The North American Agenda: What Lies Ahead for the USMCA? – All Talk and No Action

“The Ministry of Economy (SE) informs that, regarding the issue of consultations with the United States and Canada on energy matters, it is important to accelerate the resolution of its conclusion in order to give security to investors who want to [invest] in the country,”

-wrote Mexico’s Secretary of Economy in a statement on its proposed solutions to the ongoing trilateral dispute over energy. 

Mexico Goes Public With Its Justifications

In an unusual step, Mexico’s Secretary of Economy (SE) issued a press release describing the plan submitted to the U.S. and Canada to address their concerns over Mexican energy policies. Instead of seeking opportunities to negotiate, Mexico seems to be treating at least some of those concerns as mere misunderstandings that can be explained away. While the press release states that solutions have been proposed to address two of the countries’ outstanding concerns, SE officials have clarified that changing Mexico’s controversial Electricity Industry Law (LIE) is off the table as court injunctions have paused the law’s implementation, making it irrelevant to the consultations. Instead, Mexico has proposed creating technical working groups to “clear up doubts, as well as justify the decisions made in the energy sector.”

• Diving deeper: While the SE claims that the LIE does not apply within the context of the consultations, the government continues to litigate in favor of the legislation in domestic courts. Following an April Supreme Court ruling declaring the law’s constitutionality, the Mexican government maintained that the LIE “is in force on its terms and should be applied by the relevant authorities.” Moreover, Article 31 of the USMCA explicitly allows members to dispute both “actual and proposed measures[s],” further undermining Mexico’s argument that the LIE is immaterial to the consultations.
• Our takeaway: Mexico’s public statement frames the consultations as a mere misunderstanding instead of a process founded on the real concerns of its trade partners. It also continues a pattern of Mexico one-sidedly framing the debate around the consultations instead of collaborating on public messages with its counterparts, who have remained quiet about the country’s proposals. In short, if Mexico’s behind-the-scenes negotiating approach reflects these public statements, the countries seem unlikely to reach an agreement by Mexico’s January timeline.

Mexico and Canada Win Auto Parts Dispute

Reporting suggests that Mexico and Canada have preliminarily won a contentious panel against the U.S. over the percentage of regional content necessary for vehicles to qualify for duty-free shipping under the USMCA. The ruling implies that the less-stringent regional content measurement calculations used by Canada and Mexico will now apply to auto trade, in a win for local vehicle manufacturers in these countries. Following the preliminary ruling, both sides now have time to respond before the final ruling is made public in the coming months. If an agreement is not reached, Canada and Mexico may be permitted to apply tariffs on U.S. goods, subject to certain conditions.

• Diving deeper: This ruling is consequential as automobile manufacturing is considered the poster child of North American integration: in the first nine months of 2022, over 65 million Mexican-made cars were exported to the U.S. Even so, the issue has only grown in importance since the dispute was first launched in January, given the subsequent passage of the U.S. Inflation Reduction Act in August. Following this ruling, more electric vehicles will qualify for the legislation’s substantial subsidies, which are contingent on regional content requirements.
• Our takeaway: This loss for the U.S. marks the second panel ruling since the USMCA entered into force in 2020. In January 2022, a separate panel concluded that Canada was breaching its USMCA commitments by granting local companies preferential access to its dairy market. Despite frequent finger-pointing at Mexico for enacting protectionist policies, the U.S. and Canada have now both been found culpable of advancing their domestic industry to the detriment of the regional economic unit.

Talking the Talk Without Walking the Walk

During Secretary of Economy Raquel Buenrostro’s meeting with U.S. Secretary of Commerce Gina Raimundo as a part of her trip to Washington, the two discussed creating a joint plan to further incentivize company nearshoring from Asia to North America. According to Buenrostro, this would include auctioning ten industrial parks in Oaxaca’s isthmus of Tehuantepec aimed at semiconductor manufacturing, three to four of which would be powered by wind energy.

• Diving deeper: Although the AMLO administration is partial to large infrastructure projects, experts doubt that it will be able to fully deliver its three emblematic “mega-projects” in its remaining two years in office, much less break ground on new ones. In Buenrostro’s statement, she emphasized that many of the details surrounding the parks, including the applicable business model, have yet to be defined. This subjective approach lends credence to accusations that Mexico has strengthened its rhetoric around advancing the energy transition to appease the U.S., without taking substantive action. This week, the NGO Climate Tracker accused Mexico’s revised climate targets – which were announced with the public support of the U.S. – of using “creative accounting” to frame less ambitious commitments as meaningful progress.
• Our takeaway: Mexico is missing out on historic opportunities to take advantage of U.S. investment in semiconductor manufacturing and nearshoring trends, in part due to its refusal to develop the clean energy sources that companies demand. As corporations increasingly require low-emission energy sources in order to meet their climate goals, Mexico’s bet on fossil fuels risks severely dampening its attractiveness as an investment destination.

Following the Conversation

• “Unfortunately, the Mexican government has not lived up to its biotech-related commitments in the USMCA. Accordingly, we urge USTR to promptly request dispute settlement consultations with Mexico on these issues,” reads a bipartisan letter signed by members of Congress urging the USTR to initiate consultations over Mexico’s proposed ban on GMO corn.
• “Over the course of our shared history, Mexico and the United States have demonstrated that we are stronger and safer when we stand together. Our futures are irrevocably connected. And today – as we embark on the next century of our partnership with mutual respect and commitment to our shared aspirations – we remember that nothing is beyond our reach if we continue to work together,” said U.S. President Joe Biden in a statement on the 200th anniversary of U.S.-Mexico relations.
• “So, instead of thinking about warlike hegemonies, about world domination through the use of force, one must seek [to create] balances in the economic and commercial spheres and that there are no hegemonies that lead to wanting to solve the problems of imbalances through the use of force. [This entails] removing the temptation to use force and compete fairly, without there being any kind of war, not even a trade war,” stated Mexican President Andrés Manual López Obrador regarding his vision for regional integration.

All translations provided by FTI Consulting.

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