Mexico's Claudia Sheinbaum faces economic challenges

As Mexico's first female president, Claudia Sheinbaum, begins her term in office on October 1, dark clouds are looming on the northern horizon of the North American country. US Republican presidential hopeful Donald Trump has again plunged Mexico's economic model of low-cost production for the US market into doubt by calling on companies there to immediately relocate their operations to the United States or face higher tariffs.

Speaking to party members at the Republican National Convention in July, he warned Chinese electric vehicle manufacturers in Mexico that their EVs would become unaffordable due to new duties of 100% he was planning to impose on their imports.

Trump has also called on German automakers, which operate big plants in Mexico, to "become American car companies."

"I want them to build their plants here," Trump said during a campaign speech in Savannah, Georgia, on September 24, as he promised them a reduced corporate tax rate of 15%.

Mexico's robust growth faces political headwinds

Sheinbaum's presidential agenda will only become clear after November 5, when a new US president is elected. Whether it's going to be Donald Trump or Kamala Harris from the Democratic Party, the outcome of the US election is sure to have a major impact on the Mexican economy.

Left-wing politician Sheinbaum is inheriting a robust economy from her predecessor, mentor, and party ally Andres Manuel Lopez Obrador. Mexico's gross domestic product (GDP) grew 3.2% last year, marking the second consecutive year of over 3% growth. Official data also shows that the poverty rate fell from 43.9% in 2020 to 36.3% in 2022, with around 8.8 million fewer Mexicans living in poverty.

In recent weeks,however, a judicial reform has sparked national and international controversy. Rushed through institutions at record speed, it has raised concerns among trade partners in the US and Canada. The reform calls for all federal judges to be directly elected by the public, which critics fear could increase the influence of organized crime, which holds significant sway in Mexico, on the judiciary.

US companies have already frozen an estimated $35 billion (€31.6 billion) in investment projects, and Ken Salazar, the US ambassador to Mexico, has voiced his concerns about the potential negative impact on Mexico's democracy and the $807 billion bilateral trade. Nonetheless, Lopez Obrador pushed through the reform, which he described as a "democratization of the judicial system," in the final stretch of his presidency.

Investors pushing for rule of law

Human rights organizations and the Catholic Church have also warned that elections in Mexico could be infiltrated by organized crime, noting that the high number of political murders during recent election campaigns was an indicator of this. The concern is that this type of political violence could mar elections in the judiciary as well.

Hartmut Rank, head of the Latin America Rule of Law Program at Germany's Konrad Adenauer Foundation in Bogota, Colombia, thinks the reform could negatively impact the economy. "For the economy, the rule of law is a crucial criterion for doing business abroad, building and operating facilities. And independent judges are a fundamental prerequisite for the rule of law," he told DW. "If the reform is implemented as planned, courts in Mexico will be less independent, which could lead businesses to look for alternative locations."

Following Sheinbaum's landslide election victory in June, the Mexican currency lost 13% of its value against the US dollar, reflecting the skepticism of financial investors in Mexico's economic development under the new president.

Despite international concerns, the new Mexican government remains optimistic about the economy. According to the Mexican financial newspaper El Economista,  Sheinbaum's administration expects an increase in foreign direct investment (FDI) of "three to four billion dollars per year." By the end of her six-year term in 2030, this would amount to an inflow of up to $24 billion in foreign investments.

German automakers face uncertainties

German companies, which have a strong presence in Mexico, are also paying close attention to the political and economic development as Sheinbaum assumes office.

Johannes Hauser, the head of the German-Mexican Chamber of Commerce and Industry (AHK Mexico) says companies are in a "wait-and-see" mode as to how the judicial reform will be implemented. "Our member companies are currently analyzing the different scenarios. It's clear that the judicial reform could limit the independence of the courts," Hauser told DW.

For German car manufacturers, Mexico is the most important production location in the Americas after the US and ahead of Brazil and Argentina. According to a spokesperson for the German Association of the Automotive Industry (VDA), Sheinbaum's judiciary reform is probably less important for German carmakers than Donald Trump's threat of higher tariffs.

"The US, Mexico and Canada have signed the USMCA free-trade agreement. Imposing higher US import tariffs on vehicles from Mexico would violate this agreement. They will harm US companies in particular because they are the ones benefiting most from the North American production network," the VDA spokesperson told DW.

This article was originally written in German.