Mexico’s judicial overhaul and potential impacts in foreign investment flows.

BY CARLOS LOBO AND
IVAN SERRALDE

On September 11, 2024, the congress of México approved a constitutional amendment significantly modifying the structure and composition of the Mexican judicial system, prompting both national and international scrutiny. The judicial reform, often described as controversial, has been portrayed by some as a tentative by the ruling party to interfere with the judicial system, potentially at the expense of judicial independence and impartiality. This article explores the implications of this reform from the perspective of foreign investors, evaluating the risks that may arise.

REFORM IN A NUTSHELL

The reform encompasses various aspects that address the integration of the Federal Judiciary (Poder Judicial de la Federación) and modifications to existing bodies. However, the core of the reform consists of three significant changes:

Modification in the Election of Judges: Except for justices of the Supreme Court which follow a separate process, currently, judges are appointed by the Judiciary Council (Consejo de la Judicatura) based on a “judicial career” criteria. This criteria consists of a qualifying exam, which candidates can only apply for if they possess a certain number of years of experience in the judiciary. Under the new reform, judges will be elected through direct popular vote without the “judicial career” requirement. This shift creates a significant tension between the traditional “judicial career” system and a new election-based system. As a result of the reform, all judges and justices, regardless of their rank, will be replaced by those chosen through the democratic process. This amend raises concerns about the qualifications of the judges to be elected, as well as the compromised impartiality of the decisions, as the judges who seek to be elected will have to build their electoral base as political actors rather than as judges, creating an inherent motivation to issue decisions that are more politically favorable.

Replacement of the Judiciary Council: The reform transforms the Judiciary Council, separating it into two entities: (i) an administrative body handling judges and courts administrative matters; and (ii) a disciplinary tribunal with broad powers to investigate and adjudicate misconduct. This disciplinary tribunal can impose sanctions ranging from warnings to dismissals, and it has the authority to request political trials and initiate investigations through the Attorney General’s Office. While the former Judiciary Council already handled the sanctioning of infractions committed by judges, the issue with the reform arises from the lack of clarity regarding the grounds that legitimize the disciplinary tribunal to take action, thus, raising concerns about the impact on judicial independence.

Restructuring of the Supreme Court: The Supreme Court of Justice will be restructured, reducing its members from 11 to 9 and reducing their terms from 15 to 12 years. This change is intended to promote a more dynamic and accountable judicial leadership, but it also introduces questions about the stability and continuity of judicial decisions.

IMPLICATIONS FOR FOREIGN INVESTMENT

The judicial reform in Mexico has generated considerable debate among scholars, policymakers, legal professionals and the international community. In paper it seeks to streamline judicial processes and enhance access to justice; however, critics argue that it effectively weakens the judicial system and creates an imbalance of power between the three branches of government, raising questions about the quality and impartiality of future decisions.

These factors contribute to a climate of uncertainty on whether foreign investors will continue to rely on Mexico’s legal system or if they will be hesitant to commit capital to a country with an uncertain legal framework, which could inevitably lead to economic instability, slowing economic growth and job creation.

The international community’s response to Mexico’s judicial reform has been generally negative so far. The international community’s main concerns relate to: (i) politicization of the judiciary, as the reform intertwines political motives with judicial functions, raising fears that judicial decisions may favor governmental interests over impartial justice; and (ii) doubts about impartiality, as the changes in the judiciary’s structure is being perceived as a threat to independence of judicial decisions and the rule of law, particularly when they intersect with the interests and principals of the administration.

Nevertheless, despite the concerns raised by the judicial reform, the current global situation and the particular characteristics of Mexico present strong elements that lead us to believe it should remain as an attractive destination for foreign investments.

In the first place, Mexico’s geographical proximity to the United States, Canada, and Latin America represents a significant advantage that make it appealing for investors all over the world as it provides easy access to key markets in the region. In particular, the United States is Mexico’s largest trading partner, and the trade agreements between the two countries, such as the United States-Mexico-Canada Agreement (USMCA), makes Mexico an attractive place to do business. Additionally, the COVID-19 pandemic highlighted the need for businesses to diversify their supply chains and reduce dependence on a single region and Mexico presents a viable option for companies looking to secure reliable, close-to-market production, distribution, and supply chain.

In the second place, Mexico can be perceived as a country resilient to the risks generated by recent global conflicts. Global geopolitical tensions, such as the ongoing conflicts in Ukraine, Russia, and the Middle East, have created significant risks for businesses that depend on global supply chains, having a disrupting effect in trade routes, creating supply delays, and rising costs for transportation. In these context, having manufacturing hubs located far from target markets creates significant risks for businesses with global operations and Mexico provides a viable alternative to mitigate these risks, as it is strategically located next the U.S. and Canada, both markets that are highly targeted by global businesses.

Finally, the growing tensions between the United States and China have created an increasingly unpredictable global economic landscape. Many companies that previously relied on China as a primary manufacturing hub will likely rethink their strategies, as they face the risk of potential geopolitical instability. In this context, Mexico offers a viable alternative, for these companies as it is convenient for manufacturing and assembly operations that can serve the U.S. market. This “nearshoring” trend, has become more appealing in light of the concerns about overreliance on Chinese supply chains. Additionally, Mexico’s lower labor costs, skilled workforce, and favorable trade agreements make it an increasingly attractive option for investors looking to diversify their operations and secure access to one of the world’s largest consumer markets.

While the uncertainties arising from Mexico’s judicial reform are undeniable and may somehow adversely impact the interest by some foreign investors, they do not necessarily outweigh the strategic advantages the country continues to offer for foreign investment, as described above. Mexico should remain an attractive location for international investors who may choose to still invest in the country but mitigate the risks associated with the judicial reform by adopting different strategies. One possible alternative may consist of structuring operations so that they are governed by laws from other jurisdictions, thus shielding investments from the uncertainties of the Mexican legal system while maintaining operational efficiency.

Another adaptive strategy to be considered is the increased use of alternative dispute resolutions methods, particularly arbitration. By opting for arbitration, investors can bypass potential biases or inefficiencies in the Mexican court system and resolve disputes in a more controlled and predictable environment, offering a neutral, faster alternative to the courts, and ensuring that conflicts can be addressed impartially, regardless of the challenges posed by the local judiciary.

CONCLUSION

Mexico’s judicial reform brings a cloud of uncertainty to Mexico’s investment environment and may have adverse impacts on investor’s appetite for the country. While concerns about the politicization of the judiciary and potential lack of impartiality on the decisions issued by the courts will continue to draw the attention of the international community for the coming months, the strategic advantages of Mexico’s geographical location coupled with the current global context remain compelling, picturing a positive landscape for Mexico from a foreign investment perspective. Investors are likely to continue investing in Mexico and navigate the uncertainties of the reform by adapting their strategies, incorporating mechanisms that safeguard their interests such as arbitration as dispute resolution mechanism.

Carlos Lobo is a partner with Arnold & Porter. Ivan Serralde is a Foreign Attorney at Arnold & Porter.

This column was written for Latinvex.

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