Mexicos Political Economy

Analysis
Alexandra Metcalfe
BUS 453.01

This paper analyzes Mexicos political economy as it relates to what U.S.

businesses should know before they decide to conduct business in Mexico. This
paper will cover Mexicos political system, legal system, economic system and
also cultural values that are important for businesses to know.

Contents
Introduction......................................................................................................................................2
Mexicos Political System.......................................................................................................2
Mexicos Political Corruption effect on U.S. Businesses........................................................2
Mexicos Legal System....................................................................................................................3
Contract Law...............................................................................................................................4
Intellectual Property (IP).............................................................................................................4
Trademark................................................................................................................................5
Customs Procedures.....................................................................................................................5
Mexicos Economic System............................................................................................................6
Currency Inflation and Exchange Rate........................................................................................6
Mexicos Corporate Culture............................................................................................................7
Conclusion.......................................................................................................................................8
Bibliography....................................................................................................................................9

Introduction
U.S.s relationship with Mexico is strong and vital. Thanks to their shared 2,000-mile
border, bilateral relations between both countries have a direct impact on each other. This
relationship entails diplomatic and official relations along with, extensive commercial, cultural,
and educational ties, with some 1.4 billion dollars of two-way trade and hundreds of thousands
of legal border crossings each day1. For U.S. businesses, Mexico could be an option for an
international market. This paper will analyze Mexicos political economy in relation to what U.S.
businesses should know and understand when conducting business with Mexico.
Mexicos Political System
Mexicos political system is a federal government system divided into three branches; executive
branch, legislative branch, and a judicial branch, much like that of the United States. The
president of Mexico is democratically elected for a 6-year term and may not be re-elected.
Mexico City is the Federal District of Mexico and is not part of the 31 Mexican states. Each state
has its own constitution, modeled after the national one, giving it the right to legislate and levy
taxes as they see fit. Within each state are local governments or municipalities that govern any
area relating to its specific areas public service2. One thing businesses should know is that when
doing business, they will be dealing with the local and state governments directly if any
problems arise.

1 (Bureau of Western Hemisphere Affairs 2015)

2 (Country Studies n.d.)

Mexicos Political Corruption effect on U.S. Businesses

Corruption is deeply embedded culturally and remains pervasive at all levels of society,
fed by and entrenching the power of monopolists, party bosses, and other mafias. Mexicos
freedom of corruption score in 2015 was a 34, which was far below the world average. Mexico
ranks 107th out of 175 on the corruption perceptions index in 20143. Mexicos efforts to reduce
the alarming levels of violence are having a significant impact on the countrys economy. In
2013, the cost of fighting the powerful drug cartels rose to almost $172.7 billion. That is the sum
of almost one tenth (9.4%) of Mexicos GDP, which amounts to $1,430 per person. 4 The state
and local levels are mainly affected since they do not have the same level of means to fight
against the drug war as that the national government does. Corruption is a factor that creates
hesitation for those who are looking to do business with a foreign country, since it creates
uncertainty for business owners. One thing U.S. businesses should be aware of if that Mexican
drug cartels, as many have unrivaled control of vast territories in Mexico. U.S. companies will
likely have to deal with theft and other crimes and may even have to pay protection money to the
cartels in order for them not to cause problems5.

Mexicos Legal System

Mexico has a civil law system where the laws are coded, and used as the primary
source of law for judges. When it comes to litigation, a large difference U.S. businesses should
be aware of is that there is no presence of juries at any trail. All trials will either be heard by one
judge or a panel of three judges. In most appeal cases, there will be three judges to rule over the
3 (Transparency International n.d.)
4 (Estevez 2014)
5 (Ortiz 2015)

case. Judges serve as the finder of fact and the interpreter of law in every case. Mexico civil law
does not include precedent or the use of previous rulings as a legal principle for judges to follow,
when making a legal decision. Though some judges use knowledge of other cases to make their
decisions, the ruling must be enforced by the statutes and laws that the Civil Code implies.
When it comes to laws that govern business and commerce, not only are they set by the Civil
Code, but they also come from the Commercial Code.

Contract Law
The fundamentals of Mexicos contract law are very similar to that of U.S. The contract
must be in writing with an offer and acceptance, establish some penalty provision like liquidated
damages, and have a condition of default and termination of contractual obligations. The
difference that sets Mexicos contract law apart from the U.S. is the principle of consideration.
The validity of a contact in Mexico only depends on the existence of an agreement between the
parties. Since there is not consideration requirement, it is fundamental that there is a presence of
a witnesses and the contact is registered publically. This is so there are third parties that are
legally bound to the contract that can prove that the contact is valid. Sometimes contracts are
subject to a more formal form of legality and it could be required to be notarized.

Intellectual Property (IP)

The IP laws are weak in Mexico, and many Mexican and other international companies
have claimed a loss of sales and weakening of brands due to counterfeit products. These losses
are hundreds of millions of dollars annually and are a large problem the Mexican Government
has recognized but has not made any progress due to the lack of resources. Mexico has IP laws
and has increased their number of arrests and seizures of counterfeit products, but the IP
violations are still great. The good thing for U.S. companies is that under NAFTA and the WTO

Agreement on Trade-Related Aspects of IP Rights (TRIPS), Mexico has a certain obligation to

follow certain standards regarding IP and how to protect it and how to address violations6.
Trademark
For a U.S. Company to protect its trademark it must be registered with the Mexican Institute of
Industrial Property. If it is not, you can still use the trademark, but risk losing it to someone who
does register it, even if it was not theirs originally. Mexicos government has a database for
trademarks where companies can look to see if their trademark or something similar is already
being used in Mexico. A trademark will be registered in Mexico for 10 years, which then would
need to be renewed, but you can renew it an unlimited amount of times7.

Customs Procedures
Mexican customs authorities are very strict when it comes to imports into Mexico,
especially when it comes to documentation and procedures. For this reason, it is Mexican law
that U.S. companies hire a Mexican Customs broker to handle all the formalities. The documents
needed are; an import requisition from the Ministry of the Economy, commercial invoice, a bill
of lading, an exemption permit, and a certificate establishing the origin of the goods8. When it
comes to import duties, because of the NAFTA agreement, some products have reduced or no
duties, this however depends on the products origin. To determine the products origin, U.S.
Companies can reference the Harmonized Tariff Classification Number for their product(s) in
order to reference the rules of origin that govern the allowable percentage of foreign

6 (UK Government 2015)

7 (The Spencer Law Office 2011)
8 (Export Entreprises SA 2015)

components.9 The final import approval for any product is subject to any rules and standards as
interpreted by board officials at the time of product entry.

Mexicos Economic System

Mexico has traditionally been thought of as a poor country but this stigma has slowly
been changing especially within the past decade. Mexicos current GDP is $1.282 trillion (2014
est.) the 11th largest in the world and has been steadily increasing. The average Mexican
household doesnt make as much money as that of its U.S. counterpart but never the less has
been experiencing constant growth within their income levels. The average familys income
given the countrys GDP per capita based on purchasing power parity is about $16,946.00.
In society there are three general classifications of income classes; upper class, middle
class, and lower class. Most Mexican households fit into the middle class or lower class with a
small proportion considered upper class. The middle class is about 39.2% of the population and
the lower class is about 59.1% of the population. The middle working class is the fastest growing
wealth class in Mexico. This is important to know for U.S. Companies to know because when
selling products in Mexico, it would be beneficial to market and sell a product targeting the
growing middle class.

Currency Inflation and Exchange Rate

Mexico has an inflation rate of about 2.59% as of 2015. This is a record low for Mexico
when in 2014 Mexicos inflation rate was around 4%.10 If the inflation rate continues to drop
deflation could negatively affect the country hindering international business because the price of
9 (Export.gov 2011)
10 Trading Economics Inflation Rate (9/25/2015)

goods and service would drop drastically making US exports to Mexico less prospective.
However, as the countrys GDP growth rate continues to rise, the inflation rate should level out
and stay constant reflecting a stable economy.
The exchange rate in Mexico is currently 16.76 pesos for 1 dollar which means 1 peso
will buy back 0.06 dollars.11 The currency exchange rate fluctuates relatively often depreciating
and appreciating on a monthly basis by about one peso. For the past 5 years the exchange rate
has steadily appreciated against the dollar making the pesos purchasing power decrease relative
to the dollar. U.S. companies should conduct business with Mexico using a spot rate in order to
determine the value of currency they will receive at the time of the transaction. A spot rate will
allow them to set the value of their goods at the moment of the quote. This is the best option in
case the Mexican peso continues to be worth fewer dollars so that U.S. Companies dont run the
risk of losing any profit.

Mexicos Corporate Culture

In regards to Mexicos culture in order to be successful doing business, U.S. companies need to
recognize and understand the cultural differences.
Mexican businesspeople like to make relations with their business partners. To them,
business is personal, so it is important for a U.S. executive or the person making the contact to
establish trust before talking about anything business related. It is important to be patient and
build these relationships first. For example, during a meeting the first 15 to 20 minutes to be
small talk before any business is talked about.
During meetings, take time for consideration before agreeing to anything as this could be
seen as rushed. Anything a U.S. businessperson proposes should be personalized, showing how it
11 XE Currency Converter (9/25/2015)

will benefit Mexico as a community, country, families and the Mexican business personally.
When making agreements, make sure it is in writing as verbal contracts or promises are not
always carried out. Also almost all business matters are done in Spanish so it would be beneficial
for a U.S. Company to send someone who speaks Spanish or hire an interpreter.
Women will find it more difficult than men to do business in Mexico as in Mexico it is
uncommon to find a woman in a position of authority in a Mexican business. To get over this
difference, women should demonstrate their competence, skill and authority while in the
meetings and not to get discouraged. If you give up or cannot show competence, your Mexican
partner might assume that you werent serious to begin with or the business is not up to their
standards12. These are some cultural elements U.S. businesses should be aware about when doing
business in Mexico

Conclusion
Mexico looks to be a viable business location for U.S. Companies for a number of economic
reasons. Mexico seems to be stable, even after the crisis of 2008; as the rest of the world
struggled, Mexicos economy was growing strong. Also the exchange rate is good and it is
cheaper now than before for Mexicans to buy U.S. products. However, even though
economically Mexico looks like a great business options, Companies still have to be aware of the
cultural and political risks they will be exposed too. Corruption and drug cartels are still a part of
Mexicos culture and could be a risk some U.S. businesses could run in to. Moving forward, it is
predicted that the relationship between Mexico and the U.S. will strengthen, and it will become
easier and safer for U.S. to conduct business is Mexico.

12 (eDiplomat n.d.)

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Estevez, Dolia. Mexico's Astonishing Costs Of Fighting Drug Cartels Have Not Reduced
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https://www.transparency.org/cpi2014/results (accessed 12 9, 2015).
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