12 / 05 / 23
Has U.S. investments in Mexico slowed down due to disagreements over energy policy?
MEXICO CITY, MEXICO, December 5th, 2023 – The Biden administration alleges that Mexico’s protectionist measures violate USMCA rules.
Three years after the renegotiation of the North American trade agreement, tensions persist between the United States and Mexico. The source of discord lies in Washington’s ongoing complaint against measures taken by the Andrés Manuel López Obrador administration to protect Mexican energy companies—a policy deemed integral to national identity. While economic disagreements fuel the conflict, the underlying issues appear to be primarily political.
Despite these tensions, commercial exchange between the United States and Mexico continues to thrive, as indicated by official figures. The post-pandemic economic recovery and the significant impact of nearshoring have contributed to the growth in trade. This trend involves the relocation of companies from both countries, previously situated in other regions, highlighting the dynamic nature of economic relations between the two nations.
The focal point of the disagreements lies in the energy sector, with implications for highly sensitive areas in binational trade. These disputes have the potential to reignite other unresolved issues, including the contentious automotive matter and the case of genetically modified corn. Additionally, the persistent and intricate issue of migration, which affects the United States along the shared border, should not be underestimated.
Since 2021, the U.S. has expressed concerns, contending that various measures implemented by AMLO contain protectionist elements. Washington has labeled these actions as ‘energy nationalism,’ a stance directly contradicting the open trade policy advocated by the USMCA. This discord highlights the ongoing challenges in aligning the economic interests of both nations within the framework of their trade agreement.
“This relates to policies enacted by a country to protect and enhance its domestic energy resources, leading to a reduction in dependence on foreign energy sources. The United States argues that Mexico’s measures give preference to state-owned productive enterprises,” elucidates Fernanda Garza Magdaleno, a partner at SMPS Legal and the leader of the antitrust and foreign trade practices.
The situation has led the United States to brace for an intensification of their complaint, encouraging U.S. energy companies to compile affidavits outlining how Mexico’s protectionist policies have affected their investments. This declaration, at the very least, demands context, considering that the inflow of resources from the northern neighbor to Mexican territory is set to achieve its third consecutive year of growth in 2023.
According to data from the Ministry of Economy, in 2021, direct investment from the U.S. amounted to USD 15.094 million, marking a significant increase of over 48% compared to the USD 10.170 million in 2020. In 2022, direct investment from the United States surged to USD 20.417 million, reflecting a 35.2% rise from the previous year. During the first half of 2023, it reached a total of USD 12.37 billion.
However, the reality is that the trade dispute has been escalating to the point that Washington is on the verge of convening a Dispute Panel to address the matter, having explored other avenues of resolution. Fernanda Garza Magdaleno is here to assist us in gaining a deeper understanding of the issue.
– What is the current status of the U.S. complaint?
On July 20, the United States initiated consultations with Mexico under Article 31.4 of the USMCA. In their request, the United States argued that the measures challenged favored Mexican state-owned companies at the expense of U.S. companies and energy produced in the United States, thereby breaching Mexico’s commitments under various USMCA provisions. Furthermore, these measures had an impact on climate-related objectives.
These consultations mark the initial, non-contentious phase of the dispute resolution process outlined in the USMCA. From that date, both countries had a 75-day window to reach a solution before resorting to the establishment of a panel under the USMCA’s dispute settlement mechanism. This period concluded on October 3, and Mexico did not take any steps to modify its energy policy.
– What is the next step, given that the consultations did not yield any results?
As of now, neither government has made an official statement. The United States has not invoked its right to request the formation of a panel to review the contested measures. Consequently, we are currently awaiting further developments and actions to be taken in this matter.
– Does the U.S. accusation have legal basis? Did Mexico breach the agreement immediately upon signing it?
This accusation needs to be considered within its historical context. In 2013, Mexico implemented a constitutional reform in the energy sector with the goal of opening it up to private participation at various stages of the value chain. This reform marked a significant shift from the historical government control exercised through entities like Petróleos Mexicanos (Pemex) and the Federal Electricity Commission (CFE). The energy reform aimed to attract foreign investment and promote competition within the sector.
However, in the current administration, the Mexican government began implementing certain measures that the United States perceives as favoring the strengthening of state-owned enterprises, potentially limiting competition with the private sector.
The grounds for the consultation proposed by the United States include the following four points:
- The amendment to the Electricity Industry Law in March 2021, which mandates the grid operator, the National Energy Control Center (CENACE), to prioritize electricity produced by the Federal Electricity Commission (CFE) over electricity generated by private competitors on Mexico’s grid. The U.S. alleges that this may be in violation of Articles 2.3 and 14.4 of the USMCA, as it could potentially fail to provide national treatment to U.S. goods and may not grant U.S. investors treatment that is no less favorable than what is provided to Mexican investors in similar circumstances.
- Lack of Action, Delays, Rejections, and Permit Withdrawals for Private Companies in Mexico’s Energy Sector. The request for consultations alleges that Mexico hampers private companies’ ability to operate in the Mexican energy sector by delaying, rejecting, or failing to respond to requests for new permits or permit modifications. Mexico is accused of suspending or revoking existing permits and taking actions that obstruct private companies from:(a) operating renewable energy facilities, such as wind and solar installations; (b) importing and exporting electricity and fuel; (c) storing or transshipping fuel; and (d) constructing or managing refueling stations. The United States argues that these measures appear to be inconsistent with Articles 2.3, 2.11, 14.4, 22.5.2, and 29.3 of the USMCA.
- Delay in the Requirement to Provide Low-Sulfur Diesel Exclusively to Pemex (Alleged Violation of Articles 2.3 and 22.5.2 of the USMCA, Chapters on Market Access and State-Owned Enterprises). The U.S. request questions a regulation introduced by the Energy Regulatory Commission (CRE) in 2019, which extends a five-year compliance grace period for meeting maximum sulfur content standards for automotive diesel fuel exclusively to Pemex. This is the subject of dispute and is seen as potentially violating Articles 2.3 and 22.5.2 of the USMCA, which pertain to market access and state-owned enterprises.
- Measures Concerning Mexico’s Natural Gas Transportation Service (Alleged Violation of Articles 2.3 and 2.11 of the Market Access Chapter in the USMCA). The United States questions a letter sent by Mexico’s Secretary of Energy to the Energy Regulatory Commission (CRE) and the Centro Nacional de Control del Gas Natural (CENAGAS) in June 2022. This letter announced an energy policy and supply assurance strategy that mandated current or potential users of Mexican natural gas transportation to obtain natural gas from either CFE or Pemex. It also imposed restrictions on the importation of U.S. natural gas.
The Impact of the Dispute
– What would the consequences for the Mexican economy be if the dispute is not resolved through negotiation?
If the dispute is not resolved during the consultation phase and proceeds to a panel, and if the final report of that panel favors the U.S., Mexico may be compelled to alter its energy policy. If Mexico does not comply with such a ruling, the U.S. could implement trade countermeasures, often referred to as “retaliatory measures.” This could have significant economic impact for Mexico.
Under Article 31.19 of the USMCA, when suspending benefits due to a party’s failure to meet its obligations, the party that receives a favorable ruling must aim to suspend benefits in the same sector affected by the measure. In this context, the trade sanctions that might be imposed by the U.S. could specifically target the Mexican energy sector, potentially resulting in increased production and export costs for Mexican energy. This could make Mexican energy less competitive in the international market and could lead foreign companies to further reduce or even halt their investments in Mexico.
Moreover, the tariffs imposed by the United States could impact Mexican exports, ultimately affecting the country’s economic growth. The consequences of these actions could have a far-reaching impact on various aspects of Mexico’s economy and energy sector.
– Have U.S. energy investments in Mexico declined or been adversely affected?
The Office of the United States Trade Representative (USTR) has voiced criticism of Mexico’s energy policies, characterizing them as detrimental to foreign investment, to the environment and innovation.
In a recent statement, the USTR highlighted that Mexican policies have significantly disrupted foreign investment in clean energy infrastructure. Moreover, these policies have been observed to cause Mexico to backtrack on its climate commitments under the Paris Agreement. This is primarily because the policies appear to favor energy production from fossil fuels, a known source of greenhouse gas emissions.
U.S. energy and power companies, such as Chevron and Marathon Petroleum, who are looking to expand their presence in Mexico, have raised concerns about facing denials of permits and applications, particularly in cases where the Mexican government seems to favor state-owned entities like Pemex and CFE.
It is estimated that Mexico will not achieve the targeted quota of clean energy production by 2024. Is this dispute related to that?
The request for consultations does not explicitly address its connection to Mexico’s climate change commitments. Nonetheless, the contested measures implemented by the Mexican government could potentially hinder Mexico from meeting the 2024 clean energy production quota outlined in the USMCA (35%), as well as its obligations under the Paris Agreement.
The U.S.-Mexico energy dispute is one of several that have arisen between the northern partners, and some of these disputes, even after a dispute settlement panel ruling, continue to openly violate the agreement’s provisions.
Automotive: In January 2023, a panel decision ruled in favor of Mexican and Canadian automakers and against the U.S., stating that the USMCA allows certain components of a finished vehicle to be considered as originating if these parts individually meet the minimum regional content requirement of 75%. The U.S. does not recognize this percentage of incorporation.
Milk: Five years ago, the United States accused Canada of not complying with the dairy purchase quota, which Canada initially refused to accept to protect its dairy farmers. A resolution panel’s decision favored Washington, and Ottawa began to comply with the ruling.
Transgenic corn for human and animal consumption: Mexico maintains a ban on the purchase of genetically modified corn for human consumption until 2024. Currently, Mexico only imports such corn for animal consumption and certain non-food industries. The U.S. contends that this ban violates the USMCA.
The full article was made in collaboration with Lexlatin, and you can find the original article in Spanish herein: https://lexlatin.com/entrevistas/inversiones-estados-unidos-mexico-desacuerdo-energetica
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