. In early 2023, US imports of goods from Mexico surpassed those from China, making Mexico the main origin of goods imported to the US for the first time in modern trade history.

Global trade connectivity

Mexico is a party to 13 trade agreements, with more than 50 countries in the world meaning it has preferential access to the main economies around the globe.

Nearshoring trend

Nearshoring is helping Mexico's manufacturing sector thrive. Mexico offers lower labour costs compared to the United States, making it an attractive destination for manufacturers, particularly in automotive, electronics and consumer goods.

Workforce

Its young skilled talent pool (with an average age of 29), combined with its cost effectiveness, currently places Mexico as one of the ten most attractive workforces in the globe according to the Total Workforce Index.

Foreign trade programmes

World class manufacturing is in Mexico’s DNA. The “Maquiladora” programme was instituted as an alternative to the “Bracero” programme in the 1960s. Mexico has a number of foreign trade programmes that promote the import, manufacture and export of goods, such as the IMMEX Programme (maquila), which allows the temporary importation of goods without payment of the general import tax and other taxes (eg, VAT) and PROSEC (Sector Promotion Programmes), which allow producers of certain goods to import at a preferential rate.

Tax incentives

In line with local laws, the various states in Mexico are able to grant tax incentives by reducing or exempting payment for a certain number of years in terms of the 2% local wages tax, or interconnection of water and sewage services or training. To promote regional economic growth and attract investment to the Isthmus of Tehuantepec inter-oceanic corridor, the federal government granted various income tax and VAT incentives to those taxpayers, whether individuals or corporations, that carry out productive economic activities in this location. One of the four incentives of Plan Mexico is the Nearshoring Decree that specifies tax incentives for companies to invest in Mexico.

While Mexico offers many business opportunities, including access to international markets, a growing consumer base and a favourable manufacturing environment, businesses must navigate various challenges, including security concerns and regulatory complexity. Understanding the local environment, obtaining the right advice and support and staying informed about policy changes are essential for businesses looking to succeed in Mexico.