Mexico's Legal Reforms and Their Implications for Foreign Investment

Mexico stands at a crossroads. For decades, it has been a linchpin of North American trade, leveraging its proximity to the United States, skilled labor force, and participation in the USMCA to attract foreign direct investment (FDI). Yet, the sweeping legal reforms enacted in 2024–2025 under the political agenda of former President Andrés Manuel López Obrador (AMLO) and continued under President Claudia Sheinbaum have introduced profound uncertainties. These reforms, which include the popular election of judges, the restructuring of the judiciary, and the elimination of independent regulatory agencies, have sparked a global debate about Mexico's regulatory stability and its implications for investor confidence.

The Judicial Overhaul: A Double-Edged Sword

The most contentious reform is the constitutional amendment of September 11, 2024, which replaced judicial appointments with popular elections for all judges, including the Supreme Court. This shift, framed as a tool to combat corruption, has instead raised alarms about politicization. Critics argue that the judiciary, once a bastion of technical expertise, is now vulnerable to manipulation by political actors, particularly the ruling Morena party. The creation of a Judicial Discipline Tribunal (JDT), composed of elected officials, further erodes checks and balances, as its decisions are final and unappealable No Checks on Power? The Effects of Mexico's Judicial Reform on Foreign Investment and USMCA^[1].

The International Bar Association and the Inter-American Commission on Human Rights have warned that these changes undermine judicial independence and due process Mexico's Controversial Judicial Reform Takes Effect: Assessing Its Impact^[2]. Morgan Stanley's downgrade of Mexico to "underweight" in 2024 underscores the market's skepticism, while Oxford Economics predicts a 12% drop in investment below its baseline forecast Judicial reform will hit investor confidence in Mexico^[3]. Yet, the government insists the reforms democratize justice and align with public demand for accountability.

Regulatory Erosion and Sectoral Vulnerabilities

Complementing the judicial reforms, Mexico has dismantled seven independent regulatory bodies, including the Federal Economic Competition Commission (COFECE) and the National Institute for Transparency. These agencies were critical for ensuring fair competition and transparency in sectors like energy, telecommunications, and antitrust enforcement. Their elimination has concentrated power in the executive branch, raising fears of favoritism and reduced oversight Mexico to eliminate 7 independent regulatory, and oversight agencies^[4].

The energy sector, in particular, faces heightened risks. The phasing out of the Energy Regulatory Commission and the Federal Telecommunications Institute has created uncertainty for investors in infrastructure and renewables. For example, COFECE's absorption into the Commerce Ministry threatens its historical independence, potentially politicizing antitrust enforcement. This risks violating USMCA obligations, which mandate non-discriminatory regulatory frameworks Mexico tweaks reform on scrapping regulatory bodies to avoid USMCA issues^[5].

FDI Trends: Contradictions and Context

The data on FDI is paradoxical. In the first half of 2024, new FDI plummeted to its lowest level since the 1990s, with USD264.4 million in Q2 2024 Mexico Records Historic $34.265 Billion FDI in Q2 2025, Up 10.2%^[6]. Morgan Stanley and Moody's cited the judicial reforms as a key factor, warning of long-term damage to nearshoring opportunities. Yet, by Q2 2025, FDI surged to a record USD34.265 billion, a 10.2% increase year-on-year Mexico Sets New Record for Foreign Investment Inflows in Q2 2025^[7]. This rebound reflects Mexico's enduring strategic advantages: its geographic proximity to the U.S., participation in global supply chains, and the "nearshoring" trend as companies diversify away from China.

The resilience of FDI suggests that Mexico's structural strengths-such as its skilled workforce and trade agreements-remain compelling. However, the volatility highlights the fragility of investor confidence. For instance, reinvestment of earnings accounted for 84.4% of Q2 2025 FDI, indicating that firms are prioritizing existing operations over new projects Mexico's 2024 Article IV Consultation and Review Under the Flexible Credit Line (FCL) Arrangement^[8]. This cautious approach underscores the lingering uncertainty.

Investor Confidence Metrics and Global Reactions

Regulatory stability indices, though limited by data gaps, paint a mixed picture. The World Bank's Worldwide Governance Indicators (WGI) do not yet reflect 2024 reforms, but the IMF has explicitly warned that the changes create "important uncertainties" for contract enforcement and the rule of law Mexico: OECD Economic Outlook, Volume 2024 Issue 2^[9]. The U.S. and Canada have also raised concerns about USMCA compliance, with Canada's ambassador to Mexico calling the reforms "a direct threat to the treaty's integrity" Mexico Economic Outlook. June 2024 | BBVA Research^[10].

Meanwhile, the EIU and WEF note that Mexico's economic growth projections remain modest, at 1.2–2.2% annually through 2026 Shienbaum says historic 1Q:25 FDI of $21.4bn shows investor confidence in Mexico^[11]. This suggests that while Mexico's macroeconomic institutions are robust, its long-term growth is constrained by governance risks.

The Path Forward: Mitigating Risks in a Shifting Landscape

For foreign investors, the key lies in risk mitigation. Incorporating arbitration clauses into contracts, as recommended by Mayer Brown, allows firms to bypass Mexico's domestic judiciary Impact of Mexico's Judicial Reform on Foreign Investment^[12]. Similarly, thorough due diligence on regulatory changes-particularly in energy and infrastructure-is essential.

The Mexican government, for its part, must balance its anti-corruption agenda with the need for institutional credibility. President Sheinbaum's public commitment to judicial independence is a positive signal, but actions will determine whether Mexico can retain its status as a nearshoring hub.

Conclusion

Mexico's legal reforms exemplify the delicate balance between democratic renewal and institutional stability. While the government's efforts to combat corruption are laudable, the unintended consequences-politicized courts, eroded regulatory oversight, and investor hesitancy-pose significant risks. For emerging markets, this case underscores the importance of aligning legal reforms with long-term economic goals. Investors, in turn, must navigate this duality: leveraging Mexico's strategic advantages while hedging against its growing uncertainties.