By Mónica Rodríguez *
The Biden administration has already proved that it looks to reshape the US-Mexico relationship into a more institutional and cooperative one. Unlike its predecessor, Biden has a clear understanding of the interconnection between both countries, particularly in the energy sector.
However, the relationship with president López Obrador has not been easy, and given the little interest shown by the Mexican government in the international agenda, Mexico has reduced the bilateral relationship to a few issues, among them, labor, migration, and trade.
Energy in the bilateral relationship
Energy is already one of the most controversial issues in the US-Mexico bilateral relationship, however, it has not been addressed directly. Clean energy is mainly an important issue for the Biden administration and its scope its not limited to the U.S., it includes Mexico and Central America. However, currently both countries have incompatible positions towards the energy sector and specially towards clean energy and energy transition.
On the one hand, Joe Biden’s administration is not only committed to combating climate change and promoting renewable energy as part of its domestic policy, but as a central axis of its foreign policy. On the other hand, President Andrés Manuel López Obrador has a nationalist agenda focused on oil extraction and fuel production, a policy that exacerbates global warming and represents a clear setback in terms of clean energy policy.
President López Obrador has doubled down on his commitment to a nationalist model centered on Mexico’s State-Owned Enterprises (oil company Pemex and power utility CFE). The recent changes to Mexico’s Electricity Industry Law and Hydrocarbons Law made it clear that López Obrador administration is not interested in the participation of private companies in the energy sector, nor in promoting clean energy. These reforms have been challenged in court by private companies and some environmental groups – in the case of the Electricity Industry Law – and they have obtained injunctions to stop its implementation.
The limits to the participation of private actors in the Mexican energy sector, as well as to the development of new clean energy projects and their eventual interconnection to the entire Mexican electricity system has led to a clash of projects that will generate friction in the bilateral relationship, particularly in the framework of the commitments acquired under the USMCA trade deal.
Unlike the Trump administration, Biden is more likely to defend US investments and contracts in the energy sector, but despite the complexity of the issue, we will not see an openly conflictive relationship. However, the promotion of clean energy and the entire energy file will continue to be one of the toughest topics on the bilateral agenda, and pressure from the various U.S. agencies will probably increase to ensure that Mexico complies with the regulatory processes established in the USMCA and stops all discriminatory treatment against private companies for the benefit of Pemex and CFE.
Investment and USMCA
AMLO’s current energy policy and legislative attempts to roll back Mexico’s landmark 2013 energy reform puts US investments at risk and has already generated disagreements. The legislative and regulatory changes in Mexico´s energy sector, which in both cases have discriminatory treatment towards private companies, whether national or foreign, has raised concerns among U.S. investors in Mexico over the last two and a half years.
The possibility of international arbitration under the USMCA increased but President López Obrador has not shown any signs of going back in his energy policy goals, and has only offered to “review” private contracts, which he considers detrimental to CFE and PEMEX.
USMCA can be considered one of the most important policy tools for both the U.S. and Mexico, and it has the potential to enhance cooperation and free trade. However, the insistence of the AMLO government that the USMCA does not cover the Mexican energy sector -based on the reading of Chapter 8- leaves U.S. investors with the only tool to defend their investments in Mexico.
In this sense, Ambassador Katherine Tai, U.S. Trade Representative, has already been outspoken about these concerns in the energy sector, although no plan or agreement has been reached yet on how to proceed.
What can we expect ahead in the bilateral relation?
One of Biden´s most ambitious plan is to create an integrated energy grid that goes from Mexico through Central America, supplied by clean energy. Another issue in the agenda is to include its trade partners, including of course Mexico, to impose a carbon adjustment fee or quotas on carbon-intensive goods to incentivize its partners to maintain and accomplish their climate goals and commitments. In this sense, Mexico will have to adapt or face a great drawback in its trade with the U.S.
The recent midterm election in Mexico may have changed the political scenario. However, the projected loss of the President´s party (Morena) supermajority in the Lower House is not yet a reality. Therefore, there is no guarantee that President López Obrador will not try to amend the Constitution to finally erase Mexico’s 2013 Energy Reform or to keep changing secondary laws and to attempt the disbandment of independent regulatory agencies.
The bilateral relationship has enormous potential when it comes to energy and climate change issues, however, Joe Biden’s pro-environment and renewable energy agenda will seek to pressure Mexico. Yet, there is no guarantee of a favorable result.
Mexico´s energy dependence on the U.S. makes the bilateral relationship crucial. But in a relation that has always been characterized by its complexity, asymmetry and marked interdependence, how can a cooperation agenda on energy transition and clean energy be established when no common ground has been found?
*Mónica Rodríguez is political risk consultant for the energy sector at Integralia Consultores. She is a member of the Youth Program Board of the Mexican Council on Foreign Relations (Programa Jóvenes COMEXI). The U.S.-Mexico Foundation is a binational non-profit organization dedicated to fostering bilateral cooperation and improving the understanding between the United States and Mexico by activating key people in the relationship that once were dormant.Twitter: @usmexicofound