Why Mexico is no longer safe for investors

OPINION:

In less than a year, Mexico has dismantled one of the pillars that made it a top destination for foreign investment: an independent judiciary.

For more than a decade, Mexico drew in more than $300 billion in outside capital by offering stability, legal protections and a strong reputation for honoring contracts. That changed last September, when a constitutional reform — one of the final acts of outgoing President Andres Manuel Lopez Obrador — mandated that Mexico’s 7,000-plus judges stand for election and lowered the minimum credentials to qualify.

The reform effectively ended judicial independence and opened the door for incompetence, political capture and cartel influence over court decisions.

Without an impartial judiciary, criminal actors and politically connected corporations can bend the legal system to their will. This undermines Mexico’s obligations under trade and investment treaties, such as the enforcement of arbitration awards under the New York Convention, a United Nations treaty that requires member countries to recognize and enforce foreign arbitral awards. This is a cornerstone of foreign investor confidence in developing markets such as Mexico.

Under these agreements, disputes are meant to be resolved by neutral arbitral tribunals and their rulings are supposed to be recognized by domestic courts. When courts are politicized, losing parties — often the companies or investors involved in these disputes — can engage in “forum shopping,” deliberately choosing courts to overturn unfavorable awards. This tactic creates a direct pathway to sidestep neutral arbitration for politically influenced rulings.

Mexico’s judicial overhaul has already rattled financial markets. The peso, once one of the best-performing currencies, collapsed 23% in 2024, its biggest annual drop since the financial crisis. This crash illustrates more than a currency risk; it reflects a loss of confidence in Mexico’s willingness to uphold arbitration commitments. Money flows where the rules can be trusted; today, Mexico is no longer that place.

Despite its long struggle against drug cartels, Mexico built a reputation for honoring international arbitration. Business lawyer Luis Asali wrote in Global Arbitration Review last month that for years Mexico has demonstrated “a longstanding commitment” to international arbitration rules and “the exclusive jurisdiction of arbitral tribunals” in settling investor disputes.

Foreign investors commit capital, negotiate contracts and structure financing under the assumption that arbitration clauses will be enforced. With elected judges now vulnerable to political and economic pressure, there is a real risk that domestic courts will overturn or refuse to enforce arbitration rulings, stripping investors of previously promised protections.

Legal advocates have also documented drug cartels’ influence on local elections throughout Mexico. The first round of staggered judicial elections took place on June 1, and several candidates were flagged by independent watchdogs as having ties to the Sinaloa Cartel and other criminal syndicates. This further undermines trust in legal decisions and amplifies the perception that justice can be bought.

Investor confidence is already weakening, with billions of dollars in project investments paused. Some firms have exited their investments in Mexico altogether. Spanish energy giant Iberdrola, once among the largest utility operators in Mexico, accelerated its departure. The Center for Strategic and International Studies warns that other companies may adapt by using political connections to “resolve disputes informally,” which means through corruption.

Now, Mexican newspaper Dinero en Imagen is reporting that Citigroup has gone to a Mexican court to overturn an arbitral award that its pensions arm lost before an international tribunal in December. In international arbitration, awards are meant to be final, with domestic courts enforcing rather than revisiting the merits of the case. Seeking to overturn an unfavorable arbitral award is viewed as a breach of good faith and a signal to other companies that treaty protections can be bypassed when politically convenient. As Mexico Business Daily recently put it, “Citigroup might be using Mexico’s increasingly politicized courts to protect itself.”

If true, this would set a dangerous precedent as the U.S. seeks to rewrite the rules of international trade and commerce. The U.S. cannot control how foreign governments or companies behave, but we can refuse to legitimize the dismantling of international investor protections. If Mexico hopes to restore market confidence, it must demonstrate that it will honor its treaty commitments and protect judicial independence. Likewise, U.S. policymakers and major investors should make clear now, before more capital flows out of Mexico, that the erosion of arbitration protections carries trade, diplomatic and market consequences.

Allowing corrupt and powerful firms to bypass neutral arbitration and deliberately seek out politicized courts will undermine the system that safeguards U.S. investments abroad and weaken America’s ability to insist on those same protections for its own investors.

• Danielle Zanzalari is an assistant professor of economics at Seton Hall University. She formerly worked as a financial economist for the Federal Reserve and as a vice president for Citigroup. She frequently researches bank regulation and public finance.