United States Trade Representative Katherine Tai announced that the United States has requested dispute settlement consultations with Mexico under the United States-Mexico-Canada Agreement (USMCA). The consultations relate to certain measures by Mexico that undermine American companies and U.S.-produced energy in favor of Mexico’s state-owned electrical utility, the Comisión Federal de Electricidad (CFE), and state-owned oil and gas company, Petróleos Mexicanos (PEMEX).
Mexico’s Energy Sector Under Alleged USMCA Violations
If the 2014 Energy Reform promised greater protections for free trade and a partial retreat of the state, recent reforms have seen the state re-immersed in all aspects of the energy industry. Through these reforms, it has been alleged that Mexico has violated aspects of the USMCA free trade agreement by fomenting state monopolies within the energy sector and hindering the participation of private companies, particularly from the US. Earlier this year, the US initiated formal proceedings between both countries. An expert in free trade legislation and energy law, Benjamín Torres-Barrón, Principal, Baker McKenzie, outlined the state of play, describing how the arbitrary process will continue to unfold and the possible implications if violations of the USMCA are found to have occurred.
Since the explicit violations have not yet been made public, Torres-Barrón listed the four examples of the types of violations believed to have been committed by the Mexican government, the first of which are modifications to various rubrics of the Electric Industry Law (LIE). “The modifications to the LIE were not only very disruptive, having taken place in the middle of the pandemic, but they also include measures that appear to be incompatible with articles of USMCA by demanding grid operator CENACE to dispatch electricity produced by CFE at the expense of electricity produced by its private competitors, even when they offer lower costs or cleaner energy.” By failing to establish an even playing field, these modifications appear to be in violation of articles 2.3 and 14.4, as well as the investment chapter of the General Agreement on Custom Tariffs and Trade from 1994 (GATT).
Another example of possible violations is the inaction, delays and revocations private businesses have been subject to regarding permitting. “We have seen many private companies complain that their permits to generate electricity or export hydrocarbons were not renewed without justification. In some cases, such requests were met with silence by both SENER and CRE, leaving businesses unable to carry out everyday activities,” said Torres-Barrón, adding that such actions suggest that state authorities are not exercising regulatory authorization impartially.
Other possible violations include potentially unfair exemptions allowing PEMEX to circumvent regulation for ultra-low sulfur diesel and the government’s efforts to ccompel private companies to purchase natural gas supply contracts from state-owned companies.
A dispute is resolved either through consultation between parties or by having formal proceedings heard before a panel. The two governments therefore have initiated bilateral negotiations in which they will attempt to arrive at a mutually satisfactory agreement. If the dispute, is not resolved within 75 days, however, the US government can request that an arbitration panel be established to resolve the dispute. The USCMA allows for opinions from non-governmental entities to be presented in writing. Governments are also allowed to call upon testimonies from legal or technical experts while the opinions of the respective governments are also heard in person.
As Torres-Barrón noted, the current process was initiated on July 20, 2022, when the US government submitted a request for consultation, after which negotiations must begin within 30 days. “We now know that negotiations indeed commenced on August 23,” Torres-Barrón explained. Both governments have issued statements regarding the ongoing consultation process, and Mexico’s Minister of Economy, Tatiana Clouthier, confirmed a meeting is set to take place this month in Mexico.
The role of Canada in the current process has been somewhat ambiguous, even though the country confirmed its agreement with the assessment of the US government. “Some statements made by the Minister of Economy suggest Canada might be looking to start its own case,” Barron-Torres said.
If the parties cannot reconcile and decide how to move forward before the deadline on October 3, a panel will be established to settle the controversy. The panel then has 150 days to reach a verdict, with the possibility of an additional 30-day extension. A preliminary decision would therefore be reached no later than April 2023, a final decision would come one month later.
Given the intransigent positions taken so far by both governments, Torres-Barrón believes it is unlikely the dispute will be resolved within the initial 75-day consultation window. The parties will therefore have to present their cases before a panel, which would see the controversy drawn out further, without factoring in appeals.
If punitive action is taken by the panel, this could result in increased trade tariffs, customs barriers and other serious economic consequences, targeting Mexico’s energy industry specifically. Nevertheless, it might affect other sectors of the economy. “Nearshoring is generating hugely significant resources for Mexico currently and makes it much more competitive than other countries in the US market. In the event of punitive tariffs or trade barriers, this could be a major casualty for Mexico and affect the economic viability of various industries. I simply cannot imagine the prospect of our country not having an FTA with the US, and the devastating impact it would have across sectors as diverse as agriculture, pharmaceuticals and the automotive industry,” he said.
Torres-Barrón pointed to some key dates for the proceedings, as he highlighted Mexican Independence Day on September 16, with President López indicating he will clarify his position at the parade. Moreover, economic discussions are due to take place this month with US Secretary of State Antony Blinken. On a positive note, President López Obrador and President Biden sustained what was described as a “very cordial discussion” just a few weeks ago, with both describing their comfortability with the topic of the USMCA consultation process. November will also see the North American Leaders Summit and Midterm elections in the US. Furthermore, the looming prospect of the 2024 presidential elections in both countries will play a part.
The position of the Mexican government has been based so far on Chapter 8 of the USMCA, which recognizes Mexico’s “Direct, Inalienable and Imprescriptible Ownership of Hydrocarbons” and defends the “full exercise of their democratic processes” in addition to Mexico’s “sovereign right to reform its constitution and its domestic legislation” to this end.
According to Torres-Barrón, Mexico’s government has mainly adopted this stance because it sought to portray the ongoing dispute as being driven by one disgruntled US company, Talos Energy, as a result of the Zama field’s unification process. Meanwhile, the government maintained that most US companies have no problem with current energy policies. Torres-Barrón noted that the Mexican government’s reading of Chapter 8 is short-sighted: “The reach of Chapter 8 is limited to the oil and gas industry and only mentions the upstream sector. If we refer to the US government’s complaints, these concerned the midstream and downstream sectors primarily, with natural gas transport and electricity generation cited. If the Mexican government continues to base its argument on Chapter 8, the defense will therefore be seriously limited.”
Torres-Barrón concluded by drawing attention to Chapter 14 of the USMCA, which protects foreign investment. “This chapter upholds the rights of private intensities to pursue arbitration proceedings in an appeal for compensation for foreign investment in a guest country,” he explained, adding that “the wide-reaching protections stipulated in any other type of investment treaty, such as direct expropriation, fair and equitable treatment and full protection and security, are limited within Chapter 14 USMCA since they are only granted to businesses with direct contracts with the central administration. Even though they are state-owned, both CFE and PEMEX possess legal personality, own equity, and technical, operational and managerial autonomy, which may expand the reach of such rubrics.”
Furthermore, Torres-Barrón highlighted that under the sunset provisions established upon the expiry of NAFTA, a three-year window exists for expired clauses present in NAFTA but absent from the USMCA to be re-invoked. Therefore, businesses are free to appeal for compensation for investments under NAFTA’s broader framework for the time being.
Here’s what they are saying about today’s announcement:
New York Times: The Biden administration will challenge Mexico’s state control of its energy industry.
“Officials at the Office of the United States Trade Representative told reporters on Tuesday that Mexico’s actions appeared to violate the United States-Mexico-Canada Agreement. That free-trade deal, which went into effect two years ago, bars the countries from adopting policies that discriminate against the others and requires them to curtail their use of state-owned enterprises. The officials said the United States had raised its objections to Mexico’s energy policy with Mexican officials on multiple occasions over the last 18 months.”
Wall Street Journal: U.S. Initiates Trade Fight With Mexico Over Energy Policy
“The U.S. is seeking dispute settlement consultations under the U.S.-Mexico-Canada Agreement—the first step in what could lead to tariffs on a range of Mexican products. It also represents a challenge by the Biden administration to Mr. López Obrador’s effort to regain government control over the country’s oil and electricity markets. In a brief statement, Mexico’s economy ministry, which is in charge of trade negotiations, said that Mexico’s government is willing to reach a ‘mutually satisfactory’ solution during the consultation stage.”
Associated Press: US demands talks on Mexican energy policies it calls unfair
“Among the specific issues in dispute is an amendment to Mexican law last year that the United States says gives an unfair edge to electricity produced by Mexico’s state-owned utility Federal Electricity Commission over energy from private companies and over cleaner sources such as wind and solar. The United States also protests a 2019 regulation that gives only state oil and gas company Petroleos Mexicanos extra time to comply with tougher environmental standards limiting the sulfur allowed in automotive diesel fuel. The U.S. also accused Mexico of delaying, rejecting or failing to act on private companies’ applications for permits to operate in the energy business and of revoking or suspending existing permits.”
Politico: Biden administration targets Mexican energy policies that hurt U.S. investors
“Among other things, the United States is challenging policies that prioritize Mexico’s state-owned utility, which Tai argued negatively impact American economic interests in multiple sectors and disincentivize investment by clean-energy suppliers and by companies that seek to purchase clean, reliable energy. The United States still hopes to resolve its concerns with Mexico through consultations, rather than take the next step of requesting a USMCA dispute settlement panel to rule on the issue, she added.”
Inside U.S. Trade: U.S. requests USMCA consultations over Mexico’s energy policies
“The U.S. has requested consultations with Mexico over the country’s energy policies, alleging several violations of the U.S.-Mexico-Canada Agreement, U.S. Trade Representative Katherine Tai announced on Wednesday. Tai, along with other Biden administration officials and lawmakers from both parties, had for more than a year been raising concerns about efforts pushed by Mexican President Andrés Manuel López Obrador to reverse reforms undertaken in 2013 to liberalize the country’s energy sector. But despite those calls, USTR says, López Obrador has continued to pursue policies that discriminate against U.S. companies, impede Mexico’s progress toward meeting climate goals and run afoul of its commitments under USMCA.”
House Ways & Means Committee: “Our committee fought for comprehensive enforcement mechanisms in USMCA to ensure that our partners uphold their commitments. We are committed to fighting for clean, reliable energy, and commend @USTradeRep for holding Mexico accountable to its USMCA obligations.” [Tweet]
Senate Finance Committee Chair Ron Wyden [D-OR]: “Mexico’s protectionist energy policies are a one-two punch against economic and environmental progress. As I discussed with Ambassador Tai in our March hearing, Mexico is flouting its USMCA obligations by shutting American renewable energy providers out of the market and giving unfair advantages to less reliable, fossil fuel-based state-owned enterprises. These actions are not only discriminatory, but they also have dire environmental consequences and raise questions about whether Mexico can meet its climate goals under the Paris Agreement. As I have frequently said, a trade agreement without strong enforcement is just words on paper. So, I’m pleased that Ambassador Tai is using the improved enforcement mechanism I fought for in USMCA to hold Mexico accountable, protect our environment, and ensure open markets for American renewable energy providers.” [Statement]
House Ways & Means Committee Ranking Member Kevin Brady [R-TX]: “I applaud Ambassador Tai’s leadership on this enforcement effort, and I appreciate the substantial time she has spent with me, other Members of Congress, and a wide range of stakeholders, in order to develop the right strategy to address these issues. I urge Mexico to do the right thing and reverse its problematic policies in the energy sector.” [Statement]
Senator Ted Cruz [R-TX]: “Under the USMCA, Mexico agreed to level the playing field and allow American companies to compete with Mexican companies to meet Mexico’s energy needs. But the government of Mexico has been violating this agreement. It was well past time for the United States to respond, and it was right for the U.S. Trade Representative to finally act. I will continue working to ensure that Texan and American energy producers are able to fairly compete.” [Statement]
Spokesperson for Mary Ng, Canada’s Minister of International Trade, Export Promotion, Small Business, and Economic Development: “We agree with the United States that these policies are inconsistent with Mexico’s USMCA obligations. We are joining the United States in taking action by launching our own consultations under USMCA to address these concerns, while supporting the U.S. in their challenge.” [Statement]
American Petroleum Institute CEO Mike Sommers and American Clean Power Association CEO Heather Zichal: “Today’s announcement by the Biden administration represents a significant step forward in addressing Mexico’s alarming energy sector policies, which not only violate the country’s commitments under USMCA, but also undermine the integration of North American energy markets and jeopardize our shared climate goals…We applaud Ambassador Tai for making this request and reinforcing the mutual benefits of continued international trade and energy investments can deliver for both Mexico and the United States.” [Statement]
U.S. Chamber of Commerce Senior Vice President for the Americas Neil Herrington: “The Chamber applauds this important step toward addressing troubling measures Mexico is advancing in its energy sector that we believe violate the country’s commitments under USMCA. We have repeatedly expressed our concerns with the direction of these policies, which have unfairly disadvantaged U.S. companies and are at odds with our common goals of generating reliable energy, sustainable growth, and a durable economic recovery.” [Statement]
National Association of Manufacturers Vice President of International Economic Affairs Ken Monahan: “This bold action from the Biden administration and Ambassador Katherine Tai is critical to stemming measures implemented and proposed by the government of Mexico that contradict the letter and spirit of the USMCA and undermine the rule of law in Mexico… “Manufacturers welcome the news that the U.S. has requested dispute settlement consultations with Mexico under the USMCA. We stand ready to work with USTR to quickly reverse Mexico’s unfair energy policies and to address the many other industry challenges in Mexico.” [Statement]
Alliance for Trade Enforcement Executive Director Brian Pomper: “The Alliance for Trade Enforcement applauds USTR’s request for consultations with Mexico. President López Obrador’s efforts to nationalize the country’s energy sector directly violate the USMCA, obstruct clean energy initiatives in the region, and threaten America’s economic prosperity…It is our hope that this action today will demonstrate to Mexico that the United States is serious about enforcing Mexico’s USMCA commitments in these as well as other areas where it is falling short.” [Statement]