Mexico could be hit with between $10 billion and $30 billion in tariffs if it loses a trade spat with the US and Canada, according to two former officials who negotiated the pact under which the dispute was brought.
The US and Canada have requested dispute settlement talks under the US-Mexico-Canada Agreement, known as USMCA, arguing that Mexico is violating the North American free trade deal with its moves to prioritize energy from its state utility over private renewables companies. They argue the policies of President Andres Manuel Lopez Obrador, known as AMLO, have led to denials and revocations of US firms’ abilities to operate in Mexico’s energy sector.
If there is no resolution and Mexico loses the dispute, then in the summer of 2023, the US and Canada can slap tariffs equal to the losses their companies have faced, Kenneth Smith Ramos, who was Mexico’s chief USMCA negotiator through 2019, said in an interview. Former Economy Minister Ildefonso Guajardo, now an opposition lawmaker, said the same in an interview with Mexican journalist Carmen Aristegui.
US officials have already quoted losses of anywhere between $10 billion and $30 billion, which Canada would only add to, and BloombergNEF has calculated at least $22 billion in all private investment is at risk.
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“This looks very difficult to be resolved during the consultation period because the violations are so precise, specific,” said Ramos, who saw this as one of the most potentially expensive trade spats since USMCA’s predecessor took effect in 1994. “Mexico would need to completely overhaul two pieces of legislation that are essential to AMLO.”
The fight could have a wide-ranging impact beyond Mexico’s energy sector, hitting automakers and farmers, Guajardo added.
Ultimately, the battle could hurt Mexico and North America’s attractiveness to investors just as the region is expected to see a boom in trade.
Amid disrupted global shipping networks, the re-routing of supply chains from Asia could boost exports by billions of dollars for Latin America’s No. 2 economy, but the trade dispute puts some of that at risk, Luis de la Calle, Guajardo’s former deputy, said in an interview. A report by the Inter-American Development Bank estimates the annual value to Mexico of over $35.3 billion.
China and Europe’s economic problems have made North America the “most competitive region in the world” at the moment, De la Calle said. If the three countries fail to come to an agreement, “the main cost is the opportunity cost for Mexico and North America to not take advantage of the international context that tremendously favors North America.”
Read More: US, Canada Say Mexico Energy Moves Break Trade Deal; Seek Talks
Under the trade accord’s rules, such a request would give Mexico up to 30 days to agree to schedule consultations. If after 75 days no agreement is reached, the US could request that a formal panel hear arguments from the two nations. While that process focuses on getting Mexico to agreeing to corrective actions, dragged-out conflicts can ultimately lead to the US imposing punitive tariffs on imports from Mexico under the two-year-old trade pact.
Lopez Obrador, known as AMLO, defended his policies Thursday, saying the oil sector was excluded from the trade pact, an argument Smith and other trade experts dispute. At a daily press conference Wednesday after the US announced its complaint, he played a song titled “Oh, so scary,” seeming to downplay his concerns. He also said he was protecting the country against “voracious companies” and added that by starting the dispute, the Biden administration risked looking like it was supporting “corrupt” firms.
Lopez Obrador has worked to return Mexico to energy independence by supporting state-owned oil and gas producer Petroleos Mexicanos, known as Pemex, and state power company CFE. The government has refused to hand out permits to several all-but-finished foreign energy projects.
“We are watching a potential train crash between the US, Mexico, and Canada,” Smith Ramos said.