By Connor Pfeiffer *
At the September 2022North Capital Forum in Mexico City, I was struck by the enthusiasm emanating from Mexican business leaders, government officials, and civil society leaders in their interactions with American counterparts. Opportunities to increase nearshoring and deepen economic integration were top of mind, with Mexican Foreign Minister Marcelo Ebrard urging attendees to use the Forum to help advance policies and partnerships that make those goals a reality. Hovering over these discussions, however, was a multitude of serious challenges in the U.S.-Mexico relationship that have only intensified in the past six months.
Despite the once-in-a-generation opportunity to compete for U.S. supply chains leaving China within the framework a modernized North American free trade agreement, Mexico has had mixed success. While companies are building new factories and some industrial parks are filling up, the investment climate remains plagued by uncertainty around government policies and growing security issues. Recent moves to weaken Mexico’s independent electoral agency and consolidate government control over the energy sector also do not inspire long-term confidence for potential investors. To avoid squandering this unique opportunity, Mexican leaders must take steps to address the country’s problems sooner rather than later. And the Biden Administration should recognize that these challenges have weakened the bilateral relationship, requiring a different approach to protect U.S. interests and make North American nearshoring a success story.
The enthusiasm in Mexico for the promise of nearshoring is not misplaced. Foreign direct investment (FDI) in Mexico increased by 12 percent in 2022 to US $35.3 billion, with nearly US $15 billion of that coming from the United States. Another positive sign was the sectors where FDI was most concentrated—manufacturing and transport. In a February 2023 feature, The Wall Street Journal described how many border states in Mexico are seeing an uptick in hiring by foreign companies and new manufacturing investments that will come to fruition over the next several years. Similarly, New York Times reporter Peter Goodman recently described how U.S. companies are seeking out Mexican manufacturers to fill orders normally made in China.
Opposite these positive developments, however, are decisions imposed by President Andrés Manuel López Obrador (AMLO) that undermine Mexico’s economic potential and threaten foreign investment. For instance, AMLO is working to reverse Mexico’s historic 2013 energy reforms, which opened the government-controlled energy sector to competition from private and foreign firms. If implemented, the 2021 electricity law could potentially raise Mexico already high electricity rates and disincentivize foreign investment in the sector. Additionally, it likely violates Mexico’s commitments under the U.S.-Mexico-Canada Agreement—one of several dispute settlement cases the United States and Canada have raised in response to AMLO’s actions.
AMLO has also become personally involved in deciding the fate of major investment projects, circumventing normal legal processes. One example: on February 20, AMLO announced that Tesla would not be allowed to build a new factory in Nuevo León. A week later, AMLO said the project would move forward after having direct discussions with Tesla CEO Elon Musk. This level of uncertainty and what Mary Anastasia O’Grady described as “arbitrary treatment of investors” undercuts efforts to encourage nearshoring, especially large projects that would bring significant gains for Mexican workers.
Additionally, the worsening security situation in Mexico creates heightened risk for potential nearshoring. In 2021, U.S. Northern Command estimated that 30–35 percent of Mexico’s territory fell under the effective control of organized criminal groups. Since then, violence has escalated, with waves of attacks by criminal groups that block roads and even threaten commercial air traffic in response to raids by the Mexican military. At times, this has directly affected U.S. trade—the U.S. Department of Agriculture had to temporarily suspend imports of Mexican avocados in February 2022 because of threats against U.S. inspectors.
Corruption also remains a pervasive issue that hurts the investment climate and undermines confidence in the rule of law in Mexico. The recent conviction of former public security minister Genaro García Luna in U.S. court was a positive step towards combating impunity, but the revelations during the trial about the nature of Mexican government corruption only accentuated how difficult it will be to make meaningful progress in this area.
Finally, recent events have done little to inspire confidence from potential investors about Mexico’s long-term political situation. At January’s North American Leaders’ Summit (NALS), President Biden, Prime Minister Trudeau, and AMLO proclaimed that “full, equal, and meaningful participation in our democracies” was part of “the North American DNA.” Just weeks later, AMLO’s allies in Mexico’s Congress pushed through legislation that severely undermined the country’s National Electoral Institute only a year before the next presidential election. The legislation could still face review by Mexico’s Supreme Court, but it raises fears that Mexico could lose some of the democratic gains in recent decades that have helped fuel the country’s economic growth.
Amid these problems, U.S. political and business leaders should recognize that attempting to silo economic issues apart from the rest of the bilateral relationship with Mexico is no longer tenable. Failing to address backsliding on economic reforms, a worsening security situation, and threats to the rule of law threatens the viability of the existing US $184.9 billion U.S. investment stock in Mexico, never mind future FDI. On the other hand, successful nearshoring in Mexico would be a strategic gain for U.S. economic security and add to the estimated 4.9 million U.S. jobs already supported by trade with Mexico. The Biden Administration must take a firm and vocal approach with its Mexican counterparts not only on violations of economic commitments, but also in these other areas where merited.
The challenges described here are significant and, in many cases, driven by Mexican government policies that have little prospect of changing before the next president takes office in October 2024. Until then, however, making even marginal progress in these areas could establish the foundation for a potentially revolutionary period of economic success in Mexico. Leaders in Mexico City and Washington must grasp this and have the difficult conversations necessary to move forward together.
* Connor Pfeiffer is executive director of the Forum for American Leadership and former national security advisor to a member of the U.S. House Committee on Appropriations and Permanent Select Committee on Intelligence. The views expressed in this article are the writer’s own. Twitter: @ConnorPfeiffer
