US-Mexico-Canada energy dispute grows - what could the consequences be?

Legislation | | MIC Customs Solutions |

A dispute between Mexico, the US and Canada about the former's energy policies could lead to significant new tariffs on goods being exported from Mexico to its USMCA partners.

The US-Mexico-Canada Agreement (USMCA) is facing one of its first major tests after the US and Canada joined forces to file a complaint against Mexico over the latter's energy policies.

If not resolved, this could lead to the prospect of major new tariffs on exports from Mexico to its biggest trade partners. So what does this dispute revolve around and what will the consequences be if efforts to come to an amicable solution fail?

What is the dispute about?

The US and Canada brought the complaint under the terms of the USMCA trade agreement over the policies of president Andres Manuel Lopez Obrador. It relates to efforts by the Mexican government to prioritize buying energy from state utility companies ahead of foreign renewables providers.

According to the Office of the US Trade Representative, the moves undermine US green energy companies in favor of Mexico's state-owned electrical utility provider, the Comisión Federal de Electricidad (CFE), and its state-owned oil and gas company, Petróleos Mexicanos (PEMEX). 

Specifically, the challenge relates to a 2021 amendment to Mexico’s Electric Power Industry Law that prioritizes CFE-produced electricity over electricity generated by all private competitors.

As well as this, the US claims that the changes have led to "delays, denials, and revocations" of certifications required for US energy firms operating in Mexico. The US also warned that rolling back efforts made under the Paris Agreement will damage the countries' shared regional economic and climate goals.

US trade representative Katherine Tai said: "These policy changes impact US economic interests in multiple sectors and disincentivize investment by clean-energy suppliers and by companies that seek to purchase clean, reliable energy. 

"We have tried to work constructively with the Mexican government to address these concerns, but, unfortunately, US companies continue to face unfair treatment in Mexico." 

What are the next steps to resolve the issue?

The US was joined in the complaint by Canada, with the country's Ministry of International Trade stating that the new policies are "inconsistent with Mexico's obligations" under the USMCA agreement.

Under the rules of this deal, once a request for review has been made, Mexico has up to 30 days to schedule consultations. If after a further 75 days no agreement is reached, the US and Canada could request the formation of a formal panel to make their case to.

However, Kenneth Smith Ramos, who was Mexico’s chief USMCA negotiator until 2019, told Bloomberg that it is highly unlikely that the issue will be able to be resolved in the consultation period because of the specific nature of the claimed violations. 

In order to satisfy the concerns, he explained Mexico would have to "completely overhaul" two pieces of legislation that are essential to president Lopez Orbador's agenda.

For his part, Mr Lopez Orbador appeared unbothered by the complaint, telling his regular news conference that "nothing is going to happen" and playing a song by Mexican artist Chico Che called 'Oh, how scary!'

What could the consequences be?

The US and Canada argue the policies have led to significant economic harm. Bloomberg noted that the US is claiming losses of between $10 billion and $30 billion, while Canada's trade ministry puts the investment figure for Canadian energy firms in Mexico at CA$13 billion ($10.1 billion). 

Both countries could seek to impose punitive tariffs on Mexico to claw back these investments if an agreement is not reached.

Mexico's former economy minister Ildefonso Guajardo added that the impact of the dispute could be felt far beyond the energy sector, with industries such as automaking and agriculture among those that could be impacted by tariffs.

It may also harm the region's attractiveness to investors at a time when it is expected to see a boom in trade. Currently, disruptions to global supply chains have resulted in a major boost for Mexico's export sector as buyers look for trade routes outside Asia.

A report by the Inter-American Development Bank estimates this has created annual value to Mexico of over $35.3 billion. Much of this could be put at risk if importers face additional tariffs on goods shipped from Mexico.

Mr Smith Ramos added: "We are watching a potential train crash between the US, Mexico and Canada."

However, the energy issue is not the only dispute facing the USMCA, which was negotiated under Donald Trump's administration and came into effect in 2020 to replace the 25-year-old North American Free Trade Agreement.

Mexico and Canada are also challenging the way in which the US has interpreted new regional automotive rules, arguing that a more flexible approach is needed, while the US had also called for a dispute panel to settle a long-running disagreement with Canada over its allocation of dairy quotas.

Therefore, it seems there will be a lot of work ahead for trade negotiators in the coming years if the USMCA is to offer the smooth, tariff-free trading environment its backers have promised.