Today's Deep Dive is 1,143 words and a 7-minute read.
On Sunday, outgoing Mexican President Andrés Manuel López Obrador (also known as AMLO) signed into law a deeply controversial judicial reform plan that will make all Mexican federal judges popularly elected on nine-year terms. Fiercely opposed by internal critics (the reform was met by several judicial strikes) and by international observers, including the US, opponents to the judicial reform argue that the new system risks degrading Mexico's democracy and pushing away foreign investors – even potentially voiding the USMCA trade agreement. As Mexico implements the new law, international investors will need to navigate changes in the business environment and plan for increased operational risks.
"Plan C"
Introduced in February of this year, AMLO's judicial reform plan is part of a package of constitutional changes called "Plan C" – similar previous iterations Plans A and B were struck down by Mexico's Congress and Supreme Court. The judicial reform plan will make all Supreme Court and state judge positions popularly elected on renewable nine-year terms, first dismissing all sitting judges in order to clear the benches. In addition, the reform will scrap Mexico's Federal Judiciary Council, an independent supervisory body comprised of councilors appointed by various stakeholders, and replace it with two new bodies: the Judicial Administrative Body, a five-person council appointed by the president to oversee the judicial branch's general administration, and the Court of Judicial Discipline, a body of five popularly elected members elected for a six year term to investigate and discipline public servants within the judiciary.
The changes are billed by AMLO and his party, the left-wing Morena, as a bid to fight corruption in the judiciary, which they argue has evolved to be inefficient and only serve the elites (including wealthy international investors). Despite flaws in the current reform plan, Morena's negative opinions about the judiciary are widely shared – popular trust in the judiciary is low, with the widespread perception that the branch is corrupt and nepotistic, unable to address the widespread instability and violence that the country's poorest live with every day. However, critics argue that Morena's reform effort has more to do with political expediency than with repairing the broken judicial system. The reform comes after several years of political tussles between AMLO and the Supreme Court, including an effort last year to cut funding to the National Electoral Institute and loosening of campaign regulations. In 2023, the Economist assessed that no other Mexican president had ever had as many policies struck down by the body.
Risks to Democracy and to Investors
The reform has been heavily criticized by both internal and external observers, who argue that the change will introduce political turmoil into the judiciary, hampering justice and creating a chaotic, unstable legal environment. Judges are likely to become politicians first and neutral arbitrators of justice second, reducing the quality of and expertise of judges on the bench and producing judicial decisions that are based on political, rather than legal, justifications – either because judges may be genuine partisans or because they simply seek to be reelected. Cases and decisions could also be disrupted or delayed by the periodic political transitions around judicial elections, building delays and turmoil into the legal system. There is also a risk of increased political violence against judges as organized crime and private interests become more involved in judicial elections. All these risks are compounded by the fact that the judiciary's two new supervisory bodies are also now politicized, with one being directly appointed by the president and the other also popularly elected.
Beyond concerns of democratic backsliding, investors and those doing business in Mexico are wary of the impacts of the judicial changes on their businesses, international trade agreements, and the business environment more broadly. At a baseline, the unknowns inherent to the new legal landscape are giving investors pause – and in the long term, investors are looking at a capricious judicial branch subject to the cycles and whims of electoral politics, and one that is potentially completely overhauled every nine years.
The concerns are part of a broader sense that AMLO has become less friendly to international businesses in recent years, taking several foreign companies to court over investments he argued were exploitative of Mexican consumers -in line with the economic nationalism at the heart of Morena's political ideology. At a press briefing ahead of the reform's approval, the president confirmed that the change was, at least in part, aimed at foreign businesses, saying that without elections Mexican judges would "continue defending foreign companies that come to sack, steal, and affect Mexicans' economy." The market has already shown some signs of shying away from the new developments: the peso is at a two-year low against the dollar, and Moody's Ratings has called the change "harmful" to external investment. Oxford Economics published a report assessing that while the reform does not pose an immediate danger to the economy, the changes could lead to a 12% reduction in future investment against the current baseline. Even before the law was ratified, Mexico's central bank reduced its forecast for economic growth from 2.4 to 1.5 percent, citing global economic headwinds.
There are also serious concerns that the changes could impact the US-Mexico-Canada trade pact (USMCA) by disrupting labor tribunals and violating provisions that require independent magistrates. The treaty is set to be renewed in 2026 in what was already set to be a contentious summit that may more resemble a renegotiation than a review. While the US and Canada are not likely to withdraw from the deal over the lack of an independent judiciary, the 2026 iteration of the deal could reduce Mexico's opportunities. For example, the US House Foreign Relations Committee has already hinted that the US may seek to pursue a tighter interpretation of "rules of origin" in the automotive sector, strengthening the US domestic sector at Mexico's expense. Reduced access to a stable Mexican market could cause issues for the US' long-term plans to shift supply chains away from China's sphere of influence. The US and international businesses could seek other, more politically stable alternatives in the region, like Costa Rica, the Dominican Republic, and Panama.
The reform will be a difficult inheritance for President-elect Claudia Sheinbaum, who takes office October 1 and is often described as AMLO's protégée. While she has been a vocal supporter of the judicial reform, saying this week that "national and foreign investors don't have anything to worry about," she has also outlined plans to prioritize attracting foreign direct investment, including by upgrading Mexico's infrastructure to compete for US nearshoring investments. Sheinbaum is widely considered to be more pragmatic and business-friendly than her predecessor, but ultimately shares AMLO's ideological background, and is likely committed to the reform agenda at this point. A deteriorating legal environment, alongside rampant security concerns, risks challenging Mexico's place in the North American trade bloc and on the geopolitical stage more broadly in coming years.
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