Morgan Stanley Says Mexico Can Boost Its Own Economy Beyond US Trade

Mexico City — Morgan Stanley analysts say Mexico’s economic future depends more on domestic reforms and private investment than on trade with the United States, according to a report following a recent visit to the country.

Eric Carlson, portfolio manager and director of emerging market equities at Morgan Stanley, and Ravi Jain, executive director of emerging market equities, concluded that “international trade is not the only important factor influencing Mexico’s prospects. The attractiveness of investment depends much more on the new government’s ability to revitalize internal growth and, in particular, private investment.”

The analysts noted that despite President Donald Trump’s threats of tariffs, a border emergency declaration, and designating drug cartels as foreign terrorist organizations, Mexican exports to the US hit a record $535 billion in 2025, up from $150 billion in 2021, driven by electronics and machinery that offset weakness in the automotive sector. The rapid growth reflects Mexico’s strong position in the US supply chain, supported by competitive advantages and a diversified industrial base.

However, while exports grew, the domestic economy stagnated and investment declined due to setbacks in internal policies. President Claudia Sheinbaum, now 18 months into her term, inherited challenges including the highest budget deficit in 40 years from spending on infrastructure projects of questionable economic value such as the Tren Maya and the Dos Bocas refinery, as well as constitutional reforms that raise concerns about property rights, contracts, and judicial independence, affecting business confidence and private investment.

“Despite inheriting these challenges, Sheinbaum has adopted a more constructive tone than her predecessor. Her cabinet appointments have been considered highly competent, especially the ministers of finance and security. She has demonstrated an ability to work with Washington, proactively addressing security issues and successfully collaborating with the private sector,” Morgan Stanley acknowledged.

The next key milestone will be the renegotiation of the USMCA, where talks are advancing on rules of origin, tariff harmonization, and critical minerals. While issues related to local content rules, labor rights, and energy policy need clarification, the direction of negotiations appears constructive. “Greater formal clarity would help Latin America’s second-largest economy unlock investments that have been postponed due to uncertainty,” the report said.

Morgan Stanley added that Sheinbaum’s flagship “Plan Mexico” program aims to reduce inequality by boosting economic growth and attracting more investment, targeting an increase in investment from 22% to 28% of GDP by 2025, focusing on public-private partnerships, infrastructure projects, and creating 1.5 million formal and specialized jobs. The initiative is a step in the right direction, representing a shift in attitude to support investment and address persistent supply-side obstacles such as energy and infrastructure, which are critical for Mexico to move up the manufacturing value chain and improve productivity.

The bank emphasized that much depends on whether Sheinbaum leverages her approval ratings to decisively shift from her predecessor’s strategy and implement much-needed supply-side reforms to boost investment. “While it is still early in her six-year term, if she successfully implements the spirit of Plan Mexico and fosters private sector investment, the country can become much more than the United States’ main trading partner; Mexico can fully develop its own economic potential,” Morgan Stanley concluded.