Everything Will Change! But Nothing Changes?

Many of our clients are eager to understand the potential impact of the 18 constitutional reforms approved during the twilight of President López Obrador's administration on Mexico's business and investment environment. These reforms, whether we agree with them or not, have been democratically passed by an absolute majority in both houses of Congress under a party breakdown that reflects the will of most Mexicans. As Churchill rightly said, democracy is not perfect; it is a responsibility that all citizens must assume. In this case, the commitment has led us all to ”responsibly” revisit the past 30 years.

Those of us who lived during the 1970s and 1980s have a unique perspective on how the country ”worked” in terms of the relationship between politics and the economy. This historical context provides us with insights and a sense of continuity. Today, when asked about the changes and their potential implications, we often respond that, in the grand scheme of things, ”nothing will happen,” which is playfully reminiscent of the famous line in Tomasi di Lampedusa's “Gatopardo:” ”Change everything so that nothing changes.” 

We start from the principle that reality ultimately creates a status quo, the current state of things that provides a measure of certainty and which, over time, sustains common sense and adaptability in the daily life of companies and individuals. Being pragmatic allows you to mitigate the impact of any changes you may encounter. The unknown now is that this premise does not take into consideration abrupt transformations based on ideology, which could happen but which would imply much more severe situations that are not the subject of this reflection.

The phenomenon of nearshoring, so widely discussed by laypeople and ignoramuses, is nothing new. It is simply the phenomenon of relocation that occurs if companies find profitable conditions for projects that are good for business in the short, medium, and long term. In the case of Mexico, nearshoring is absolutely linked to proximity to the world's largest national economy and leading global trader, the United States, not only in terms of geography but also based on personal, family, business, and institutional factors. 

Much has been written about the Chinese wave that threatens to reach Mexico, but in reality, so far, it has been minimal. According to data from the National Institute of Geography and Statistics (INEGI), only 0.8% of foreign investments come from that country. 

It should also be noted that companies have already considered structural changes but have yet to see and appraise their implementation. Suppose we break down the foreign investment data from the Ministry of Economy. In that case, there is very little new investment, and most of it is reinvestment of capital for companies that have visualized their presence in Mexico for the long term. I do not mean to say that investments are not arriving; those that are landing are those requested by the OEMs so that some of their smaller suppliers can establish themselves in Mexico because, unfortunately, these large companies have great difficulty in finding Mexican suppliers. Again, data from the Mexican Institute for Competitiveness (IMCO) reveals that less than 15% of manufacturing inputs are of national origin. We still are a maquiladora country, not very innovative, and totally dependent on the relative cost of labor, which does not need to be dollarized.

Why do we say that this trend will continue? The crux is certainty and confidence. Once confidence is lost, it will take a great deal of work to rebuild a reputation as a serious country that deserves to be among the 15 world economic powers.

Companies need to know the rules of the game, and based on them, they calculate the risks and make or not make investments in other countries. Today, the rules of the game are changing in Mexico, and companies are pausing and waiting to know how this new menu will be eaten. That does not mean that they will stop playing the game. Many companies continue to invest in Cuba, Venezuela, and even the Russian Federation despite the restrictions due to the war with Ukraine. Companies decide to invest in Central America, Africa, or in countries that rank lower in the competitiveness index of the World Economic Forum because they know and understand the instruction manual on how to play. 

This certainty can be summarized in three situations: 

The first is to have guaranteed conditions that ensure the mobility of capital. That is, if I put US$1 into a country, I should be able to take that dollar out. In this sense, Mexico has signed several investment protection agreements with many countries that are part of the Basel agreements, and it has also adopted the OECD codes of conduct. All these international treaties have constitutional status, so capital mobility should be assured in principle.

The second is that under market conditions and respect for the rule of law, there is a positive return on investment in the short, medium, or long term. No one will invest in a place where money is lost. For this reason, successful foreign companies operating in our country adhere to a very long-term vision and essentially rely on their historical presence. Other newcomers, such as some Asian companies, believe that the "cheap, cheap" philosophy and quick win would be possible in a country without rules, and that is why many of these investments have not been and will not be consolidated in Mexico.

The third condition for ensuring investment attractiveness is a commitment to uphold the rule of law, invest in infrastructure, and provide access to labor. These factors, along with public safety and quality of life, are crucial for maintaining and attracting investment. In this context, the infrastructure program presented by the president-elect holds promise for the future, offering a more strategic approach than the ad hoc measures of the outgoing administration.

At Spyral, we are confident that Mexico will continue to be attractive as a destination for domestic and foreign investment. For sure, we will see a waiting period of a few months that may slow down the pace of investments. We will have to see how the transcendental changes that were forged in September 2024 will be implemented through statutory law, to which, like it or not, we will have to adapt. We will also have to wait for the results of the presidential elections in the United States, which, whoever the winner is, will also imply essential changes in the way the bilateral relationship is conducted and how the rules of the game get recalibrated. 2026, and the review of the USMCA, is just around the corner.

We wish Mexico’s new administration, particularly the Ministry of Economy, every success in explaining the benefits of the reforms. Above all, we want to continue being a country that can be trusted and counted on, an accomplishment that has benefited us all in Mexico a great deal over the years.