The United States-Mexico-Canada Agreement (USMCA) replaced NAFTA as the primary North American trade agreement on July 1, 2020 (U.S. Trade Representatives 2022). Some agreement policies highlighted are creating a level playing field for American workers, better rules of origin for automobiles and other products, disciplines on currency manipulation, strengthening agriculture trade, and additional rules on Digital Trade, Anti Corruption, and Good Regulatory Practices (U.S. Trade Representatives).

The United States requested consultations with Mexico under the Dispute Settlement chapter of the USMCA on July 20, 2022 (Luther 2022). The issue they raised was that Mexico’s government supposedly favors its state-owned utility and oil companies at the expense of U.S. businesses. The U.S. was motivated to request consultations because of the Mexican government’s efforts to promote state-owned electrical utility (CFE) and oil and gas companies (Pemex) in recent years, led by President Obrador (Luther 2022). Canada soon followed with a similar complaint.

The policies the United States’ request targets are prioritizing electricity generated by the state-owned utility, obstructing private companies from operating in the energy sector, favoring Pemex in extending time for regulatory compliance, and incentivizing the sourcing of natural gas in Mexico from state-owned entities (Luther 2022). The USMCA chapters they violate are Market Access, Investment, State-Owned Enterprises, and Publication and Administration, which address unfair treatment that promotes Mexican investors and businesses.

The first issue in the request is about how Mexico’s Electric Power Industry Law requires the grid operator to prioritize CFE-generated (state-owned) electricity over electricity generated by private competitors, regardless of cost or environmental impact (Luther 2022). The second issue is about obstructing private companies from operating in energy. Mexico hinders U.S. private companies from operating in the energy sector by “delaying, denying or failing to act on applications for new permits; suspending or revoking existing permits; or otherwise blocking private companies’ ability to effectively operate” (Luther 2022). The third issue is that Mexico granted only Pemex a five-year extension to comply with sulfur content requirements for automotive diesel fuel (Luther 2022). Mexico has not been impartial in regulation by granting only a Mexican company this extension. The final issue the U.S. targeted is incentivizing the sourcing of natural gas in Mexico from state-owned entities. The Mexican Secretary of Energy sent a letter about how they wanted government agencies to take action to incentivize users of Mexico’s natural gas transportation to get natural gas from CFE or Pemex (while restricting importation of U.S. natural gas). 

What is the process for settling these matters? It is a lengthy process of consultations and dispute settlement proceedings. Thirty days after the request, they had to begin consultations. Mexico and the U.S. have expressed that they want to put every possible effort towards reaching a resolution. They had 75 days to reach a resolution (before a dispute panel that would put Mexico in danger of tariffs), which has expired. However, this period to discuss solutions has been extended after productive actions from Mexico, such as addressing the backlogs on permits, had pointed them in a “productive” direction (Graham 2022). Aside from productive action, the U.S has midterms in November and increasingly complex inflation issues, which has probably influenced them to continue talks and avoid escalating the dispute for now (Graham 2022).

 The next step if they do not reach a resolution in this extended period would be the U.S. requesting a panel of experts to rule on the matter. If the panel found that Mexico violated the chapters the U.S. has claimed, both countries would have 45 days to negotiate a resolution. If no agreement is reached by the end of this period, the U.S. could impose tariffs on Mexico to “offset the damage suffered by U.S. companies” (Luther 2022). A similar process should occur for Canada. 

 The U.S. has solid evidence of Mexico violating some of the policies of USMCA if the panel agrees with their interpretation. As the U.S. comprises 80% of Mexico’s exports and is Mexico’s top foreign investor, retaliatory tariffs would be devastating to the economy depending on the scale (U.S.-Mexico Trade Relations 2022). However, President Obrador’s commitment to building up the strength of state-owned enterprises in the energy sector has led him equating this issue to one of sovereignty (U.S.-Mexico Trade Relations 2022). Mexico mainly exports crude oil, and president Obrador wants to focus on homegrown production of diesel and gas. Therefore, it seems for some of the issues around Pemex and CFE, there will need to be a weighing of what is more important: tariffs or long term energy sector growth.

 This is far from the first requested consultations, with Canadian dairy and U.S. softwood lumber duties coming under fire in the past. However, because of the geopolitical backdrop of the Russia-Ukraine war influencing oil supply and the strength of the relationship between the U.S. and Mexico in the energy sector, it has the most impact on both nations’ economies. The U.S. needs oil, and to threaten their relationship with Mexico especially around election time is dangerous. On Mexico’s side, the issue of their massive exporting to the U.S. being threatened by taxes or limiting the growth of home production of diesel and gas is important. Another factor to consider is that the Russia-Ukraine war has driven some people to value nearshoring, where the supply chain is more geographically close, opening up an opportunity for Mexico to reclaim some manufacturing power from China. 

Who is right in this issue does not matter; what matters is the implications of changing the relationship between the U.S. and Mexico in the energy sector in this current economic climate. For the time being, Mexico and the U.S. both have strong incentives to solve through consultations or at least avoid the panel. In the long-run, their interests are opposed, and how they handle this issue will highly depend on factors like inflation and the war.

Works Cited:

Luther, Paul. “United States Challenges Mexico's Energy Policies under the USMCA .” Baker Botts, 23 Aug. 2022, https://www.bakerbotts.com/thought-leadership/publications/2022/august/united-states-challenges-mexicos-energy-policies-under-the-usmca. 

Graham, Dave. “Mexico to Extend Talks with U.S. over Energy, Hails 'Productive' Dialogue.” Reuters, Thomson Reuters, 4 Oct. 2022, https://www.reuters.com/business/energy/mexico-extend-talks-with-us-over-energy-hails-productive-dialogue-2022-10-03/. 

“United States-Mexico-Canada Agreement.” United States Trade Representative, https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement. 

U.S.-Mexico Trade Relations - Federation of American Scientists. 29 Sept. 2022, https://sgp.fas.org/crs/row/IF11175.pdf.