ARTICLE
23 July 2024

Mexico's Election And Business Future

Mexico has ushered in a new era with the inauguration of Claudia Sheinbaum as the country's first female president.
Mexico Strategy

Mexico's Business Future Under President Sheinbaum

Mexico has ushered in a new era with the inauguration of Claudia Sheinbaum as the country's first female president. I am optimistic about Mexico's prospects for continued economic growth and increased foreign investment under President Sheinbaum.

My clients keep asking what they should expect from her presidency. In this post, I try to predict that.

President Sheinbaum's Background and Qualifications

President Claudia Sheinbaum brings a blend of scientific expertise and political acumen to her presidency. She has a PhD in energy engineering from the National Autonomous University of Mexico (UNAM) and a deep understanding of complex technical issues. Her extensive experience in public service, including as the Head of Government of Mexico City from 2018 to 2024, has honed her political skills and demonstrated her ability to navigate challenges and implement effective policies.

During her tenure in Mexico City, Sheinbaum earned widespread praise for her pragmatic approach and her commitment to addressing pressing issues such as crime, air pollution, water management, and infrastructure development. Her focus on practical solutions and her willingness to collaborate with diverse stakeholders—including the United States—bode well for her presidency.

She is deservedly lauded for having greatly reduced Mexico City's crime rate during her administration there. Per Reuters, "Mexico City's homicide rate fell 50% between December 2018, when Sheinbaum was inaugurated as mayor, and June 2023, when she stepped aside to begin her presidential campaign, a drop she attributes to effective security policies that improved police work and coordination with prosecutors." One of the things Sheinbaum did to reduce Mexico City's crime rate was to learn from and work with U.S. law enforcement.

President Sheinbaum's Key Priorities and Proposed Policies

Initially, I planned to explain why President Sheinbaum's administration would be beneficial for Mexico's economy and businesses operating in the country. However, I came across an article by my friend Andrew Hupert that covered the topic thoroughly. I will be extensively citing Andrew's article, but in fairness to him, I strongly encourage you to read it in its entirety here. Not only is Andrew spot on with his analysis, but he is also more direct and funnier than me.

Because I will be so heavily relying on Andrew's article, I feel compelled to share Andrew's bona fides with you. Andrew was one of my China business guides when my law firm started doing business in and with China two decades ago. I would meet and consult with Andrew constantly about China because Andrew knew so much about China and—in particular—its manufacturing industry and its supply chains. Back in around 2017, about the same time I came to believe that China had peaked, Andrew did as well. Acting on this belief, he moved to Vietnam, and then very soon after that to Mexico, where he studied and became fluent in Spanish, and where he now lives and works. Andrew is an MBA and a business school professor and a consultant, mostly regarding manufacturing and supply chains. He is now one of my Mexico manufacturing and supply chain gurus.

Andrew's article tells people to relax about the election of Ms. Sheinbaum because—contrary to what many are saying—she is not going to overthrow Mexican democracy or go after foreign businesses.

Andrew believes the Sheinbaum administration will be "slightly better than AMLO's for the international business community." And like me, he sees her as more pragmatic and worldly than AMLO (her predecessor). Per Andrew: "It's about the PRAGMATISM. Populist AMLO was a charismatic dreamer who was never held to account for anything he did or said. Sheinbaum will be held responsible for everything that happens in Mexico, so I expect her real governing agenda will evolve to be much more realistic than AMLO was."

I agree.

President Sheinbaum's Priorities

Andrew thinks Sheinbaum's administration will prioritize the following:

Strengthening the Relationship with the United States: Andrew sees maintaining a strong and cooperative relationship with the United States as crucial for Mexico's economic well-being. Sheinbaum has signaled her commitment to addressing issues such as border security, cartel violence, and drug trafficking, particularly the flow of fentanyl from China to Mexico and then to the United States.

According to Mexican officials, there has been an increased effort to inspect incoming shipments from China, and plans are in place to further enhance these measures. Effectively managing these challenges is essential for fostering a positive partnership with the US and ensuring continued economic integration under the United States-Mexico-Canada Agreement (USMCA).

Boosting the Mexican Economy and Improving Finances: Sheinbaum inherits a generally robust Mexican economy, with GDP growth of 3.1% in 2022 and an expected growth rate of 2.8% in 2023, according to the International Monetary Fund (IMF). However, challenges remain, including income inequality, underemployment, and the need for infrastructure improvements.

Andrew believes Sheinbaum will take a pragmatic approach to economic policies, avoiding drastic changes that could disrupt the positive momentum. She is expected to focus on attracting foreign investment, improving infrastructure, and enhancing security to create a more conducive business environment. I agree.

Sheinbaum's administration is also likely to continue efforts to increase compliance with the USMCA's labor, environmental, and fair-trade regulations. These reforms are aimed at creating a sustainable and fair business ecosystem that meets international standards and fosters deeper integration within North America's supply chain.

Advancing Social Justice and Environmental Initiatives: Consistent with her progressive values, Sheinbaum has pledged to prioritize social justice initiatives focused on practical improvements in areas such as healthcare, education, and poverty alleviation. Her environmental policies are expected to focus on addressing air pollution and water management challenges. Andrew very bluntly, but accurately, says that "Sheinbaum's progressive programs focus on more schools and more doctors—not legalized shoplifting and complicated pronouns. Her emphasis on environmental issues is also more pragmatic and grounded than other leaders—she is looking at controlling air pollution and managing Mexico's chronic water problems. No word on gas ranges yet, but I think we're probably good here."

Per Andrew, improving Mexico health care and education will broaden Mexico's labor pool and open up more areas for potential development. I am not clear whether Andrew's use of the word "areas" refers to industries or geographic locations, or both. In any event, per Andrew, if President Sheinbaum can succeed with improving social justice in Mexico, "you will have more people to hire, sell to, and buy from." I agree.

Mexico's Big Challenges

  1. Though Sheinbaum's presidency holds great promise, she will also face many challenges, including the following: Political Opposition and Polarization: Despite her reputation for pragmatism, Sheinbaum will almost certainly encounter opposition from political rivals and entrenched interests resistant to change. AMLO was both very popular and very disliked. I expect Sheinbaum to be less polarizing. Cartel Violence and Insecurity: The persistent cartel violence and insecurity pose a significant challenge for Mexico. Sheinbaum's ability to enhance security measures and curb the influence of criminal organizations will be critical for attracting investment and fostering economic growth. I expect she will be considerably better at reducing cartel violence and influence than AMLO, and a growing Mexican economy will help. I anticipate a small reduction in cartel power. Balancing Foreign Investment and National Interests: Sheinbaum will need to strike a delicate balance between welcoming foreign businesses and protecting national interests, such as labor rights and environmental regulations. A rising economy will make this easier, but a rising economy is never guaranteed.

Industry Implications

  1. Sheinbaum's policies and priorities will have varying implications across different sectors of the Mexican economy: Manufacturing and Automotive: Mexico's manufacturing sector, particularly its automotive industry, has been a key driver of Mexican economic growth and foreign investment. Sheinbaum's focus on strengthening trade ties with the United States and improving infrastructure could further boost these industries. Her commitment to labor reforms and environmental regulations will require manufacturers to adjust, but overall, this should have little impact on profitability or growth. Energy and Natural Resources: With her background in energy engineering, Sheinbaum is well-positioned to address Mexico's energy needs and potentially attract investment in renewable energy sources. Her approach to the state-owned oil company PEMEX and the country's energy policies will be closely watched by industry stakeholders. Her views on nationalizing industries are not yet clear. Her science background is also expected to aid her in addressing Mexico's water shortage challenges. Tourism and Hospitality: Mexico's rich cultural heritage and natural attractions draw millions of tourists annually. Sheinbaum's efforts to counter the cartels and improve infrastructure could benefit Mexico's tourism and hospitality sectors, and her environmental initiatives may appeal to eco-conscious travelers. Agriculture and Food Production: Mexico is a major exporter of agricultural products, and its agricultural sector will likely benefit from Sheinbaum's commitment to strengthening trade relationships and improving logistics infrastructure. Her social justice initiatives may also help support small-scale farmers and promote sustainable agricultural practices. President Sheinbaum has been a staunch advocate for decriminalizing recreational cannabis use. She has said that criminalizing marijuana use is ineffective and harmful. Since the election, my law firm's international cannabis lawyers have seen a massive increase in companies seeking assistance to understand how they can participate in Mexico's cannabis industry.

China's Mexico Influence — Overrated

Though Chinese companies are setting up factories in Mexico, the numbers are much smaller than widely believed. Per a recent Mexico News Daily article, foreign investment in Mexico hit a new record high in the first quarter of 2024, with Mexico FDI increasing 9% annually. United States companies and investors contribute 52% of the Mexico FDI total—$10.61 billion—with the next biggest foreign investors coming from the following countries:

  • Germany, $1.74 billion, or 9% of the FDI total.
  • Canada, $1.7 billion, or 8% of the total.
  • Japan, $1.43 billion, or 7% of the total.
  • Argentina, $840 million, or 4% of the total.
  • Switzerland, $764 million, or 4% of the total.
  • South Korea, $641 million, or 3% of the total.
  • Netherlands, $530 million, or 3% of the total.
  • Spain, $351 million, or 2% of the total.
  • Brazil, $164 million, or 1% of the total.

Note that China was not even in the top ten.

The above numbers coincide with everything my law firm's Mexico lawyers are seeing and hearing Chinese companies are "kicking tires in Mexico," but with the exception of a few very large Chinese companies actually entering Mexico, few Chinese companies are actually doing so.

The Chinese factories that are in Mexico often use a substantial amount of component parts sourced from China and have many Chinese managers. However, this dynamic is expected to change over time as local talent takes on more significant roles. Though U.S. imports from China declined more than 20% in the last year, Chinese nationalists like to claim that all or nearly all of that decline has been made up with Chinese products made in Mexico, Vietnam, or Thailand.

First off, this is not true. Second, Chinese company products made in Mexico have a much higher level of non-Chinese components than Chinese products made in China. This has to be the case for these made-in-Mexico products to qualify for reduced tariffs under the USMCA. Also, made-in-Mexico products for Chinese companies include Mexican labor along with other Mexico expenditures. In contrast, products wholly manufactured in China do not include Mexican labor or other expenditures within Mexico.

It's crucial to note that U.S. laws under the United States-Mexico-Canada Agreement (USMCA) do not allow products with a high percentage of Chinese parts to qualify for reduced tariffs. This regulation encourages companies to source more materials locally, benefiting the Mexican economy and fostering deeper integration within North America's supply chain.

Increasing USMCA Compliance

Mexico is working hard to increase enforcement of its employment, environmental, and other laws to ensure it complies with the USMCA. This includes improving labor standards, enhancing environmental protections, and ensuring fair trade practices. The lawyers with whom we work in Mexico are always telling me that the Mexican government grasps the importance of fostering a business environment that meets international standards. These reforms are not just about compliance; they are about creating a sustainable and fair business ecosystem that can attract and retain foreign investment.

Mexico Moving Forward

Mexico stands at a pivotal juncture, with both opportunities and challenges on the horizon. I have been optimistic (more or less) about Mexico's business future for more than 20 years, and I am increasingly optimistic under Sheinbaum's pragmatic and forward-thinking leadership.

Her blend of scientific expertise, political acumen, and commitment to social progress positions her to navigate Mexico's role in the global economy while prioritizing Mexico and its people. By fostering strong international partnerships, attracting foreign investment, and implementing practical policies focused on economic growth, social justice, and environmental sustainability, Sheinbaum has the potential to elevate Mexico's standing on the global stage and create a more prosperous and inclusive future for all Mexicans.

Businesses operating in or considering entering the Mexican market should remain vigilant and adaptable, closely monitoring Sheinbaum's policy developments and industry-specific implications. However, with open lines of communication, a willingness to collaborate, and a shared commitment to ethical and sustainable practices, the private sector can play a vital role in supporting Mexico's continued economic progress under Sheinbaum's leadership.

Later this week, I will do a post on China's business future. Please stay tuned.

To view the original article, click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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