Nearshoring Without Growth: Why Investment Uncertainty Is Holding Mexico Back

Commentary by Diego Marroquín Bitar and Ryan C. Berg

Published February 3, 2026

Mexico is emerging as the United States' most important manufacturing partner, yet investment trends tell a more fragile story. As the 2026 United States-Mexico-Canada Agreement (USMCA) review approaches, uncertainty around fiscal governance and tax enforcement is increasingly shaping whether nearshoring translates into sustained growth for Mexico and North America.

Introduction: Mexico's Nearshoring Paradox

Since the entry into force of the USMCA in 2020, Mexico has become the United States' largest trading partner, surpassing both Canada and China. Trade with Mexico is now the most stable and fastest-growing component of U.S. commerce, expanding more quickly than trade with Asia and Europe since the USMCA was implemented.

Mexico's structural advantages are well established. Its geographic proximity to the U.S. market anchors the highest volume of daily cross-border commercial flows globally. The country also has the largest industrial labor force in Latin America, supported by a younger demographic profile than most regional peers. These advantages are reinforced by one of the few comprehensive trade frameworks still standing in an increasingly fragmented and protectionist global environment, giving Mexico relatively favorable access to the U.S. market even as tariffs and trade restrictions proliferate elsewhere.

Yet Mexico's economic outcomes tell a different story. Despite low trade-weighted tariff exposure relative to economies in Europe, Asia, Africa, and the rest of the Americas, Mexico continues to underperform. Growth projections for 2026 range between 0.6 and 1.5 percent GDP growth, well below what is needed to generate sustained productivity gains or meaningfully reduce poverty. As economist Valeria Moy notes, Mexico has recorded the lowest accumulation of GDP and GDP per capita growth in Latin America over the past 35 years, excluding Venezuela. Over the same period, only Ecuador, Brazil, and Argentina have grown less, none of which enjoys Mexico's geographic proximity, market access, or degree of integration with the United States.

Mexico lags its peers in logistics performance, rule of law, and property rights, as measured by the World Justice Project. Security challenges, including cargo theft along key transport corridors, continue to weigh on economic activity. Financial development indicators published by the International Monetary Fund and the World Bank also point to limited credit deepening relative to Mexico's level of trade integration and economic scale. Together, these weaknesses help explain why integration into North American supply chains has not translated into large-scale formal job creation or higher growth.

Nearshoring is real. Firms are choosing Mexico for rational reasons, including proximity to the U.S. market, established manufacturing ecosystems in sectors such as autos, electronics, and medical devices, and the need to reduce exposure to geopolitical disruptions elsewhere. But nearshoring alone, at least not at current levels, is insufficient to deliver sustained growth without investment certainty. The binding constraint is not access or demand, but investment itself.

Despite reaching record levels of foreign direct investment in 2025, total investment in Mexico, defined as the sum of private, public, and foreign investment, has declined by roughly 10 percent in 2025. Private investment has fallen by around 2 percent, while public investment has contracted by more than 26 percent. In critical areas, the pullback has been sharper still. This investment gap is the mechanism through which Mexico's structural advantages fail to translate into sustained growth.

To be sure, Mexico faces a challenging external environment that complicates investment decisions. The Sheinbaum administration has limited control over exogenous shocks, including U.S. tariff threats, intensified geopolitical competition, and kinetic actions in the hemisphere, and the broader fragmentation of global trade and declining utility of multilateral institutions. Ignoring these constraints would be naive. But just as importantly, domestic policy choices have played a central role in shaping investors' perceptions of risk. Understanding where uncertainty enters the investment equation is essential.

These policy choices are shaping not just the volume, but the quality and durability of nearshoring outcomes in Mexico. The window to capture nearshoring gains is not unlimited, and the 2026 review of the USMCA is fast approaching. Together, these forces raise the stakes for Mexico's policy choices. Structural advantages without institutional credibility produce weak outcomes, while uncertainty feeds a self-reinforcing loop in which higher perceived risk leads to lower investment, weaker growth, and even greater hesitation from capital.

Understanding and addressing the sources of that uncertainty is therefore not just a Mexican challenge. It is a North American one. This commentary focuses on fiscal governance and tax enforcement as key and addressable sources of investment uncertainty within Mexico's broader policy context.

Fiscal Governance and the IMMEX Constraint

Not all sources of uncertainty weigh equally on investment decisions. Some risks are structural and long-term, while others stem from external shocks largely beyond Mexico's control. But one channel stands out because it directly affects firms' cash flow, alters risk calculations after capital has already been committed, and shapes decisions about whether to expand or retrench: fiscal governance. How tax rules are interpreted, enforced, and applied over time has become a central determinant of investment behavior. Nowhere is this more visible than in Mexico's export-oriented manufacturing sector, where fiscal uncertainty increasingly operates as a binding constraint rather than a background condition. Mexico's IMMEX (Industria Manufacturera, Maquiladora y de Servicios de Exportación) program provides a clear lens into how uncertainty operates at the firm level.

For firms operating on the ground, investment certainty is shaped by a small set of practical questions: Will cash flow be predictable? Will the rules remain stable over time? Will enforcement be consistent and transparent? And will authorities provide notice before implementing changes?

In practice, firms report that major changes to rules are often introduced with little notice and no meaningful implementation period, creating immediate operational disruptions across North American supply chains. For investors, decisions are not driven simply by whether Mexico's tax burden is higher or lower than that of its peers. What matters most is whether the rules applied today will be applied clearly and consistently tomorrow, and whether enforcement respects basic principles of transparency, predictability, and non-retroactivity.

IMMEX is how export manufacturing works in practice. It covers roughly 15 percent of Mexico's formal manufacturing workforce and allows firms to import parts without paying value-added tax (VAT) up front, as long as the final product is exported. That mechanism has been critical to Mexico's competitiveness in North American supply chains. Over time, IMMEX helped transform the maquiladora industry into a more sophisticated and capital-intensive manufacturing base deeply integrated into regional supply chains. For decades, the program functioned as a reliable investment incentive by lowering costs and enhancing competitiveness. Since its launch in 2006, IMMEX has been closely associated with Mexico's shift from a $14 billion trade deficit to a $771 million trade surplus by 2025, driven largely by the growth of non-oil manufacturing exports in sectors such as autos and electronics.

The issue is not that IMMEX involves tax obligations. Firms understand that when imported inputs or finished goods are sold domestically or transferred within Mexico, tax liabilities can arise, and they plan accordingly. The problem emerges when compliance standards that were previously accepted are later reinterpreted, often years after the transactions occurred. Submissions to the U.S. Trade Representative (USTR) illustrate this dynamic, with firms reporting retroactive reinterpretations of value-added tax rules, in some instances extending back nearly a decade, resulting in demands for repayment of previously approved refunds, along with fines and interest. What was understood as compliant behavior at the time of investment can later become a source of unexpected liability.

Separately, some companies report exposure to VAT double taxation, where Mexican tax authorities (SAT) asserted that, in addition to import VAT already paid under IMMEX, companies must also pay input VAT on the same goods. Whatever the legal merits of individual cases, the investment implication is clear. When the same transactions can be subject to changing interpretations over time, firms cannot reliably model costs or returns.

Private-sector evidence shows how this uncertainty plays out in practice. According to a private survey shared with the authors by the American Chamber of Commerce in Mexico, 42 percent of companies report that VAT refund requests have triggered formal audits. Of those audits, 64 percent last longer than 90 days, tying up liquidity and management attention. At the same time, 70 percent of firms report that refund requests are rejected sporadically or repeatedly. In some cases, firms report that ongoing audits are accompanied by threats to suspend importing licenses unless disputed amounts are paid, raising the operational stakes well beyond the immediate tax claim. Together, these dynamics turn routine compliance processes into sources of operational and financial risk, particularly for exporting firms operating under IMMEX.

Fiscal uncertainty also carries an immediate liquidity cost. Firms report that unresolved tax and customs disputes force them to hold substantial cash reserves in anticipation of potential assessments or license suspensions. Capital that could fund expansion or hiring is instead immobilized as a hedge against enforcement risk, helping explain why nearshoring has lifted exports without delivering a comparable investment surge.

Judicial outcomes reinforce these concerns. A KPMG study shared with the authors found that roughly 70 percent of final judgments in tax-related disputes favor Mexico's tax authority over private firms. This does not imply institutional bias, but it does help explain why firms do not view litigation as a reliable safeguard when fiscal interpretations change. Long audits, retroactive claims, and uncertain resolution timelines create an environment in which compliance today does not guarantee certainty tomorrow. The risks compound after Mexico's recent judicial overhaul.

As a result, IMMEX has begun to shift from an investment asset into a source of risk. Firms continue operating and often reinvest earnings to maintain production, but they hesitate to commit to new, long-term, capital-intensive projects that depend on stable assumptions about tax treatment and enforcement. As a result, the ceiling on Mexico's nearshoring potential lowers, and firms shift from expansion to risk management.

IMMEX is illustrative rather than exceptional. The broader challenge is the credibility of enforcement across fiscal and regulatory institutions. When fiscal obligations intersect with discretionary enforcement, the risk premium on investment rises, directly offsetting Mexico's many inherent advantages.

This outcome is not inevitable. Fiscal governance does not require a trade-off between revenue collection and investment attraction. Clear administrative guidance, limits on retroactive enforcement, transparent timelines for audits and refunds, and meaningful consultation with the private sector would reduce uncertainty without weakening tax collection. Restoring predictability would allow IMMEX and other policy tools to function as investment incentives rather than as contingent liabilities. For investors, retroactive enforcement is not mainly a tax issue. It is a rule-of-law issue.

As the region approaches the 2026 review of the USMCA, the credibility of Mexico's fiscal and regulatory environment will increasingly shape how nearshoring opportunities are assessed across North America. The consequences of uncertainty, therefore, do not stop at Mexico's borders.

Ensuring that IMMEX operates as a source of certainty rather than risk is therefore not only a domestic priority. It would send a clear signal of Mexico's central role in an integrated North American market and would strengthen its negotiating position with the United States and Canada.

Not Just a Mexico (or even North American) Problem

Investment uncertainty does not stop at Mexico's borders, even when it originates in Mexican policy choices. After all, North America is an integrated production ecosystem, with supply chains spanning borders and goods often crossing multiple times before reaching final consumers. Capital planning follows the same regional logic. When uncertainty rises in Mexico, it affects investment decisions, risk assessments, and capital allocation across the entire North American market. What happens in Mexico does not stay in Mexico. It creates spillovers that directly affect U.S. and Canadian firms as well.

For the United States, Mexico's investment climate has become increasingly salient as the region heads into the USMCA review. Concerns related to investment uncertainty were explicitly referenced by USTR Jamieson Greer in testimony before the U.S. Congress in December 2025. As these issues are raised in the context of the USMCA review, they are likely to shape broader perceptions of North America's investment environment. Persistent uncertainty undermines regional economic security, weakens competitiveness, and dilutes the very advantages the USMCA was designed to reinforce.

Conclusion: From Nearshoring to Real Growth

Mexico's paradox is clear. The country is North America's most important manufacturing partner and continues to attract record levels of foreign direct investment. Yet when investment is measured holistically, including private and public capital formation, Mexico still falls short of the sustained growth needed to turn nearshoring into broader economic gains. This is not a story of failure, but of unrealized potential, driven less by a lack of opportunity than by persistent uncertainty that weakens Mexico's ability to convert momentum into durable growth.

The core takeaway is straightforward. Mexico does not lack assets, market access, or strategic relevance. What it lacks are sufficiently strong conditions of certainty to unlock sustained investment growth. In the end, Mexico will either reap the rewards of a drive toward economic and supply chain security not by relying on geography-and even less by believing that geography is destiny-but by virtue of sound institutions, fiscal credibility, transparency, and predictable rules.

This choice matters beyond Mexico. In an integrated North American production ecosystem, uncertainty in one jurisdiction quickly spills across borders. As the 2026 review of the USMCA approaches, Mexico's ability to restore predictability in its fiscal and regulatory environment will increasingly influence how firms assess North America as a whole.

Mexico's opportunities to leverage economic security initiatives are immense, but they are not self-executing. Geography creates opportunities; institutions and practices determine outcomes. For Mexico, the path from nearshoring to growth runs through certainty and the assurance that the rules governing investment today will still apply tomorrow.

Diego Marroquín Bitar is a fellow with the Americas Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Ryan C. Berg is director of the Americas Program and head of the Future of Venezuela Initiative at CSIS.

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