By Lani Anaya*
In July 2020, the trilateral relationship between Mexico, the U.S., and Canada reached a new era. After lengthy negotiations, the new United States-Mexico-Canada Agreement (USMCA) -a modernized version of 1994’s North American Free Trade Agreement (NAFTA)- entered into force.
The not-so-smooth beginning of USMCA has now encountered new tensions with the U.S.’s recent request for dispute settlement talks with Mexico on energy. The Biden Administration’s central claim is that energy policies under President Andrés Manuel López Obrador favor the Mexican state-owned energy giants: power utility CFE and oil firm PEMEX. According to the U.S., such government policies negatively impact U.S. companies operating in the Mexican energy sector. Canada has echoed the U.S.’s claim and has said it will soon call request talks.
Among the U.S. government’s concerns are the 2021 amendments to Mexico’s Electric Power Industry Law openly favoring power produced in CFE plants. Also, the U.S.’s complaints highlight several administrative decisions favoring PEMEX over private firms in the hydrocarbons sector, including restrictions on privately-owned fuel stations, obstacles to importing U.S.-origin fuels into Mexico, and the decision to allow PEMEX to postpone its compliance with maximum sulfur content requirements in diesel fuel. According to the US, these measures go against various provisions in the USMCA that establish non-preferential treatment for state-owned companies.
The 30-day countdown for Mexico and the U.S. to enter dispute settlement talks has begun. While the Mexican Ministry of the Economy expressed willingness to address the U.S.’s request for negotiations, the initial comments from president López Obrador were far from conciliatory. The president called the Mexican people to defend his energy policies -favoring CFE and PEMEX- from foreign interests. López Obrador has rejected the U.S.’s claims based on a matter of sovereignty.
Once dispute settlement talks on Mexico’s energy sector have formally begun, USMCA parties have 75 days to resolve. If not, the U.S. and Canada could request to establish an arbitration panel to decide on the matter. If Mexico is found to be in non-compliance with USMCA, the board could decide on allowing the U.S. and Canada to issue sanctions in the form of tariffs. In all likelihood, sanctions would be imposed on Mexican exports of economic and political significance like agriculture.
The source of the ongoing tension can be summed up in the incompatibility between the recent wave of administrative, regulatory and legislative changes to Mexico’s energy sector framework and the USMCA. López Obrador’s open push to favor CFE and PEMEX is in direct contradiction with an international binding agreement such as the USMCA that under Mexico´s legal framework has the same rank as the Mexican Constitution. It is important however to say that the current dispute over Mexico’s energy policies is not isolated. In addition to the present conflict, USCMA’s dispute settlements include: Canada’s dairy tariff-rate quotas (brought forward by the U.S.) and the U.S.’s interpretation of USMCA auto rules of origin (filed by Canada and Mexico). The rationale behind these disputes is the intent of one country to protect national markets and the claim by the other two signatory-countries for equal treatment under the agreement.
This time, president López Obrador argues that the disagreement over USMCA and Mexico’s energy sector is directly tied to the country’s sovereignty. The requests for dispute settlement talks go against López Obrador´s strong narrative of making Mexico independent with regards to energy. During his time in office, the Mexican president has insisted on energy self-sufficiency, and is now pleading to defend the country in case the conflict escalates. While his response resonates positively with his supporters, López Obrador’s positioning raises concerns over the future of Mexico’s energy sector.
It is hard to predict how the dispute settlement process of Mexico’s energy sector will evolve. Yet, the ongoing tensions over Mexico’s energy policy could be an opportunity for the three USMCA countries to show a willingness to solve disputes through dialogue. They could also be the starting point for signatories to implement actions to increase trade in the region. Despite former and current discrepancies, the USMCA -and its predecessor NAFTA- have been the mechanisms shaping the economic future of the North American region; each signatory country must demonstrate an interest in preserving trade cooperation.