Mexico's chaos is disrupting North American free trade

A specter is haunting Mexico’s investment climate — the specter of regulatory and tax uncertainty. Mexico’s structural and geographic advantages are well-known and have generated considerable investment interest for decades. The renegotiation of the North American Free Trade Agreement to the United States-Mexico-Canada Agreement, combined with the drive to rewire supply chains and push for economic security, has witnessed a boom in foreign direct investment in Mexico. However, policy choices by the Sheinbaum government risk undermining the country’s investment proposition and stymieing economic growth. And as tariffs alter trading patterns elsewhere and Mexico solidifies its role as the United States’ top overall trade partner, investment uncertainty will have cross-border spillover effects that impact North American supply chains as well as related efforts to reduce geopolitical disruptions and vulnerabilities to China’s coercion. Following an explosion of social and infrastructure spending in the final years of her predecessor’s administration, the Mexican government is under pressure to reduce fiscal deficits and shore up the country’s finances. In recent years, this has manifested in an aggressive campaign to raise fiscal revenues by taxing companies, sometimes claiming retroactive fees on cases settled under previous administrations. The Mexican government has pursued claims against dozens of large companies for back taxes and other penalties. The uncertainty unleashed by Mexico City’s policy choices cuts directly against rule of law and stability. The results are visible in anemic economic growth projections for 2026. Much of Mexico’s trade with the U.S. remains tariff free under the USMCA; nevertheless, the country’s GDP growth estimate for this year is a paltry 0.6 to 1.5 percent. The binding constraint is investment. Total investment in Mexico, defined as the sum of private, public and foreign investment, declined by roughly 10 percent in 2025. Mexico’s policies in the fiscal space set a dangerous precedent for investment in North America. They also ensure that the structural and geographic advantages the country enjoys fail to materialize into durable economic gains. When the rules applied today do not clearly apply to tomorrow, and when enforcement fails to respect basic tenets of transparency, predictability and non-retroactivity, firms leave capital on the sidelines to hedge against contingencies. In some cases, major changes have been introduced with little notice and no meaningful implementation period, creating immediate operational disruptions across North American supply chains. To compound these matters, Mexico’s judicial overhaul, under which every justice in the country is popularly elected, with an initial round of elections in 2025 and a second in 2027, has consolidated the ruling Morena Party’s control over all branches of Mexico’s government. Companies must pursue remediation in a court system increasingly favoring a Mexican state pursuing occasionally predatory policies. Aggressive audits and the denial of refund requests serve to intimidate companies and send the message that payment is the path of least resistance. The result is that expansion plans are put on hold, and profits are immobilized to remain in reserve as a hedge against enforcement risk. Not even Mexico’s vaunted special economic zones have been spared. Long recognized as responsible for driving much of the country’s export-oriented growth and increasing its competitiveness, companies report the Mexican government ignoring tax deductions and exemptions recognized under previous Mexican administrations and even engaging in double taxation against some companies operating in these manufacturing-oriented zones. As my organization noted in a recent analysis: “Industry submissions to the U.S. Trade Representative illustrate this dynamic, with firms reporting retroactive reinterpretations of value-added tax rules, in some instances extending back nearly a decade.” To complicate matters, retroactivity has been supported by Mexican justices before. Mexico’s policy choices are inevitably a North America problem. During the upcoming USMCA review, Mexico’s investment climate and the impacts on U.S. and Canadian companies will be under intense scrutiny. Indeed, in recent testimony before the U.S. Congress, United States Trade Representative Jamieson Greer referenced investment uncertainty casting a shadow over the future of the USMCA. Mexico’s policy choices, by extension, risk tainting broader perceptions of North America as an investment destination. Since much of this pain is self-inflicted, the solutions are well known. To be sure, tax enforcement has been a challenge for multiple Mexican administrations, but the fiscal shortfall cannot and should not come from squeezing companies operating in North America under established rules and prior agreements reached with previous governments. Instead, the Morena Party should work to reduce informality in Mexico’s economy and enforce compliance against wealthy individuals who have evaded payment for years — some of whom are even major figures within the party itself. Uncertain audits, aggressive tax claims and shifting rules may seem like quick fixes to wring resources from companies, but they will not solve Morena’s fiscal woes and will likely only damage Mexico’s long-term reputation. Only a regulatory climate capable of generating conditions for further investment can help Mexico reach its full potential. Ryan C. Berg, Ph.D. is director of the Americas Program at the Center for Strategic & International Studies.