Why Mexico’s Looming Judiciary Overhaul Spooks U.S. Business?

Date: September 08, 2024

Author: Santiago Pérez

Source: The Wall Street Journal

American companies are delaying investment plans in Mexico as they review how a shake-up of the country’s judicial system would affect doing business with the U.S.’s largest trading partner.

The judiciary overhaul would replace 1,700 federal judges and magistrates, including Supreme Court justices, through nationwide elections and would remove strict qualifications for becoming a judge. The plan—a constitutional amendment expected to pass in the coming days—has worried foreign investors who fear judges will become beholden to constituents or political considerations instead of the law.

The overhaul is among the acts President Andrés Manuel López Obrador is trying to push through in his final month in office, taking advantage of large congressional majorities that were won in June and became effective Sept. 1. During his six years in office, the nationalist was antagonistic to foreign companies, pulling the plug on construction of a major airport, forcing international businesses to sell or relocate plants and trying to restore state control of such industries as energy.

Company representatives and advisers estimate that foreign firms are holding back some $35 billion in investment projects in sectors ranging from information technology and car manufacturing to natural-gas pipelines and industrial infrastructure because of uncertainty related to the overhaul and the U.S. election. That figure almost equals what Mexico attracts in foreign-direct investment in an average year. Recently, most of it has been by companies reinvesting profits.

At stake is another $18 billion in private investment that Mexico needs to cover rising electricity demand for industrial use. The Supreme Court blocked policy initiatives that could have disrupted Mexico’s electricity sector in violation of the United States-Mexico-Canada Agreement, but some investors fear a new, elected court would approve them.

Costly international arbitration over investment rights is likely to increase as companies seek to avoid Mexican courts. Corporate lending in Mexico would also be affected because of the uncertainty, according to bankers. The measures also risk undermining talks to review the USMCA in 2026, according to Global Companies in Mexico, a group of top executives from 60 or so companies operating in the country. Included are such U.S. giants as AT&T, FedEx, 3M, PepsiCo, Honeywell International, Cargill, Visa, MetLife and General Motors.

Earl Anthony Wayne, a former U.S. ambassador to Mexico, said American executives have told him they are pausing investments in Mexico as they wait to see how the judicial-overhaul bid plays out. He said Mexico will find it difficult to attract so-called nearshoring investment to compete with China, create jobs and fight poverty, should the overhaul pass as expected. “Mexico is going to get a lot of negative attention,” said Wayne, who is a fellow at the Wilson Center, a U.S. think tank.

The replacement of the judiciary would also disrupt labor tribunals under the USMCA and violate treaty provisions that call for independent magistrates, according to the American Chamber of Commerce of Mexico. Ken Salazar, the U.S. ambassador to Mexico, has warned that the judicial overhaul would damage the country’s democracy and imperil trade with the U.S. “If it’s not done correctly, it could really damage the relationship,” Salazar said Tuesday of the overhaul.

Mexican President-elect Claudia Sheinbaum has rushed to reassure investors and diplomats that the overhaul wouldn’t be bad for business, but has said it isn’t the business of other countries to discuss how Mexico chooses its judges. “It won’t affect our trade relations, nor private and foreign investments,” she recently wrote on X.

In the U.S., federal judges are nominated by the president, confirmed by the Senate and serve for life. Many states hold elections for judges, while in others, governors select them, sometimes with the help of commissions. Incoming members of Sheinbaum’s cabinet have pointed to the widespread election of judges in the U.S. “Of all of Mexico’s main partners, the U.S. is the country that selects the most judges” through elections, said Marcelo Ebrard, who was recently appointed by Sheinbaum to serve as economy minister. But López Obrador on Friday raised fresh concern with comments suggesting that the overhaul was designed to end an era of the Mexican court system’s protection of foreign companies. “Are they going to continue defending foreign companies that come to loot, rob, and affect the economy of Mexicans?” he asked.

The judiciary plans have rattled Mexico. Judges and court workers have gone on strike in protest of the legislation. Demonstrators blocked access to the Congress building this past week. Lawmakers moved to a sports arena, where members of the lower house approved the bill in the early hours of Wednesday. Mexico’s Senate is expected to vote on the bill in the coming days. Current judges have cited the effect on the economy in opposing the overhaul.

Norma Piña, Mexico’s Supreme Court chief justice, told The Wall Street Journal that the change would violate Mexico’s free-trade agreements. “A state can’t invoke its internal law as an excuse for failing to comply with international obligations,” she said.

Juan Luis González Alcántara, a Mexican Supreme Court justice, told the Journal: “It’s difficult to imagine a country that attracts foreign investment or encourages domestic investment when the minimum conditions of legal certainty don’t exist.”

There are other factors causing foreign companies to be concerned about working in Mexico. A victory in the presidential election by Donald Trump, who wants to impose more tariffs on imports, would complicate the trade relationship between the U.S., Mexico and Canada. “We expect investors to press snooze with regards to major investments in the country until at least October or November,” Morgan Stanley said in a recent note on Mexico.

Polls commissioned by the government show that a majority of Mexicans see the judiciary as corrupt and that judges should be elected.

Reflecting the uncertainty over Mexico’s economy, the peso has lost 15% of its value against the U.S. dollar since Sheinbaum, a protégé of López Obrador, won the presidential election in a landslide. The currency is likely to experience bumpy months ahead because of the judicial-overhaul outlook and the U.S. election, said Alejo Czerwonko, an emerging-markets executive at UBS Global Wealth Management. Investors, Piña said, would likely be put off by a sharp drop in the experience and technical abilities of the new judges, who would have to decide complex business cases. The overhaul would scrap the rigorous process through which judges are now chosen.

The proposed overhaul calls for the creation of a new tribunal in charge of judicial disciplinary proceedings, composed of five members elected by popular vote. The disciplinary process risks becoming “a political instrument that could be used against judges who issue decisions contrary to the government’s interests,” the New York City Bar Association said in a recent statement.

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