Juan Manuel Ávila Hernández
CEO & Co-Founder
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The Importance of USMCA and Why it Matters in the Energy Industry

By Juan Manuel Ávila Hernández | Thu, 08/25/2022 - 16:00

The USMCA has been without a doubt a game changer in modern Mexico. The whole region of El Bajio has seen major improvements in its GDP as well as the number of universities, research centers and SMEs that have customers in the US and Canada. We have witnessed IT companies moving their headquarters and offices from other parts of the world and establishing them here. By doing so, they are generating wealth and high-paid jobs. Mexico has been shaped into an industrial economy; just with the IMMEX program, there has been more than MX$400 billion (US$20 billion) in goods manufactured and exported in February this year. This could not have happened without the USMCA.

Before its approval, most left-wing political parties expressed their concerns about the signing of the treaty. Some argued that we as a country would lose our own identity and become more Anglo Saxon. We did merge as a country with our trading partners but we did not lose our identity as a country. As we have seen since the early 2000s, Mexico started becoming a hub not only for the manufacturing of cheap or low-value goods but also a country that could sell high-end products. By 2007, Mexico was among the Top 10 exporters of cars and home appliances. All this industrialization meant Mexico needed more and cheaper energy to compete with our peers. As most analysts have pointed out, if Mexico remains on this track, by 2040, it would be one of the world’s superpowers. If we add a young and growing population then you not only need energy for the booming industry but for a bigger population, and if that population were to consume more energy due to higher income and new technological devices, then a rapid growth on the supply side would be needed. Although NAFTA (the former USMCA) was enacted in 1994 and the Energy Reform was passed in 2013, we cannot deny that if Mexico wants to compete with the world and integrate into an industrialized region like North America, it needs to have an open power market.

Even though NAFTA brought improvement not only to Mexico but for both Canada and the US, in 2016, then presidential candidate Donald Trump blamed Mexico as one of the sources for the issues that the US faced. Now, it seems that the treaty will again be subjected to politics, this time from Mexico’s side (paradoxically one of the major concerns from Mexicans in 2017 was the uncertainty of the continuation of NAFTA). If the now USMCA also includes energy as important chapters, it is because from the beginning these chapters were needed and including them was just a matter of time. Mexico or any other country cannot integrate its economy into the world without truly opening its borders.

For more than 20 years, NAFTA-USMCA has proved to be a great tool to improve the quality of life of each country’s residents. Even early critics of the treaty, especially in Mexico, by 2017 had become some of its most fearsome advocates. It’s not a coincidence that they acted like that: in 1996, more than 55 percent of the country’s population had an income lower than US$5.50 per day compared to 2006, when that percentage fell to 33.10 percent or in 2016, when it was 29.40 percent1. If we also compared the percentage of inhabitants living under the poverty line, we can see a 2.4 percent rate in Aguascalientes, a state well known for its automobile industry, compared to regions like Chiapas, where industry is not as established2; therefore, one can only assume that as long as the whole country can be integrated into this big supply chain called North America, more opportunities and development will appear.

The question is, why, if the results of this treaty can be seen so clearly, does it now seem that because of a mistaken concept of sovereignty, this great tool could be in jeopardy? The answer, sadly, is not simple. Although Mexican society has become more international and open, there’s a great deal of revolutionary nationalism – a political ideology in Mexico from the early and mid-20th century – among all Mexicans, as proven in a poll by consultancy Gabinete de Comunicación Estrategy that indicated 63.8 percent of the population agreed on having the state as the sole company for the power industry3. As long as subjects such as energy are still taboo within our country, politicians will find the sweet spot that makes citizens rally behind the flag. Unfortunately, these types of actions cannot be taken lightly, especially among our trading partners.

Mexico has now entered one of the most complicated stages of its international economic role over the past 30 years. And open market and free trade, although they have been a proven path to development, are now in jeopardy because they are being used as political tools. Let’s not forget all the generations who worked to reach a point where our country became a global player and how putting up fresh barriers can unleash a series of events that would take generations to reverse, if we are lucky. What has recently happened with the first arbitration panel opened against Mexico within the framework of the USMCA should not be treated as a mere bluff from both Canada and the US. If we as a country want to continue as an investment hub, we still need to be integrated with our trading partners. If we as a region want to be competitive, we need cheap, clean and reliable energy and that can only be achieved with an open, legal framework that allows companies to invest with the already established rules that are expressed under USMCA. Trying to change that is a dangerous path that we will regret.

 Notes.

1.- Poverty headcount ratio at national poverty lines (% of population) - mexico. Data. (n.d.). Retrieved August 8, 2022, from https://data.worldbank.org/indicator/SI.POV.NAHC?locations=MX

2. Romero, T., & 3, M. (2022, March 3). Population living in extreme poverty by state in Mexico 2020Teresa Romero. Statista. Retrieved August 8, 2022, from https://www.statista.com/statistics/1039379/mexico-population-living-extreme-poverty/

3. Staff. (2021, October 27). El 63.8% de los mexicanos está a favor de la Reforma Energética: Encuesta. Forbes México. Retrieved August 8, 2022, from https://www.forbes.com.mx/politica-mexicanos-esta-a-favor-de-la-reforma-energetica-encuesta/