What’s up with the USMCA and Mexico’s Energy Policy?

For months U.S. government officials have tried to persuade Mexican President Andrés Manuel López Obrador to reconsider the direction of his energy policy, arguing that it contravenes the 2020 United States-Mexico-Canada Agreement (USMCA). But their efforts have been to no avail.

U.S. climate envoy John Kerry visited Mexico a number of times to raise concerns over the recarbonization of Mexico’s energy industry, which is negatively impacting the country’s commitment to fight global climate change. U.S. Trade Representative Katherine Tai also repeatedly warned Mexico about serious violations to several provisions of the USMCA, and Energy Secretary Jennifer Granholm sought to persuade the López Obrador administration to join into a broader North American energy platform. Meanwhile, Secretary of State Antony Blinken has kept diplomatic channels open, and U.S. Ambassador to Mexico Ken Salazar organized and held meetings between the López Obrador government and at least 17 companies affected by the policy shift. Despite these attempts to convince López Obrador to reconsider his energy policy, he has not relented.

In fact, López Obrador seems oblivious — or perhaps even outright derisive — of U.S. officials’ complaints.

Tired of the dismissive attitude of the Mexican government and faced with the failure of convincing López Obrador to reverse course, the U.S. government has called for state-to-state consultations, as stipulated by the USMCA. Canada has joined Washington in this effort, and these consultations, charged with resolving four specific complaints brought forth by the U.S. government, should be completed by the end of October 2022.

The four complaints, as articulated by the U.S. government, are as follows:

1. Mexico’s power industry law forces the National Center for Energy Control (CENACE) to give priority to the Federal Electricity Commission (CFE) over other actors — a measure that violates the commitment to equal treatment of all actors in the market;
2. The CFE and the Secretariat of Energy’s many inactions, delays, denials and revocations of private companies’ permits to operate in Mexico go against the commitment to guarantee equal treatment of all market actors;
3. The requirement for Mexico’s oil company, PEMEX, to provide ultra-low-sulfur diesel — a privilege not granted to other companies — was postponed; and
4. Mexico’s exercise of regulatory discretion, through the National Center for Control of Natural Gas (CENAGAS) and the Energy Regulatory Commission (CRE), to give priority in natural gas transportation services to companies that buy directly from the CFE or PEMEX discriminates against companies that have other suppliers but need such services to operate.

When the U.S. government invoked the remedies offered by the USMCA and called for state-to-state consultations, the parties were given 75 days to resolve the issues at hand. If the parties fail to resolve their disagreements, Washington and Ottawa can call for the establishment of a dispute settlement panel to determine the nature and character of the violations (“findings of fact”) and make recommendations. That could take approximately 300 days, prolonging the dispute well into 2023. If no resolution is achieved, the plaintiffs can suspend trade benefits to the offender in such a way that is equivalent to the impact on the plaintiff’s investors. This means that the U.S. and Canada, in effect, could impose tariffs on Mexican goods and services of their choice.

While López Obrador appears unconcerned about not only the rights and needs of investors, but also his own commitment to free trade and the penalties that may befall Mexico, the Biden administration has ample bipartisan support in Congress and the private sector. A number of letters have been filed by members of Congress denouncing Mexico’s discrimination against U.S. companies. The fact that Canada joined the dispute against Mexico further legitimizes Washington’s position.

López Obrador, in response, has made a series of rather odd counterproposals. For example, he said that American natural gas export projects are welcome in Mexico, even though his actions suggest the opposite. He has also stated that solar power will be exported from the state of Sonora to the United States, but he has castigated solar power companies for being nowhere near ready to export anything. And, strangely, he has even declared that Americans are welcome to fill up their gas tanks at Mexico’s gas stations along the border, to take advantage of the excise tax subsidy his government deployed to keep inflationary pressures somewhat in check — something that looks increasingly out of place as U.S. gas prices are now dropping.

These counteroffers are not only perplexing, they also rub against common sense regarding a basic understanding of the Mexican government’s legal commitments on trade. Similarly, they appear to ignore the tribulations of companies trying to operate in Mexico.

What’s worse is that López Obrador seems to believe that the outcome is not his problem. Since his presidency is set to end on September 30, 2024, the next administration, not his, will have to deal with any fallout from these trade disputes.

Unfortunately, many other aspects of the binational relationship that cry for attention will either be put on hold or face adverse effects from these disagreements, which ultimately stem from the clash of López Obrador’s energy policy and the trade commitments that he himself made when he signed the USMCA in 2020. This is unfortunate given that the bilateral agenda is full and complex, and this trade dispute is likely to impede progress on many of the other issues demanding attention.