Welcome to 35 West. I'm Ryan Berg, Director of the Americas Program at CSIS and host of the 35 West podcast. Welcome to 35 West. I'm Ryan Berg, the Director of the Americas Program at CSIS and co-host of the 35 West. podcast. Mexico has experienced record levels of foreign direct investment in recent years, as the drive for supply chain security has created a boom in interest in Mexico's manufacturing sector. Yet, when measured overall, investment is down in Mexico. Uncertainty around the country's fiscal governance and tax regulation enforcement. These two issues have emerged as driving investment uncertainties and slowing economic growth in Mexico. In conjunction with the 2026 United States-Mexico-Canada Agreement Mandatory Review, there are myriad questions about the future of Mexico's economy and its position as the United States' number one overall trading partner. To help us unpack how these regulatory issues and barriers to investment intersect with the USMCA review process and the broader implications for Mexico's democracy, we're pleased to be joined by Denise Dresser. Denise is a professor of political science at ITAM in Mexico and a non-resident senior associate with the Americas program at CSIS. Thank you for joining us today, Denise, and welcome to 35 West. It's a pleasure to be here. Thank you for the invitation. Mexico's tax system has shown itself to be unpredictable, often imposing retroactive taxes and sometimes double taxation on companies operating in the country, with deleterious impacts on supply chains throughout North America. Compounding these issues is the national judicial overhaul that has emptied the bench of longstanding expertise on business and financial matters. As a result of these challenges, investors face heightened uncertainty contributing to the stalling of Mexican economic growth and a constraint on companies operating in the country. To set the stage for our audience, Denise, can you just give us a sense of what's at stake here? Can you explain for our audience the tax issues at play? Several weeks ago, a very well-known Mexican economist named Gerardo Esquivel wrote a piece called Stop Scaring Away Investment. it. The argument was that the Mexican government, both the past administration of Andres Manuel López Obrador and the current presidency of Claudia Sheinbaum, under the political and economic rehaul known as the fourth transformation, have set forth a series of measures that run counter to certainty. You mentioned the word uncertainty, and I think that that illustrates the times. And there's nothing that investors fear more than uncertainty, changing rules of the game. And if L'Observador were here or Claudia Sheinbaum, they would say that this was necessary in order to create a more inclusive economy. But you've seen numerous modifications to the tax structure for example, that it's one of the issues that is heightened concern among those who are looking at Mexico and comparing it to other countries where they might want to invest. As you said, Mexico has the great advantage of being part of USMCA, but it's almost as if the government has been acting against its own interests. We've known historically the Mexican government has had a hard time raising taxes, collecting taxes. Mexico has been running for years a fiscal deficit and is one of the countries that collects the least amount of taxes related to GDP. So in order to try and correct this issue, Claudia Sheinbaum and López Obrador started to impose a much more aggressive tax authority that went after private businesses, oftentimes motivated by what seemed political imperatives, not necessarily fiscal or economic ones, including the now famous case of Ricardo Salinas Pliego, one of Mexico's main oligarchs, who was finally forced to pay a huge tax bill that he had accrued over the years. But it's not only him. The Mexican government is pursuing, as I said, an aggressive agenda of tax collection without necessarily setting rules that are consistent. And oftentimes those rules are politicized. So if you are a small or medium-sized business or even a foreign business, you never know what's coming next down the pipeline. There have been rumors of retroactivity, for example, posed by one of the ministers of the Supreme Court who said that the Supreme Court should be looking into past tax cases that were already resolved. And there's a sense that the tax authority, the SAT, is oftentimes acting beyond the formal rules or the formal authority that it has, and that this is due to the politicization of the institution. So this is creating a climate wherein investors are very wary of what the Mexican government is going to do next. And I would say that the tax issue is just one of them, although it's perhaps one of the main concerns now, given that the government is running a high fiscal deficit, which is, I think it's 4.8% of GDP. And this is something that Claudia Sheinbaum inherited from Lopez Obrador, who went on a spending spree in the last year of his administration and also increased Mexico's debt by a huge amount. So investors are looking at this and they're looking at it with great concern. Denise, why should North American stakeholders care about some of Mexico's domestic challenges spilling over into regional economic stability? Well, the problem is the question that is now floating around, given the discretionality in Mexican economic policy, is that it goes in tandem with the uncertainty of the USMCA review. Trump has said, well, maybe we don't need the treaty. After all, you've seen a Canadian prime minister who is talking about the need for middle powers to diversify, to not necessarily view the US as a reliable partner. And for, what is it now, 30 years, the USMCA was considered a regional mainstay of growth in the region and had created, as you know, a very interdependent, largely for Mexico and the U.S., set of supply chains and a manufacturing base that was internationally competitive Now given the review it unclear what is going to happen And Mexico sadly reaches the review with self wounds Some of them have to do with concrete policy decisions that were undertaken by Lopez Obrador and then others that were made by Claudia Sheinbaum that have to do with going against specific commitments contained in the treaty. López Obrador made Pemex and the Federal Electricity Commission once again, again, dominant players in the energy field going against competition in that sector. He eliminated autonomous regulatory bodies in competition and in telecoms. And Claudia Sheinbaum pushed forward a very contentious judicial reform, wherein all ministers of the Supreme Court and half of federal judges were elected by the popular vote, An election that was marred by cheat sheets and what were viewed as fraudulent practices on the part of the ruling party that have now led to what is a captured judiciary. And that leads investors to wonder just how safe their investments are going to be. And if they have to litigate against the Mexican government for whatever reason, what kind of trial can they expect when the playing field is tilted towards the administration itself? And this combined with Donald Trump's use of tariffs as a weapon to obtain concessions on security, on immigration, and on other issues means that there are real question marks as to whether North America will survive as a vision, as an integrated economic region, as a competitive whole, given these trends that we're seeing in Mexico, in Canada, and in the United States. Thanks very much, Denise. Let's talk about Mexico's export-oriented manufacturing sector, and in particular, the acronym IMEX, which is an acronym that stands for Mexico's Special Economic Zones, meant to promote its booming export-oriented manufacturing sector. IMEX essentially covers about 15% of Mexico's formal manufacturing workforce and allows firms to import parts without paying value-added tax up front, as long as the final product is exported outside of Mexico. Yet some companies report excessive audits, denial of intercompany deductions and retroactive penalties from the Mexican tax authorities targeting some of the companies operating in these zones. So first, can you start by telling us what is the significance of EMEX and what can it tell us about broader issues that companies are facing in Mexico? Well, this goes back to what I stated initially, that sometimes it becomes hard to understand exactly what the Mexican government wants to achieve, because as you've seen over the past several months, Claudia Sheinbaum has held a series of meetings calling for investors to view Mexico as an interesting place. But at the same time, you see what is going on with Emix and the discretionary, arbitrary moves made by tax authorities against companies. So there seems to be a major contradiction at heart playing here. And that's the contradiction that is leading investors to be, as I said, extremely wary. And many of them are thinking, well, let's continue to stay in Mexico, because if you look at what's happening elsewhere, Mexico has been able to evade the huge tariff impositions placed on other countries. And I'm going to speak in Spanish here. So in other words, things have gone badly for us, but they're worse in other places. Comparatively speaking, Mexico has been able to elude the wrath of the Trump administration. And that's why Sheinbaum is oftentimes called the Trump whisperer, because she's been able to hold off tariff imposition and maintain these exceptions for Mexico. It's unclear how much of that will remain after the USMCA review. And what we are seeing is behind Claudia Sheinbaum's ability to keep Trump at bay, she is making almost daily concessions on security issues that have to do with capturing drug kingpings, extraditing Mexican criminals to the US without even due process, and perhaps accepting joint military operations in the future. And I think this is key for the administration, the maintenance of the USMCA, the maintenance of EMEX, even though you see an administration that is often acting at odds to its stated objectives. Denise, one more question about EMEX and some of these fiscal issues and tax issues. Can you just talk a bit about how some of the lack of transparency and the perceived lack of due process in fiscal enforcement is eroding Mexico's fiscal governance and deterring investment, long-term investment and capital commitments from companies that are operating in Mexico. I'm glad you've focused on the issue of transparency because it is one of the criticisms that is leveled constantly against the shame bomb administration. And this goes back to López Obrador taking a series of measures that I think led to greater opacity and greater discretionality in policymaking, including the destruction of the National Transparency Institute, and now leading to a situation where it's hard to trust government data. We used to have semi-autonomous institutions within the administration that were capable of contrasting what came out of the government with data that had been obtained elsewhere, or that at least could be verified. And now it's very hard to do so. In the morning press conference, the Sheinbaum administration uses numbers, all kinds of numbers, to argue that GDP growth is great, that investment is flowing into Mexico, that things are fine. When you look, for example, at the fact that GDP growth in 2025 was only 0.7% and that it's hard to obtain verification for what is happening in terms of social spending, tax breaks for big companies, whereas you see the guillotine being used over companies that don't comply. So fiscal policy is also being used as a political weapon against investors and companies that don't necessarily kowtow to the national palace. And this is bad news because one of the things that the USMCA brought to Mexico was a series of conditions in order to make government data and public policy more transparent and much more aligned with American and Canadian imperatives We see that being eroded in multiple spheres, not only with the tax authorities, but in government data that has to do with public investment, that has to do with spending on social policy, that has to do with what is being siphoned off into Bemex, the state oil company. And this is where Mexico came from in the 1980s, opacity and discretionality and concentration of power in hands of the executive. The USMCA was negotiated and signed to avoid those swings in policymaking. And under the past two governments, we see those swings re-emerging and therein the doubts that are emerging among investors and also link this into organized crime. The bad news coming out of Mexico over the past two weeks was the disappearance of a series of miners from, I think it's an American mining company, and now the bodies of several of them have been found. So you see organized crime seeping into companies that are not necessarily Mexican, but that have been created in the framework of the USMCA now becoming victims of crime and extortion. Thank you very much, Denise. I want to switch gears here just a little bit to talk about the fallout from the judicial reform, because it's very important to mention that this is the new environment in which companies that may have a dispute with the Mexican government will be pursuing their claims. And I'll just note for listeners that Denise was part of an excellent panel we had last year on this topic with lots of additional analysis. But this judicial reform was enacted in late 2024 and is now in full implementation in Mexico following the June 2025 elections of thousands of judges and even Supreme Court justices. Obviously, a historic shift to popular election of the entire judiciary. Can you talk a little bit, Denise, about how Mexico's judicial overhaul is affecting predictability and legal outcomes for commercial disputes? Do we have examples at this stage of cases that show that things have become less predictable in the judiciary in some of these commercial disputes? Or is it simply too soon after the implementation of the judicial reform? The Sheyman administration was warned repeatedly to not carry out this reform or to dilute it. She inherited the mandate from Lopez Obrador and then pursued it aggressively. And we saw what was a very disputed election in terms of its legality, its transparency, and so on. So now we have a Supreme Court that is filled with Morena loyalists, one of whom, as I stated earlier, has suggested that the law be applied retroactively. And although there are no cases that have reached the news yet in terms of how they're being processed within the judicial system, we'll probably start to see them soon. Remember that we're probably not going to see the full effects of this until the other half of the remaining federal judges are elected, and that's not going to happen until 2027. So the fact that you have still a half of the federal judiciary operating under professional judges that reached their post by a competition that had to take a series of exams that had to ascend the ranks of the judicial bureaucracy. From what I know of not necessarily commercial disputes, but other disputes, the newcomers are still acting within the old framework and being guided through what is new terrain for them. Because you now have a slew of judges whose only requirement to arrive there was to have a B average in college and five letters of recommendation from their neighbors. There were minimalist requirements, plus a series of cheat sheets that the governing party distributed to assure that the people that it wanted ended up in the judiciary. Until now, there have been no major scandalous cases involving American or Canadian or other foreign companies yet. But that's because you still have some guardrails within that judiciary and you won't see the full effects. I'd say until after 2027. Denise, do you have any predictions as to how this is going to play out in the USMCA review? Both Canada and the United States have expressed a lot of reservations about Mexico's judicial overhaul. It's likely to come up as a big issue in the review process. What can be done? What is likely to be the position of both the United States and Canada on Mexico's judicial overhaul? Well, Prime Minister Carney came to Mexico several months ago, And at that point, I think there was still a sense that Mexico and Canada would be able to hammer out a united front vis-a-vis the United States. And it made sense to do so because that would lead to less divide and conquer and the possibility of negotiating from a greater position of strength. And this is just my analysis from afar and from also delving into the Canadian position and Carney's speech at Davos. My sense is that the Mexico-Canada union vis-a-vis Trump has not fully materialized and that Carney realized that Claudia Sheinbaum, despite her efforts to reach out to Canada, is operating from a position of enormous vulnerability because of the self-inflicted wounds I mentioned and also because security is a main concern for Donald Trump. It's not just trade. He's not going to negotiate trade as a separate basket. He's going to use insecurity, crime, cartel activity in Mexico to extract commercial concessions that probably Canada would not want to make. And Canada doesn't want to be in the mix of cartel activity, deorganized crime and so on, because they already saw what happened to them when terrorists were initially imposed, that Donald Trump did not make a distinction and Canada was suddenly put in the same frame as Mexico, even though there is no cartel activity in Canada and the border is not a porous border through which crimes and drugs flow through So I think that the Canada So romance was short sadly in terms of a strategic position from which to negotiate with the U And if I had to make a prediction and I may be completely wrong and if I'm wrong, I'm happy to invite our listeners for a tequila in Mexico City. I see things playing out more towards the emergence of bilateral treaties, the U.S. and Canada, and then the U.S. and Mexico, which would essentially mean the end of North America as a strategic vision that has guided commercial interactions over the past 30 years. We're going to have to have you back on the podcast or at an event, Denise, to unpack that idea because that would certainly be a terremoto, an earthquake for the region. Let's shift forward and talk about stabilizing the tax administration and some of these judicial reforms. As Mexico looks ahead, improving investor confidence in fiscal governance, rule of law, tax certainty in the judiciary will be central questions about Mexico's economic growth and whether the country can grow more consistently. As we wrap up, Denise, what targeted measures do you think Mexico could pursue post-judicial reform to restore some of that confidence in investment? I think there have to be clear signals sent out about how regulation is going to proceed, because Mexico essentially eliminated the Competition Commission, incorporated into the Ministry of the Economy. It's not clear what's going to happen in telecoms regulation or how fiscal policy is going to proceed without more tax revenue. The tax authority has been squeezing left and right in order to address this fiscal deficit in a context of very little growth. And this discretionality is playing out very poorly. I think in each one of these areas, Schoenbaum is going to have to make a concerted effort to assure clarity, consistency, and the end of discretionality, and provide greater transparency in terms of what the government is doing. And also avoid these conflicting messages that appear time and again. One day it's we welcome investment and then the next day it's we're not a colony. We are not going to be subjected to extraction by anybody. We're setting the rules. And I think these two contradictory narratives that are coming out of the National Palace have contributed to the situation that Mexico is currently in, which is not good for the country. And many of us have been saying, instead of going after foreign companies and small and medium-sized companies, why don't you actually tax the rich? Because if you look at reports over concentration of wealth and inequality in Mexico, yes, the Mexican government got some money out of oligarch Ricardo Salinas Pliego. But the big companies that accompany Claudia Sheinbaum acquiesce to her demands, stand by her, the CEOs in every photograph that is taken, saying that investment is finally going to flow into government-promoted infrastructure projects. those companies are still getting tax breaks and those companies are still benefiting from the discretionality emanating from the National Palace. And also, if you're an investor and the Mexican government is saying you're going to be a minority investor because the state is going to be determining or the key player, the majority investor in these ambitious infrastructure projects. I think there's a huge issue of distrust precisely because we've seen how investment has played out in the major infrastructure works of the López Obrador administration, where contracts were doled out in a discretionary fashion, crony capitalism prevailed. People who were close to the administration or to ex-presidents López Obrador's sons benefited and the lack of clarity in how massive infrastructure projects are handled and the fact that the military is a key player in terms of determining contracts, I think creates enormous unease among investors in Mexico and abroad as well. Denise, this has been a very comprehensive look at some of these issues. As we close up our podcast, is there anything that we haven't discussed that you think is essential to understanding regulatory and tax uncertainty as well as Mexico's judicial overhaul? I hope that the Sheinbaum administration is paying attention to what experts are telling her. For the first time in seven years, she met with independent economists probably worried about the lack of growth in the Mexican economy. And for example, there was news several days ago that an effort to draw investment to Chiapas into these special zones that she has created, providing tax breaks and incentives to invest in places like Chiapas, there were no takers. And I hope she learns the lesson from the fact that nobody wanted to invest even under the positive or more positive conditions that the government was offering. And I think this stems from lack of trust, lack of certainty, and simply looking at what has happened over the past seven years. A government that breaks its word, a government that changes the rules of the game as the game is taking place, cannot expect investment to flow into the country. And even more so now that the USMCA is under review, investment has flowed in because of the disparity in tariffs and Mexico being the place that has suffered the least. But that could change over time. And those are not the conditions that you want for a sustainable future in terms of investment in Mexico's capacity to compete with other markets. Denise Dresser, Professor of Political Science at ITAM in Mexico and non-resident senior associate with the Americas Program at CSIS. Thank you so much for joining us today on 35 West. Thanks for the invitation. And if I lose the bet, we'll plan a party. We're not great at rule of law, certainty, good conditions for investment, but we do great parties. Thanks very much, Denise. For you, thank you for joining. Stay tuned for the next episode of 35 West.
