Energy Reform Clashes with USMCA

President Andrés Manuel López Obrador has actively sought to center the energy sector in favor of state-owned enterprises PEMEX and the Federal Electricity Commission (CFE), argued former USMCA negotiator Kenneth Smith Ramos at an event by the Mexican Association of Service Station Providers (AMPES). These measures are in direct contention with the USMCA and the Comprehensive and Progressive Trans-Pacific Partnership (CP-TPP) agreements, he added.

Mexico’s laissez-faire export practices in the US while attempting to enact counter energy reforms that restrict private investment in the sector. These two approaches are irreconcilable, argued Smith Ramos. "These two elements cannot coexist, if Mexico insists on policies that go against the 2013 energy reform. Sooner or later, we will have commercial reprisals and a closure of the main export products” he added.

President López Obrador, however, has insisted that the energy sector is essential to Mexico's sovereignty and claims that it is not an integral part of the USMCA. But, the liberalization of the electric industry was an indispensable aspect of the part of the aforementioned agreements and of the Mexico-European Union Free Trade Agreement, which is pending ratification.

Moreover, the language in the original NAFTA states that once a sector is liberalized for investment or services—even unilaterally—this openness would become part of the agreement due to the ratchet clause, a 2021 Wilson Center report points out. Therefore, after the 2013-14 energy reform under the former President Enrique Peña Nieto’s administration, investments in the energy sector were to be safeguarded under chapters 11 and 12 of the NAFTA.

Recently, President López Obrador renewed his efforts to pass a new energy reform bill through a constitutional amendment. However, since he lost congressional majority during this year’s midterm elections it is highly unlikely that the changes will come to fruition. If the reform successful, Smith assured that the administration will be met with international legal action by USMCA and possibly TPP members. There has yet to be an official allegation by corresponding members, but if a case is presented it would be handled by the World Bank’s International Center for Settlement of Investment Disputes (ICSID).

According to the Center of Investigation in Public Policy (IMCO), the proposed energy bill and related reforms violate USMCA by changing regulatory conditions, which represents an indirect expropriation of investments made by foreign investors. The elimination of self-supply permits points to a loss of market “openness” which is still protected under the USMCA. More evidently, there has been a clear shift in favor of state-owned enterprises over other market participants.

Even in light of this, officials have been careful to sidestep accusations, including US Trade Representative (USTR) Katherine Tai during her visit to Mexico City on the anniversary of the ratification of the USMCA. While both countries have expressed concerns regarding the turbulent investor climate, neither has come forward with specific requests despite Mexico being one of the US’s largest trading partners.