US and Mexico Enters into Bilateral Dispute Settlement Consultation Over Energy

The U.S. government identified several specific actions, as well as overall “inaction, delays, denials, and revocations of private companies’ abilities to operate in Mexico’s energy sector,” as violations of the Market Access, Investment, and State-Owned Enterprise Chapters of the USMCA.² These include: 

• A 2021 amendment to Mexico’s Electric Power Industry Law (LIE) that prioritizes CFE-produced electricity in the dispatch order, regardless of price or environmental considerations. 
• A 2019 regulation granting only PEMEX an extension to comply with the maximum sulfur content. requirements under Mexico’s automotive diesel fuel standard. 
• A 2022 notification by the Secretary of Energy (SENER) which would require users of Mexico’s gas transportation network (SISTRANGAS) to demonstrate that they source their natural gas from PEMEX or CFE. 
• Mexico’s delay, denial, or failure to act on applications for new permits or permit modifications, as well as suspending or revoking existing permits. 
• Measures that block private companies’ ability to operate renewable energy facilities, such as wind and solar installations. 
• Measures that block the import and export of fuel, the storage or transload fuel, and the construction or operation of retail fuel stations.³ 

This action by the U.S. means that the U.S. and Mexico must enter into consultations within the next 30 days. If the consultations do not lead to a resolution within 75 days, the U.S. could request the establishment of a panel of experts. At that point, if the panel determines that there has been a denial of rights, and if the parties fail to agree on a resolution to the dispute, the U.S. could impose import tariffs on Mexican products to offset the damage suffered by U.S. companies.4 

This is the second time that the United States has requested consultations with Mexico under the USMCA, having previously used the mechanism to address concerns related to the protection of endangered species in Mexico. Those conversations follow a different track under the Environmental Chapter and remain ongoing.⁵ 

Canada’s International Trade Minister Mary Ng has since stated that Canada agrees with the U.S. in this dispute and will also be launching consultations under USMCA to address energy sector challenges.⁶ 

 Mexico’s Response 

In a brief statement responding to the USTR, Mexico’s Secretary of Economy acknowledged receipt of the U.S.’s request to begin consultations and shared the U.S.’s desire to come to a mutually satisfactory solution during the consultations.⁷ 

In his daily press conferences, President López Obrador’s response to the USTR dispute has centered on the following arguments: 

• The action is a result of lobbying by individual, antagonistic companies, while the majority of U.S. businesses in Mexico do not have a problem with Mexican policies. His Administration is merely protecting the people of Mexico from companies that are trying to take advantage of them. 
• Nothing will come from these consultations, and Mexico is not afraid of this action as everything they are doing is within the letter of the law. On Wednesday, the President even played a song entitled, “Oh, how scary,” seemingly mocking the USTR action. 
• President Biden respects Mexico’s sovereignty and sees Mexico as an equal partner. His Administration would not infringe on Mexico’s right to govern its own territory.⁸ 

In the past when the U.S. and Canada have alleged violations of the USMCA in Mexico’s energy sector, the AMLO Administration has publicly claimed that the trade agreement does not apply to energy. This is based on the incorrect statement that an exception was created by including Chapter 8, on recognition of Mexico’s ownership of hydrocarbons, during the latter rounds of negotiations.9 

Looking Forward 

President López Obrador is unlikely to back down from his Administration’s ambitions to strengthen PEMEX and CFE vis-à-vis foreign investors, given how central this strategy is to his political philosophy, rhetoric, and achievements in office. In public, he is likely to continue to argue that the USMCA does not apply to energy matters and that the U.S. respects Mexico’s sovereignty in this area. 

Nonetheless, if the country is to avoid U.S.-imposed tariffs, it will have to reach a resolution with its neighbor. It is important to note that it is in both countries’ best interest to avoid this outcome. The U.S. is Mexico’s largest trading partner by a wide margin — with the country serving as the destination for 83% of Mexican exports in 2021 according to the United Nations COMTRADE database — and tariffs could bear important consequences for Mexico’s economy. Such measures are likely to target products and sectors that would cause enough impact to compel the Mexican government to change its policies.¹⁰ U.S. Ambassador to Mexico Ken Salazar recently estimated that the affected energy investments are worth more than $30 billion in investment.¹¹ 

While President López Obrador has maintained overall fiscal balance, his spending priorities have not led to high growth rates. Failure to reach an agreement would further complicate Mexico’s outlook in this regard, particularly in the current inflationary/recessionary environment. The brunt of the potential economic pain brought by tariffs would be shouldered by Mexican exporters, a constituency which has not yet weighed in systematically from an advocacy standpoint. Canada’s backing of the statement further raises these stakes, while weakening the Mexican government’s argument that the dispute is the work of only a few individuals. 

In the U.S., President Biden will likely seek to reach an agreement before convening a panel, and he may hesitate to apply severe tariffs that would further impact consumer prices in an already inflationary environment, especially since Mexican energy policy is not a primary issue for his political base. However, failure to act may also have its consequences, as the issue has gotten the attention of both Democratic and Republican senators alike. Furthermore, the current trajectory of Mexican energy policies undermines the region’s climate ambitions, which is an issue of great importance to the Administration. 

Given this context, one of the following outcomes may be likely: 

• Mexico addresses harms brought upon specific companies, without fully addressing broader sectoral challenges, and this is deemed to be sufficient by the U.S. and Canada. The AMLO Administration has in the past shown willingness to resolve issues on an individual company basis and may pursue this remedy once more. U.S. Ambassador Ken Salazar has also been a proponent of these agreements, though they have been the source of criticism over his relationship with President López Obrador. 
• Mexico is pushed to address technical concerns, while maintaining his broader rhetoric of strengthening national champions. Given that many of the adverse policies addressed in the USTR press release are technical changes that likely fly over the heads of the majority of AMLO’s voter base, the Administration may agree to reverse some of the more technical regulatory changes while maintaining its public-facing rhetoric of strengthening PEMEX and CFE. It may even shift blame for these changes to third parties, such as Mexican courts currently analyzing related cases brought forth by both domestic and international companies.12 
• Mexico refuses to change course, and the U.S. convenes a panel and then applies tariffs individually or in coordination with Canada. Ultimately, Mexico may decline to change its course and simply accept that a panel will be convened, at the risk of tariffs being imposed. Given the centrality of energy to President López Obrador’s agenda, he may be willing to bet that the entrenched nature of USMCA supply chains will limit the real-world impact of tariffs. 

Overall, the trilateral relationship is in for a bumpy ride. The next North American Leaders’ Summit has been scheduled for December in Mexico City. 

Additional Bilateral Context 

The announcement comes amid a period of increasing turmoil between Mexico and the U.S., in which AMLO recently refused to attend the Summit of the Americas and offered asylum to Julian Assange, among other snubs. Additionally, the U.S. Ambassador to Mexico Ken Salazar has been criticized in recent weeks for his close relationship with the Mexican President and lack of results in advancing U.S. interests in the country.¹³ 

In an attempt to reset relations, President Biden invited President López Obrador to the U.S. last week, during which time the Mexican president did not shy from asserting his stance on energy; he even harkened back to the 1930s when Mexico expropriated U.S. oil assets in the country, stating that the countries should seek to resolve their disputes amicably now as they did then. Following his trip to the U.S., AMLO announced that U.S. companies would be investing $40 billion in energy projects over the remainder of his tenure, a claim which is now seriously in question.14 

Footnotes:

¹ “United States Requests Consultations Under the USMCA Over Mexico’s Energy Policies”. Office of the United States Trade Representative. July 20, 2022. https://ustr.gov/about-us/policy-offices/press-office/press-releases/2022/july/united-states-requests-consultations-under-usmca-over-mexicos-energy-policies-0

² Ibid.  

³ Ibid.  

⁴ United States-Mexico-Canada Agreement. Chapter 31. Office of the United States Trade Representative. July 1, 2020. https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/Text/31%20Dispute%20Settlement.pdf 

⁵ “Readout of Ambassador Katherine Tai’s Meeting with Mexico’s Secretary of Economy, Tatiana Clouthier.” Office of the United States Trade Representative. July 8, 2022. https://ustr.gov/about-us/policy-offices/press-office/press-releases/2022/july/readout-ambassador-katherine-tais-meeting-mexicos-secretary-economy-tatiana-clouthier 

⁶ “Statement by Minister Ng on Canada launching Canada-United States-Mexico Agreement consultations on Mexico’s new energy policies.” Global Affairs Canada. July 21, 2022. https://www.canada.ca/en/global-affairs/news/2022/07/statement-by-minister-ng-on-canada-launching-canada-united-states-mexico-agreement-consultations-on-mexicos-new-energy-policies.html 

7 “México recibe solicitud de Estados Unidos para el inicio de Consultas.” Secretaría de Economía. July 20, 2022. https://www.gob.mx/se/prensa/mexico-recibe-solicitud-de-estados-unidos-para-el-inicio-de-consultas 

8 Daily Press Conference. Andrés Manuel López Obrador. July 21, 2022. https://lopezobrador.org.mx/2022/07/21/version-estenografica-de-la-conferencia-de-prensa-matutina-del-presidente-andres-manuel-lopez-obrador-777/ 

9 “Presidente fijará postura sobre el T-MEC a favor del interés de la nación el 16 de septiembre.” Andrés Manuel López Obrador. https://lopezobrador.org.mx/2022/07/22/presidente-fijara-postura-sobre-el-t-mec-a-favor-del-interes-de-la-nacion-el-16-de-septiembre/ 

10 Mexican Exports by Country. Trading Economics. https://tradingeconomics.com/mexico/exports-by-country 

11 David Graham and Stephen Eisenhammer. “U.S. ironing out energy sector disputes with Mexico worth $30 bln -ambassador.” Reuters. June 15, 2022. https://www.reuters.com/business/energy/us-ironing-out-energy-sector-disputes-with-mexico-worth-30-bln-ambassador-2022-06-15/ 

12 Enrique Hernández. “Empresas se van a amparar contra la Ley de la Industria Eléctrica: Concamin.” Forbes. April 7, 2022. https://www.forbes.com.mx/empresas-se-van-a-amparar-contra-la-ley-de-la-industria-electrica-concamin/ 

13 Natalie Kitroeff and Maria Abi-Habib. “Has Biden’s Top Diplomat in Mexico Gone Too Far, Officials Ask?” The New York Times. July 5, 2022. https://www.nytimes.com/2022/07/05/world/americas/united-states-mexico-diplomacy.html? 

14 Daily Press Conference. Andrés Manuel López Obrador. July 14, 2022. https://lopezobrador.org.mx/2022/07/14/version-estenografica-de-la-conferencia-de-prensa-matutina-del-presidente-andres-manuel-lopez-obrador-772/