Mexico’s Risks: Internal Challenges and External Pressures in International Trade

Last week with Joshua Meltzer, we discussed the intricate dynamics of the United States-Mexico-Canada Agreement (USMCA) in our podcast, exploring the relevance for the U.S., Mexico, and Canada, and the importance of a unified, aligned trade approach toward China. While the USMCA fosters a shared framework for trade, each country faces distinct internal and external risks, with Mexico appearing to bear the brunt of many of these risks. Read more on the broader USMCA framework here.

Domestically, Mexico contends with risks from as judicial reforms and the dissolution of regulatory institutions, raising concerns over governance and compliance. On the external front, the pressure is mounting, particularly with President Trump’s threats to impose tariffs unless Mexico takes stronger measures to curb the flow of fentanyl into the United States. Within days of his return to office, Trump has taken a firm stance, declaring a national emergency at the southern border and designating Mexican cartels as foreign terrorist organizations. These actions underscore the tough approach Trump is willing to adopt toward Mexico, adding layers of complexity to Mexico’s position within the USMCA framework.

Internal Risks: Judicial Reform

On 11 September 2024, Mexico’s Senate passed a controversial judicial reform, sparking widespread opposition from lawyers and members of the judiciary. Protests escalated dramatically, with some demonstrators storming the Senate building. The reform was signed into law on September 15, just before Mexico’s Independence Day, as a final act by former President Andrés Manuel López Obrador (AMLO). The ruling party, MORENA, used its congressional majority to pass the reform, despite criticism that the process disregarded public consensus. In Episode 178 Dominic explores risks in Mexico.

This reform raises serious concerns about the erosion of judicial independence by proposing the election of judges and magistrates based on political criteria rather than merit. Such changes risk politicizing the judiciary, undermining the rule of law, judicial impartiality, and democratic principles.

The reform also violates key provisions of the USMCA. Annex 23 requires impartial labor courts, but a politicized judiciary would likely breach these commitments. Chapter 14 mandates independent courts for resolving investor disputes, and Chapter 27 emphasizes anti-corruption enforcement. The reform erodes confidence in Mexico’s judicial impartiality, potentially leading to costly arbitration, deterring foreign investment, and compromising the enforcement of anti-corruption measures. A judiciary controlled by political interests may fail to hold officials accountable, further violating USMCA standards and tarnishing Mexico’s reputation for transparency.

This judicial reform introduces significant legal uncertainty, jeopardizing investor confidence and Mexico’s compliance with its international trade obligations under the USMCA. It remains to be seen how the full implementation of these reforms will affect judicial independence and the broader implications for Mexico’s economic stability and international partnerships.

External Risks: The US vs. Mexico

President Trump, as part of his campaign pledge, emphasized ending illegal immigration and combating Mexican cartel organizations. His primary tool to achieve these objectives has been economic pressure on Mexico. One such measure includes a proposal to impose 25% tariffs on imports from Mexico and Canada, citing concerns about illegal immigration and the flow of fentanyl into the United States. Mexican President Claudia Sheinbaum has engaged in talks with Trump, asserting that threats will not address these issues and warning of retaliatory measures if tariffs are implemented.

This week, Howard Lutnick, President Donald Trump’s nominee to lead the Commerce Department, stated that Mexico and Canada could avoid tariffs by implementing stricter controls on fentanyl and immigration. Otherwise, the tariffs are expected to take effect on February 1st. Given the integrated supply chain between the three countries under the USMCA, manufactured goods cross borders multiple times. A 25% tariff at each crossing would drastically increase costs, and if Canada and Mexico retaliate with tariffs of their own, the cumulative effect could lead to skyrocketing prices borne by consumers. More on tariffs on Episode 200.

While Trump’s threats target both Mexico and Canada, his primary concerns, fentanyl and illegal immigration, are directed toward Mexico. This focus could create asymmetries in the upcoming 2026 USMCA review, as Trump’s administration is likely to prioritize these issues during renegotiations.

Meanwhile, Mexico has implemented its own tariff measures. On December 19, Mexico issued a presidential decree raising tariffs on textile imports to 15%-35% until April 2026. Additionally, it tightened restrictions under the IMMEX program to curb “border-skipping” practices, where goods bypass tariffs on Chinese imports. Although these measures primarily target Chinese goods, they also disrupt U.S. companies in the textile sector, forcing them to find alternative supply chain solutions. These actions highlight the complex dynamics of trade tensions and retaliatory policies shaping the North American trade landscape.

In this week’s episode of The International Risk Podcast, Dominic Bowen is joined by Juan Carlos Machorro to delve deeper into these issues. Together, they explore the origins and relevance of the USMCA, the upcoming 2026 Joint Review, and the potential impact of tariffs and asymmetrical pressures on regional trade dynamics. Don’t miss this insightful discussion on the risks and opportunities shaping Mexican trade and the importance of a unified approach. Tune in to stay informed on the future of trade and economic cooperation in North America!