Mexico’s defense budget will weather strained US relations to reach $8.8 billion by 2027, says GlobalData

Mexico’s defense industry has been closely intertwined with the US for many years with political changes in both states testing the resolve of their cooperation. As a result of this, Mexico’s defense budget is expected to grow from $6.9 billion in 2022 to $8.8 billion in 2027, according to GlobalData, a leading data and analytics company.

GlobalData’s latest report, ‘Mexico Defense Market Size and Trends, Budget Allocation, Regulations, Key Acquisitions, Competitive Landscape and Forecast, 2022-2027’, notes that Mexico’s defense industry will showcase a positive compound annual growth rate (CAGR) of 5.5% between 2023 and 2027, which is a faster rate of growth compared to the 2018-22 period, which saw a positive CAGR of 4.4%.

The election of President Andrés Manuel López Obrador (known colloqiuoully as AMLO) in Mexico has led to the increasing militarization of many civillian activities such as the running of airports and domestic anti-crime operations.

Madeline Wild, Associate Defense Analyst at GlobalData, comments: “AMLO has found a domestic solution to the budgetary turbulence caused by US/Mexico relations. In 2019, the Mexican constitution was changed to allow the President to use the military in various roles to support the civilian authorities. Since then, troops have run over 2,500 branches of a state-development bank, constructed a new airport in Mexico City, and run various customs centers. These activities all require funding, thus driving continued growth in the defense budget.”

Mexico and the US had both been deeply involved in the Merida Initiative, which is due to be renewed. The Merida Initiative is an agreement aimed at strengthening the rule of law and providing funding for counter-narcotic operations. Political tensions between AMLO and Biden’s administrations are making many question the viability of the creation of a replacement to the Merida Initiative.

Wild continues: “Counter-narcotic and anti-organized crime operations under the Merida Initiative had been key drivers of Mexican defense spending. The decline of these will impact the division and allocation of defense funds. However, AMLO’s continued push to utilize the armed forces in other ways will act as a counterbalance to operational funding requirements.”

Mexico may have seen a reduction in financial and operational cooperation with the US Department of Defense (DoD), however, Maquiladora Investment Incentives in Mexico (IMMEX) is one program that the US/Mexico industrial relationship may continue to benefit from. The IMMEX program offers vast reductions on various taxes and significantly reduces barriers to trade, for example, raw materials can be imported into Mexico tax free so long as they are then exported out of Mexico after being manufactured into various goods.

Wild adds: “Mexico’s defense industry benefits from a close relationship with the US due to the large presence of US firms operating in Mexico under IMMEX rules. Manufacturers benefit from cheap labor costs and fewer regulations when carrying out manufacturing procedures on Mexican soil, whilst Mexico gains knowledge transfers, a greater industrial skills base, and an increase in the operations of smaller Mexican firms that may have the opportunity to engage in the supply chains of US firms operating in Mexico. The IMMEX program is compounded by the US-Mexico-Canada Agreement (USMCA, the NAFTA successor). Thus, unless relations decline substantially enough to threaten USMCA, this beneficial relationship looks set to stay.”

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