AMLO Is Undermining What’s Left of Mexico’s Favorable Investment Climate

Introduction

Historically, Andrés Manuel López Obrador’s presidency is likely to be remembered unfavorably for reducing the power of independent government agencies, encroaching on other democratic institutions, encouraging the military to intrude into many parts of Mexican life, failing to effectively combat corruption, putting Mexico on track to breach its Paris Agreement environmental obligations, and allowing the drug cartels free reign.[1] Mexico will not quickly recover from López Obrador’s efforts to increase his grip on Pemex and the Comisión Federal de Electricidad (CFE), Mexico’s state-owned power utility, at the expense of the public, when private developers could have stabilized Mexico's petroleum production and reduced reliance on dirty fuel oil for electric power generation. Other historians will focus on the wasteful Dos Bocas gasoline refinery, the cost of which has increased from $8 billion to $15.4 billion,[2] and the $16 billion, environmentally disastrous Maya train line planned for the isthmus of Tehuantepec.[3]

In my view, however, the greatest tragedy for Mexico of the López Obrador regime will be the squandering of the once-in-a-generation opportunity to encourage new foreign investment from multinational companies that have decided to reduce their reliance on China and relocate to Mexico rather than to Vietnam, India, or the United States. The leaders of these countries — particularly President Joe Biden, as he ramps up his reelection campaign — can thank their lucky stars that Mexico, which would normally be a major competitor for the investment dollar, is remaining largely on the sidelines. One Mexican consulting firm, with more optimism than many, summarized the situation:

Mexico’s strategic location, existing and growing economic integration with North America, duty-free access to more than 50 countries, affordable workforce, and track record of protection for intellectual property rights make it uniquely positioned to take advantage of the investment opportunities created by these global developments.[4]

It may not be possible to undo all of the damage done under López Obrador, even after his successor takes office on October 1, 2024. But for Mexico to take advantage of badly needed economic opportunities created by foreign and domestic investment, its next president — likely former Foreign Minister Marcelo Ebrard or Mexico City Mayor Claudia Sheinbaum — will need to promptly reverse course.

Background

In recent months, Mexico’s government has seized a number of private assets belonging to both American and Mexican enterprises, once again discouraging major investors from reshoring operations from China and elsewhere in Asia to Mexico. These expropriations follow a number of efforts by López Obrador, working through the Mexican Congress, to reduce the rights of the domestic and foreign private sector (only some of which have been successful to date). They also follow several years of government breaches of petroleum leases and foreign wind and solar contracts, many of which remain unresolved.[5]

While most observers probably did not expect López Obrador to become friendlier to business during the remainder of his presidential term (which ends September 30, 2024), some may have hoped that the pace of anti-investor activity would slow. Instead has come the shocking slew of takings. As Guillermo Garcia Sanchez, a law professor at Texas A&M University, observed, “It’s a step back to the Mexico of the 60s, the 70s, where companies had to sit down and negotiate directly with the president, and no one knows what the rules are.”[6]

Despite the adverse climate, foreign investment in Mexico has continued. But much of it — originating from American and increasingly Chinese investors — resembles traditional maquiladora operations in the border states, focusing on low-tech production such as toys and furniture. Exceptions include Tesla and Unilever, which have invested up to $5 billion and $400 million in Nuevo León, respectively, and BMW, which has invested $800 million on electric vehicle (EV) production in San Luis Potosí.[7]

Such financial commitments provide highly desired employment and exports but, with few exceptions, do little to help Mexico increase the sophistication of its manufacturing and avoid the “middle income trap.”[8] And while new foreign investment is significant — amounting to approximately $31.6 billion in 2021[9] — experts believe a favorable investment climate would result in far more nearshoring and other investment activity.[10] Jose Medina Mora, president of business chamber Coparmex, suggested that potential investors from Canada, Germany, Spain, and the U.S. are keeping an estimated $35 billion parked until Mexico’s rules of the game become clearer.[11]

Surprisingly, even the widely heralded deal in principle between López Obrador and Tesla CEO Elon Musk to establish a Tesla factory in Nuevo León — with a price tag exceeding $5 billion — does not seem to have lessened the president’s hostility to private business. While Tesla, BMW, and Unilever are investing significant capital, their projects may have had the opposite effect — convincing López Obrador that he can safely ignore the massive criticism of policies that are creating broad angst among foreign investors.

A country with a labor force of some 57 million[12] needs far more than a handful of new major investments to prosper. Unfortunately, it does not seem likely that many other major capital-intensive projects will follow. It also may be significant that several of the major investments have come from the auto industry, as most of the global auto producers already have plants in Mexico (some existing for many years [13]) and have rarely had disputes under López Obrador or any other president in many decades.

The forces that are encouraging departure from China (including American penalty tariffs on more than $300 billion worth of Chinese exports to the U.S., concerns about long and vulnerable supply chains, and new risks for foreign companies doing business in China in an increasingly challenging business environment) are not likely to disappear over the next few years. However, businesses that soon decide to shift all or part of their current Chinese production to Vietnam, India, the United States, or elsewhere, are unlikely to reverse course when a new Mexican president takes office in October 2024, or anytime soon thereafter.

The Recent Takings

Bacanora Lithium

In February 2023, the Mexican government issued a presidential decree taking control of more than 900 square miles in the state of Sonora, where substantial lithium ore reserves (already government property) are located. The decree gave LitioMx, a new state-run lithium mining company, exclusive rights to mine lithium there. Lithium is an increasingly sought-after metal used throughout the world in the manufacture of electric vehicles and other rechargeable batteries.[14]

The government has assured private investors that existing concessions will be respected, but the decree also stated that no lithium-related mining activity was to be carried out within the designated tract.[15] Whether the government will use the threat of expropriation to coerce private companies that already have concessions there — the most advanced in negotiations prior to the nationalization owned by the Chinese enterprise Bacanora Lithium — into cooperating on developing the government-controlled resources remains to be seen.

If the government cannot reach agreements with potential investors from China or elsewhere, it will need to find some other way to obtain the technical expertise and funds necessary to develop the new mines, whose lithium deposits are trapped under clay-based soils and face other serious obstacles like a lack of Mexican processing plants and the resources to finance them.[16] Any significant Mexican participation in EV battery development probably depends on the success of “Plan Sonora,” a collaboration between the Mexican federal government, the state of Sonora, and as yet unidentified foreign private investors.[17]

Vulcan Materials

in March 2023, Vulcan Materials, a major U.S. producer of construction aggregates, claimed that the Mexican government had without legal justification and against a Mexican court order sent armed police and military to occupy Vulcan’s port facilities near Playa del Carmen.[18] This action apparently was the culmination of a bitter legal dispute over Vulcan’s adjacent limestone mining operations and was supported by Cemex, the giant Mexican conglomerate, with the concurrence of a local court.[19] This, as with the May 2023 seizure of Grupo México’s railroad properties (discussed below), brings back memories of classic expropriations in Latin America — when hard-line leftists enforced governmental objectives through direct military takeovers of private facilities, rather than through administrative or tax measures designed to effectively destroy the profitability of an enterprise (termed an “indirect expropriation”).[20]

Iberdrola

In April 2023, in what appeared for all practical purposes to be a forced sale, the Mexican government agreed to purchase 13 power plants from the Spanish energy company Iberdrola for $6 billion in what López Obrador himself termed a “new nationalization.”[21] The acquisition provides the CFE with majority control (56%) over the country’s electricity market. While Iberdrola did not publicly object to the transfer, calling it in the best interests of its shareholders, it was evident from the statement that the company had concluded that maintaining a thriving energy business in Mexico might no longer feasible, although the deal reportedly resolved several legal disputes.[22] No public statements regarding whether the company received fair market value have been issued.[23]

Grupo México

On May 18, 2023, the Mexican government expropriated a critical stretch of Grupo México’s railroad properties in the Coatzacoalcos-Medias Aguas section, contending that the action was necessary for “national security and for the public interest.”[24] This action followed a government decree ordering a “temporary” takeover of some 75 miles of the firm’s network in the area around the Gulf coast.[25] This was a classic takeover (even though technically Grupo México had, allegedly, breached a long-term lease), with the Mexican Navy marching into the facilities and seizing control. With the Navy occupying its facilities, Grupo México will continue to manage the railroad under the supervision of the Mexican armed forces. An agreement was announced at the end of May in which Grupo México, likely under some pressure, agreed to a settlement that included no cash compensation, but an expansion of expiring concessions.[26]

The taking apparently scuttled tentative plans for the huge Grupo México conglomerate to complete the purchase of the Banco Nacional de México, or Citibanamex, the former Citibank subsidiary. Less than a week after the railroad expropriation, Citibank abandoned plans for the $7 billion sale, deciding to list it publicly in 2025 instead.[27] Sources attributed the reversal to concerns about tensions between Grupo México’s owner Germán Larrea Mot-Velasco and López Obrador, as well as certain requirements on the transaction levied by the Mexican government, including a ban on layoffs and a prohibition on a future sale to non-Mexicans.[28]

The United States’ Limited and Unattractive Options

López Obrador may well have concluded that he can take whatever steps he wishes against U.S. (or Chinese or Mexican) business interests in Mexico and criticize the U.S. as much and as often as he wants without fear of a significant adverse U.S. government reaction. For example, López Obrador has denied, despite overwhelming evidence to the contrary, that Mexico produces the drug fentanyl, and instead suggested that the drug’s deadly rise is a wholly U.S. — rather than a Mexican — problem caused by “American social decay.”[29]

In July 2022, earlier actions by the Mexican government against U.S. green energy and petroleum investors were the subject of a request for consultations under the state-to-state dispute settlement provisions in Chapter 31 of the United States-Mexico-Canada Agreement (USMCA). The U.S. charged that Mexico’s actions were inconsistent with its USMCA obligations.[30] (Canada filed a similar request shortly thereafter.[31]) After the consultations remained unsuccessful for 75 days, the U.S. and Canada could have demanded the formation of an arbitral panel,[32] which, if the panel had found that Mexico’s actions were inconsistent with the USMCA, could ultimately have resulted in trade sanctions against Mexican exports to the United States. (These exports totaled $455 billion in 2022,[33] or 80% of Mexico’s total exports.)

In late March 2023, it was reported that the Biden administration planned to deliver an ultimatum to break the stalemate.[34] But as of the date of writing, that has not occurred. More recently, Canadian officials suggested that Mexican authorities were willing to work with their USMCA partners and Canadian and U.S. businesses on these disputes, and that Mexico was showing a “way and an interest” in resolving the energy issues. Canadian Foreign Trade Minister Mary Ng has promised to keep a “close watchful eye” on the matter.[35] Given past history, such optimism should be taken with more than a grain of salt.

Even with Mexico’s ongoing efforts to block imports of genetically engineered corn, the U.S. government has moved slowly — not seeking formal consultations until June 2, 2023, despite pressure from the U.S. agricultural community.[36] This means that the 75 days allowed by the USMCA’s dispute resolution mechanism (or much longer, as in the case of consultations the U.S. and Canada requested a year ago on an energy dispute) will likely pass without a request for a panel, and virtually guarantees that a panel, even if promptly formed, would not be likely to issue its report while López Obrador remains in office.

Thus, López Obrador was wise not to have worried about potential formal disputes with the United States. Nearly a year after the request for consultations on energy, neither Canada nor the U.S. has requested a panel or significantly upped the pressure, and the Canadian government has explicitly stated that it does not intend to file a panel request. For the U.S. government, the controlling factor may be that the administration desperately needs Mexico’s cooperation in seeking to mitigate illegal immigration — a concern that, at least through the U.S. presidential election on November 5, 2024, supersedes all others for the Biden administration.[37] In 2020, Canada and the EU formally objected to Mexican government regulations they claim have adverse impacts on 44 renewable energy projects,[38] but these objections have had no measurable impact on Mexico’s policies.

When considering Mexican energy policies, it is worth recalling that López Obrador has maintained a focus on energy sovereignty since his presidential campaign. For his administration, this has involved returning petroleum and electric power to state control and drastically reducing or eliminating private sector participation. Since the beginning of his campaign, he has promised to repeal major parts of the 2013-2014 energy reforms enacted by the Enrique Peña Nieto administration and eventually return the sector to the total state control of the 1970s.[39]

It is only a short step from there to the argument that such steps are dictated by Mexico’s national security and are therefore within its “essential security interests.” This is reinforced by López Obrador's defense of the nationalization of Grupo México’s rail concession as a matter of national security.[40]

In my view, such an argument has a strong chance of succeeding should a USMCA panel be formed. Chapter 32 of the USMCA provides in pertinent part as follows:

Nothing in this Agreement shall be construed to:
. . .
(b) preclude a Party from applying measures that it considers necessary for the fulfilment of its obligations with respect to the maintenance or restoration of international peace or security, or the protection of its own essential security interests.[41] (emphasis added)

An independent observer might well argue that foreign and/or private ownership of a portion of Mexico’s petroleum and electric power industries is not essential or even necessary to Mexico’s national security. Rather, a country’s national security is threatened by prohibiting foreign investment at a time when its oil production is declining by more than 6% a year, as is the case in Mexico. Indeed, Pemex lacks the funds or technology to develop Mexico’s offshore oil fields, and the CFE is unable to provide an electrical grid with 24/7 reliability that is not dependent on coal or fuel oil. But the views of independent observers or opponents are irrelevant to López Obrador.

Unfortunately for the United States in this instance, it has historically interpreted similar language in Article XXI of the General Agreement on Tariffs and Trade[42] as giving it essentially carte blanche to decide unilaterally what is necessary to protect “its own essential security interests.” For decades, the U.S. has (wisely, in my view) asserted that these sovereign decisions are not subject to outside review.

Following a December 2022 adverse panel report by the World Trade Organization, the Office of the United States Trade Representative reiterated that:

The United States has held the clear and unequivocal position, for over 70 years, that issues of national security cannot be reviewed in WTO dispute settlement and the WTO has no authority to second-guess the ability of a WTO Member to respond to a wide range of threats to its security.[43]

At issue is a U.S. policy — first implemented by the Donald Trump administration and continued with some modifications by the Biden administration — that imposes tariffs of 25% (or quotas) on most U.S. imports of steel (excluding those from Mexico or Canada after the USMCA went into effect) and tariffs of 10% on aluminum (also excluding Mexico and Canada).[44] In defending its actions before the WTO, the U.S. argued not only that it was the sole judge of what constitutes “essential security interests,” but also that the concept of national security included economic security as well as more traditionally accepted military threats.[45] When the WTO panel ruled in December 2022 against the U.S., suggesting, inter alia, that the member invoking the national security defense did not have unfettered discretion in doing so, the U.S. publicly stated, as quoted above, that it disagreed with the panel ruling, that it was acting in accordance with a U.S. policy on Article XXI that it had applied consistently for decades, and that it had no intention of bringing its actions into compliance with the new WTO ruling. (The U.S. also appealed the panel decision, which, given the current absence of the WTO’s Appellate Body, means that the ruling remains in limbo and cannot be enforced.[46])

Under such circumstances, should the U.S. pursue an arbitral USMCA panel based on Mexico’s energy violations of the USMCA, Mexico could, with minor modifications, draw from the statements the U.S. submitted to the WTO to support its assertions that it would enjoy the same insulation from review in the USMCA proceeding. This is in addition to its assertion that Chapter 8 of the USMCA protects full Mexican energy sovereignty:

Recognition of the United Mexican States’ Direct, Inalienable and Imprescriptible Ownership of Hydrocarbons

1. As provided for in this Agreement, the Parties confirm their full respect for sovereignty and their sovereign right to regulate with respect to matters addressed in this Chapter in accordance with their respective Constitutions and domestic laws, in the full exercise of their democratic processes.

2. In the case of Mexico, and without prejudice to their rights and remedies available under this Agreement, the United States and Canada recognize that: (a) Mexico reserves its sovereign right to reform its Constitution and its domestic legislation; and (b) Mexico has the direct, inalienable, and imprescriptible ownership of all hydrocarbons in the subsoil of the national territory, including the continental shelf and the exclusive economic zone located outside the territorial sea and adjacent thereto, in strata or deposits, regardless of their physical conditions pursuant to Mexico’s Constitution (Constitución Política de los Estados Unidos Mexicanos).[47]

These provisions state what the U.S. and many independent observers view as a truism: No one is questioning Mexico’s sovereignty over its petroleum resources. Most developing countries assert similar claims, allowing foreign companies to exploit petroleum — often in cooperation with their national petroleum enterprise but seldom with outright ownership.[48] Nor is there any serious question that Mexico has the right to change its laws and constitutional provisions affecting petroleum (and electricity) development and exploitation, including by reverting to the statist rules in force before the 2013 reforms. What seems equally clear is that if the reversion is inconsistent with Mexico’s USMCA obligations, such actions may have financial or international trade consequences if, as here, both private U.S. and Canadian interests and the interests of the U.S. government are adversely affected.

Buried in Chapter 32 of the USMCA, which covers exceptions and general provisions, is a legally solid but politically weak counterargument that would be strongly advanced by the United States if the dispute moved to a panel process. It provides the United States with most-favored-nation (equal) treatment from investors of countries that are party to the Comprehensive and Progressive Trans-Pacific Partnership Agreement, including Mexico and Canada. Unfortunately, the exception lacks the clarity that in retrospect would have been helpful in a state-to-state-dispute,[49] particularly after Mexico’s assertion that Chapter 8 of the agreement, as quoted above, grants it absolute sovereignty to do what it wants in the energy sector, therefore trumping the most-favored-nation guarantee. It is already evident that the López Obrador administration either rejects this provision of the USMCA or chooses to ignore it in favor of Chapter 8.

For American businesses that have been adversely impacted by expropriations or regulatory actions but do not have the confidence (or patience) to pursue a resolution through U.S.-Mexico discussions or a USMCA panel, there may be other options available. Some businesses are pursuing legal action in Mexican courts. In addition, various government contracts with private foreign investors may include arbitration clauses providing for the jurisdiction of entities such as the London Court of International Arbitration. Investors whose projects pre-dated the USMCA, as do most of the clean energy claims, were able to file “legacy” claims under Chapter 11 of the North America Free Trade Agreement (NAFTA) as long as they were submitted by June 30, 2023.[50]

Many other adverse impacts may be subject to arbitration under Chapter 14 of the USMCA. Those whose claims are based on breaches of obligations relating to energy, electricity, transportation, communications, and certain infrastructure are subject to protections similar to those included in Chapter 11 of NAFTA.[51] Most other U.S. investors enjoy only a reduced level of protection: Coverage is not available for establishment claims; investors are required to exhaust local remedies before they submit an arbitration claim; and they are precluded from seeking relief from violations of “fair and equitable treatment” or for indirect expropriation.[52] The latter is a particularly unfortunate limitation for many prospective litigants that do not fall within the preferred arbitration category, since it effectively excludes arbitral jurisdiction over regulatory takings, changes in tax, or other administrative actions that make an existing project unable to continue to operate.

What Happens Next?

Because of the political difficulties that would arise for the Biden administration should Mexico fail to continue cooperating on illegal immigration, as well as the legal challenges stemming from the U.S. position on “essential security interests,” it seems unlikely that the USMCA panel on energy will be convened during the remaining 15 months of López Obrador’s presidency — and perhaps it never will be. Possibly the best that the U.S. can hope for is that the next Mexican president, who will take office in October 2024, will be willing to reach an accommodation with the U.S. government and the private investors involved so that petroleum and clean energy projects in Mexico can again receive the new investment that they desperately need. the meantime, private investors (including those in the U.S., Spain, Italy, and China) can pursue injunctive relief in Mexican courts, as many are already doing,[53] or focus on negotiations with various Mexican government agencies. Some may well negotiate settlements with the Mexican government, even if for less-desirable terms than they had hoped for. Others may seek political intervention by the Biden administration or the U.S. Congress but, given the skepticism in the U.S. on both sides of the political aisle, those stakeholders in my view should not be optimistic with regard to U.S. government intervention, at least between now and January 2025.[54]

Mexican businesses, including shelter operators who cater to maquiladora-type investors, have reason to hope that the significant numbers of investors from the U.S., China, and other foreign producer countries will continue to pursue nearshoring in Mexico, and that investment will continue to increase despite the disincentives. This is likely to occur principally in the states on the U.S. border such as Nuevo León, as has been the case with maquiladoras for many years. Most of these projects are not likely to be highly capital-intensive, but there will be exceptions, as noted above, and they will create jobs and exports even if technology transfer is limited.

Still, despite the much larger and more capital-intensive investments discussed earlier, a true surge in new investment in higher-value processes and goods is not likely to come before the Mexican presidential election — when and if investors are convinced that a new president will be significantly less hostile to business and foreign investment and more supportive of private enterprise than López Obrador. There may still be new investment opportunities available, for example, in two of North America’s key industrial sectors — chips and electric vehicle (EV) batteries (and their parts) — even though it will take years for Mexico’s electric power grid to become reliable, reasonably priced, and clean.

In an improved investment climate, Mexican entrepreneurs could hope that the extensive co-production of auto parts that has taken place in the past 30 years could be replicated in both of those growing sectors, based on such factors as the increase in the regional value content of passenger vehicles from 62.5% to 75% under the USMCA’s rules of origin and the historic dependence of the U.S. auto industry on Mexican parts and components. Mexico is the largest source of imported auto parts in the U.S., supplying about 16% of the total in 2019.[55] However, in both sectors there are hurdles that suggest it will take more than an improved investment climate to generate substantial new investment.

The U.S. Chips and Science Act provides more than $52 billion in subsidies and $24 billion in tax credits for chip production but only for enterprises that meet its stringent requirements (which some might argue to be micromanagement). These rules include some that have nothing directly to do with chips (relating instead to “workforce needs”) and others that require excess profit-sharing. The subsidies and tax credits are available only for facilities built in the U.S.[56] It is too soon to tell whether all of the factories already announced will qualify; these include a Taiwan Semiconductor factory in Phoenix, Intel factories in Chandler, Arizona, and central Ohio, and a Micron factory in Syracuse, New York.[57]

Meetings were initiated on May 24, 2023, to launch a trilateral North American Semiconductor Conference and a Ministerial Committee on Economic Competitiveness.[58] The hoped-for “industry and academic partnerships” and “investments in the development, manufacture, and packaging of semiconductor technologies and related innovations in a way that addresses supply chain gaps”[59] that the countries’ officials boast may be of some limited assistance. Yet, absent staunch support from López Obrador or his successor, a few positive news releases probably will not assuage many potential investors’ broad and deep concerns about doing business in Mexico.

The inaccurately named Inflation Reduction Act (IRA) provides per vehicle subsidies of up to $7,500 for purchases of certain EVs in the U.S. — purchases that can be satisfied with battery parts and other vehicular components from across North America, rather than just the U.S., if stringent regional content requirements are met.[60] In addition, the $2 billion grants are (logically) available only for remodeling or building EV plants in the U.S., not Canada or Mexico.[61] Billions of dollars in state subsidies and tax holidays are being promised for EV and EV battery plants in Michigan, North Carolina, Kentucky, Tennessee, Alabama, and several other states.[62]

Canada is providing more limited federal subsidies, while Ontario is providing provincial subsidies. It is not anticipated that the Mexican federal government or states can or will do the same. This does not mean that there will be no EV or EV battery or component production in Mexico, as BMW’s recent commitment demonstrates, but Mexico’s poor position in the subsidies race is not helpful.

Still, given the many potential benefits of EV and EV battery production in Mexico for producers, North American consumers, and major foreign investment in general, it can be hoped that Mexico’s new president will understand what needs to be done to restore confidence among investors and businesses. This will include welcoming, rather than attacking, private investment; improving the investment climate more generally (e.g., through public safety, infrastructure, and the rule of law); seeking progress toward resolving outstanding investor disputes; and taking steps to improve electric energy availability.

By contrast, if López Obrador's policies are continued by his successor under his shadow, the next president and the Mexican economy will face a grim six years.

Endnotes

---

[1] See for example Shannon K. O’Neill, “Mexico’s Democracy is Crumbling Under AMLO,” Bloomberg Opinion, March 9, 2022, https://bloom.bg/3NuW6y4 or Oscar Lopez, “Amid Climate Worries, Mexico Doubles Down on Fossil Fuels,” Reuters, November 1, 2019, https://www.reuters.com/article/mexico-climate-change-oil/feature-amid-climate-worries-mexico-doubles-down-on-fossil-fuels-idINL8N27G04W.

[2] Adriana Barrera, “Mexico’s Newest Oil Refinery Now Seen Working at Half Capacity in Mid-2023,” Reuters, December 23, 2022, https://www.reuters.com/business/energy/mexicos-newest-oil-refinery-now-seen-working-half-capacity-mid-2023-2022-12-24/.

[3] “Mexican President: Cost of Tourist Train Project Could Reach $20 Billion,” Reuters, July 26, 202, https://www.reuters.com/business/autos-transportation/mexican-president-cost-tourist-train-project-could-reach-20-bln-2022-07-27/.

[4] Monarch Global Strategies, Nearshoring: A Strategic Opportunity, May 2023 (Monarch Global Strategies), 6, www.monarch-global.com.

[5] See “The United States’ Limited and Unattractive Options” section below.

[6] Andrea Navarro, “AMLO’s Seizure of a Billionaire’s Rail Line is Making Investors Wary of Mexico,” Bloomberg, May 23, 2023, https://www.bloomberg.com/news/articles/2023-05-23/mexico-president-amlo-spooks-foreign-investors-with-railroad-seizure. Garcia Sanchez, quoted in the article, was referring to the Grupo Mexico taking discussed later in this brief.

[7] Nearshoring: A Strategic Opportunity, 6. The Belgian steel producer Ternium announced on June 20 that it would build a new plant near its existing facilities in Nuevo León with an investment of $3.2 billion.  See “Ternium Announces it Will Build US $3.2B Steel Plant in Nuevo Leon,” June 30, 2023, Mexico News Daily, https://mexiconewsdaily.com/business/ternium-announces-it-will-build-us-3-2b-steel-plant-in-nuevo-leon/.

[8] This term refers to a situation whereby a newly industrialized developing country is unable to move to a higher level of development, due to a failure to attract more sophisticated enterprises that promise the employment of higher-skilled workers at higher wages and the transfer of more-sophisticated technology.

[9] U.S. Department of State, “2022 Investment Climate Statements: Mexico,” https://www.state.gov/reports/2022-investment-climate-statements/mexico/.

[10] Nathaniel Parish Flannery, “President Lopez Obrador is Squandering Mexico’s Economic Potential,” Forbes, March 22, 2023, https://bit.ly/3qBIFmW. In the article, Ryan Berg, Americas director of the Center for Strategic and International Studies, is quoted: “I would argue that we would see even more inflows of foreign investment were it not for Lopez Obrador’s policies. Some of the nearshoring we have seen is happening in spite of Mexico’s policies as opposed to because of them. Most of the supply-chain movement we’ve seen is organic.”

[11] Navarro, “AMLO’s Seizure of a Billionaire’s Rail.”

[12] Trading Economics, “Mexico – Labor Force, Total,” May 2023, https://bit.ly/3qKdk1C.   

[13] Chris Isidore, “Tesla to Build Next Plant in Mexico,” March 1, 2023, CNN Business, https://www.cnn.com/2023/03/01/business/tesla-mexico-plant/index.html.

[14] Carolina Pulice, “Analysis: Decree Adds to Doubts About Mexican Lithium Industry’s Future,” Reuters, February 24, 2003, https://www.reuters.com/markets/commodities/decree-adds-doubts-about-mexican-lithium-industrys-future-2023-02-24/.

[15] Pulice, “Analysis: Decree Adds to Doubts.”

[16] Pulice, “Analysis: Decree Adds to Doubts.”

[17] James Young, “AMLO – What to Expect in the Next 18 Months,” Miranda Intelligence, April 12, 2023,  https://miranda-partners.com/miranda-intelligence/.

[18] “Statement of Illegal Occupation of Vulcan’s Property in Mexico,” Vulcan Materials Company, March 21, 2023, https://www.prnewswire.com/news-releases/statement-on-the-illegal-occupation-of-vulcans-property-in-mexico-301777931.html; Sarah Morland, “US Firm Says Mexican Authorities Illegally Seized its Port Terminal,” Reuters, March 20, 2023, https://www.reuters.com/markets/us/us-firm-says-mexican-authorities-illegally-seized-its-port-terminal-2023-03-20/.

[19] Morland, “US Firm Says Mexican Authorities Illegally Seized its Port Terminal.”

[20] See for example “The Marcona Settlement: New Forms of Negotiation and Compensation for Nationalized Property,” American Journal of International Law 71 (1977): 474.

[21] Belén Carreño and Adriana Barrera, “Mexico Snares Iberdrola Power Plants for $6 biln in ‘New Nationalization,’” April 4, 2023, Reuters, https://www.reuters.com/markets/deals/mexico-buy-13-power-plants-spains-iberdrola-6-billion-2023-04-04/

[22] Young, “AMLO – What to Expect in the Next 18 Months.”

[23] Young, “AMLO – What to Expect in the Next 18 Months.”

[24] Juan Pablo Spinetto, “AMLO’s Latest Move Unnerves Mexico’s Business Elite,” Washington Post, May 23, 2023, https://wapo.st/3NsF5EQ.

[25] Valentine Hilaire, “Mexico Takes Over Part of Grupo Mexico Railway, Spooking Investors,” Reuters, May 19, 2023, https://www.reuters.com/markets/deals/mexico-takes-over-part-grupo-mexico-railway-shares-fall-2023-05-19/.

[26] Diego Ore, “Mexico, Grupo Mexico Reach Deal Over Occupation of Railway Line,” Reuters, May 31, 2023, https://www.reuters.com/markets/deals/mexico-grupo-mexico-reach-deal-over-occupation-railway-line-sources-2023-05-31/.

[27] Tatiana Bautzer, Saeed Azhar, and Isabel Woodford, “Citigroup Scraps Mexico Unit Sale, Will Pursue IPO instead,” Reuters, May 24, 2023, https://www.reuters.com/business/finance/citigroup-pursue-ipo-its-mexico-retail-unit-2023-05-24/.

[28] Bautzer, Azhar, and Woodford, “Citigroup Scraps Mexico Unit Sale.”

[29] Jeff Zymeri, “Mexican President Says Fentanyl is a US Problem Caused by American Social Decay,” National Review, March 23, 2023, https://www.nationalreview.com/news/mexican-president-says-fentanyl-is-a-u-s-problem-caused-by-american-social-decay/.  

[30] Office of the U.S. Trade Representative, “United States Requests Consultations Under the USMCA Over Mexico’s Energy Policies” (press release), July 20, 2023, https://ustr.gov/about-us/policy-offices/press-office/press-releases/2022/july/united-states-requests-consultations-under-usmca-over-mexicos-energy-policies.

[31] David E. Bond and Francisco de Rosenzweig, “United States and Canada Request Consultations Ober Mexico’s Energy Policies Under USMCA,” July 21, 2022, White & Case, https://www.whitecase.com/insight-alert/united-states-and-canada-request-consultations-over-mexicos-energy-policies-under.

[32] United States-Mexico-Canada Agreement, Article 31.6.

[33] Jarrett Renshaw and David Lawder, “Exclusive: US Plans Ultimatum in Mexican Energy Dispute, Raising Threat of Tariffs,” Reuters, March 27, 2023, https://www.reuters.com/business/energy/us-plans-ultimatum-mexico-energy-dispute-raising-threat-tariffs-2023-03-27/

[34] Renshaw and Lawder, “Exclusive: US Plans Ultimatum.”

[35] “Ng: Mexico Showing a ‘Way and an Interest’ on Energy,” World Trade On Line, May 18, 2023, https://insidetrade.com/daily-news/ng-mexico-showing-way-and-interest-energy-auto-talks-go.

[36] Office of the U.S. Trade Representative, “United States Requests USMCA Dispute Settlement Consultations on Mexico’s Agriculture Biotechnology Measures” (press release), June 2, 2023, https://bit.ly/3P7wNU6.  

[37] For example, see Renshaw and Lawder. “Exclusive: US Plans Ultimatum.”

[38] Dave Graham, “Energy Dispute Deepens between Mexico and Foreign Allies,” Reuters, May 16, 2020, https://www.reuters.com/article/us-mexico-energy-idCAKBN22S0T8.

[39] For example, see Samantha Gross, “AMLO Reverse Positive Trends in Mexico’s Energy Industry,” Order From Chaos (blog), Brookings, December 20, 2019, https://www.brookings.edu/blog/order-from-chaos/2019/12/20/amlo-reverses-positive-trends-in-mexicos-energy-industry/.

[40] “AMLO Turns to National Security to Defend Rail Expropriation,” Bnamericas, May 22, 2023, https://www.bnamericas.com/en/news/amlo-turns-to-national-security-to-defend-rail-expropriation.

[41] USMCA, Article 32.2.

[42] “Nothing in this Agreement shall be construed ... (b) to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests ... (iii) taken in time of war or other emergency in international relations ... .” General Agreement on Tariffs and Trade, Article XXI (1994).

[43] Office of the U.S. Trade Representative, “Statement from USTR Spokesperson Adam Hodge” (press release), December 9, 2022, https://ustr.gov/about-us/policy-offices/press-office/press-releases/2022/december/statement-ustr-spokesperson-adam-hodge; see WTO panel report “US—Certain Measures on Steel and Aluminum Products” (DS 544, 552, 556, and 564), December 9, 2022.

[44] U.S. Bureau of Industry and Security, “Section 232 National Security Investigation of Steel Imports,” U.S. Department of Commerce, March 8, 2018, https://www.bis.doc.gov/index.php/232-steel.

[45] Executive Office of the President , “Adjusting Imports of Steel into the United States,” Proc. 9705, March 8, 2018, https://www.federalregister.gov/documents/2018/03/15/2018-05478/adjusting-imports-of-steel-into-the-united-states.

[46] World Trade Organization members have the right to appeal panel decisions to the WTO’s Appellate Body. The Appellate Body has been moribund since December 2019; thus, a member may indefinitely block the adoption of a panel report simply by filing an appeal. See Dispute Settlement Understanding, arts. 16 and 16.4. The U.S.’ endorsement of a broad unilateral right to decide what constitutes “national [economic] security” may well have solid logic in some instances (although I am not the only observer who believes that its use to protect domestic steel and aluminum was neither necessary nor wise). The risk is that, as seen with López Obrador's energy policies, other governments will likely use the concept as a defense that may insulate them from responsibility, whether the forum is the WTO or the USMCA.

[47] USMCA, Article 8.1.1-2(b).

[48] The U.S. and Canada are exceptions. In these countries, oil companies may acquire title to oil beginning with exploration. Elsewhere, as in Brazil, private companies may partner with a national entity, (e.g., Petrobras), under production-sharing agreements. For example, see, Sabrina Valle, “Brazil’s Government-Owned Sales to Climb Sharply, Official Says,” Reuters, May 5, 2022, https://www.reuters.com/world/americas/brazils-government-owned-oil-sales-climb-sharply-official-says-2022-05-05/.

[49] See USMCA Article 32.1.1.

[50] USMCA Annex-14-C

[51] USMCA Annex 14-E.

[52] USMCA Annex 14-D, 14.D.3(a)(i), and 14.D.5(1)(a).

[53] For example, a Mexican court issued an injunction in March 2021 blocking a new Mexican law favoring state electricity plants. See Mark Stevenson, “Mexican Court Blocks Law Favoring State Electricity Plants,” Seattle Times, March 11, 2021, https://www.seattletimes.com/business/mexican-court-blocks-law-favoring-state-electricity-plants/.

[54] For example, see David Lawder, “Reuters: 33 Democrats Urge Ban on Investor-State Dispute Settlement Provisions in All US Trade Deals,” Office of U.S. Representative Lloyd Doggett, May 3, 2023, https://doggett.house.gov/media/in-the-news/reuters-33-democrats-urge-ban-investor-state-dispute-provisions-all-us-trade. It can no longer be assumed that Republicans would favor U.S. intervention in such disputes if the claimant were not in their home district or were not a large U.S. enterprise with extensive lobbying power.

[55] Chris Isidore, “Why Mexico is so Important to the American Auto Industry,” CNN Business, May 31, 2019, https://www.cnn.com/2019/05/31/business/mexico-tariffs-auto-industry/index.html.

[56] Erica York, “Careful What You Wish For: CHIPS Subsidies Require ‘Excess Profits’ Sharing,” Tax Foundation, March 2, 2023, https://taxfoundation.org/biden-semiconductor-chips-act-subsidies/.

[57] Electrification Coalition, Fact Sheet: IRA EV Tax Credits, August 16, 2022, Electrification Coalition, https://electrificationcoalition.org/wp-content/uploads/2022/08/SAFE_1-sheet_Webinar.pdf.

[58] The White House, “Joint Statement on the Launch of the North American Semiconductor Conference and North American Committee on Economic Competitiveness,” May 24, 2023, https://www.whitehouse.gov/briefing-room/statements-releases/2023/05/24/joint-statement-on-the-launch-of-the-north-american-semiconductor-conference-and-north-american-ministerial-committee-on-economic-competitiveness/; See “U.S., Mexico, Canada Set to Step up Nearshoring Efforts on Chips,” World Trade Online, May 17, 2023, https://insidetrade.com/daily-news/us-mexico-canada-set-step-nearshoring-efforts-chips.

[59] “U.S, Mexico, Canada Set to Step Up Nearshoring Efforts on Chips.”

[60] Electrification Coalition, Fact Sheet — IRA EV Tax Credits.”

[61] Sara Baldwin, “Inflation Reduction Act Benefits: Electric Vehicle Tax Incentives for Consumers and U.S. Automakers, Forbes, September 7, 2022, https://www.forbes.com/sites/energyinnovation/2022/09/07/inflation-reduction-act-benefits-electric-vehicle-tax-incentives-for-consumers-and-us-automakers/?sh=7c831200117e.

[62] For example, see Claire Bushey, “Subsidies Spark EV Manufacturing Race,” Financial Times, February 4,2022, https://financialpost.com/commodities/energy/electric-vehicles/subsidies-spark-ev-manufacturing-race-in-u-s-states. The article discusses subsidies offered by the state of Michigan.

 

 

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