Arturo Carranza
Project Manager Energy
Akza Advisory
Expert Contributor

The Repercussions of Mexico's Energy Policy

By Arturo Carranza | Thu, 08/18/2022 - 12:00

The relationship between Mexico and the United States comprises a host of realities that arise from being neighbors. Both countries are forged in contrasts, sharing a history of similarities and differences.

But beyond our history, it is appropriate to emphasize that this relationship is made up of a wide network of connections, especially now, when polarization prevails within both societies. It is within this context that we must analyze the request from the US Trade Representative's office to initiate consultations under the US-Mexico-Canada Agreement (USMCA) regarding Mexico's energy policy.

From this perspective, we could better understand that, although energy is a strategic issue for both Mexico and the US, it is neither the only nor the most important one. Today, there are other components that delineate more clearly the tone and intensity of the relationship between these two countries. Specifically, migration and border security.

Having said that, it is worth mentioning that both governments would do well to approach their energy differences very carefully. Not only because of the effects that the trade dispute talks will have in each country, but also due to the impact that an erratic management of energy differences could have on the integration and competitiveness of North America.

What differences are we talking about? On July 20, the US requested dispute settlement consultations under the USMCA. According to US Trade Representative Katherine Tai, these consultations are related to certain measures by Mexico that undermine American companies and US-produced energy in favor of Mexico’s state-owned electrical utility, the Federal Electricity Commission (CFE), and its state-owned oil and gas company, PEMEX.

Now that the US has formally requested consultations, no more than 30 days must pass before the general dispute settlement mechanism provided by the USMCA in Article 31 is set in motion. Considering the date on which the request was formalized, both governments will begin the non-contentious stage of the general dispute settlement mechanism no later than Aug. 20.

With the formal beginning of these consultations, a period of 75 days will pass in which, through technical and ministerial dialogue, both parties will seek a mutually satisfactory solution. This means that, by the first weeks of October 2022, we will know if this non-contentious stage was able to avoid litigation or if, on the contrary, it triggered one of Mexico’s most controversial and complex commercial disputes so far.

If the consulting parties fail to resolve the matter by October, as of day 76 of the consultations the US may request the establishment of a panel to decide on the energy matters in dispute. This panel would be made up of at least three panelists: one from each disputing party plus a panel chairman. It should be noted that the selection of panelists would take between one and two months, so the panel would not begin its proceedings until early 2023.

The panel’s function would be to make an objective assessment of the matter and to present a final report. If the parties are unable to agree on a resolution to the dispute within 45 days from receipt of the final report, the US may suspend the application to Mexico of benefits of equivalent effect to the non-conformity or the nullification or impairment until both countries agree on a resolution to the dispute.

One does not need to be a scholar in energy matters to anticipate what conclusions this arbitration might reach. Contrary to what President Andrés Manuel López Obrador argues, there is clear evidence that the USMCA does not exclude Mexico’s energy sector. Although the parties involved can change their legal framework, this does not mean that by doing so they are empowered to go against the treaty’s principles.

In this regard, it is useful to insist that Chapter 8 of the USMCA is part of a complex and voluminous document. For this reason, its correct interpretation must be made in consideration of the entire treaty. In this sense, the Mexican government is responsible for recognizing that there are such obligations as market access and a national treatment, which are provided for in other of the USMCA chapters.

From a comprehensive reading of the treaty’s document, we can assume that the concerns of the US government are justified. This means that the changes implemented during the last three years to Mexico’s Electricity Industry Law and Hydrocarbons Law are inconsistent with the principles of the USMCA.

Two observations arise from this assumption. First, that the Mexican government would do wrong to defend its position of clinging to Chapter 8 of the USMCA during its consultations with the US. Second, if the panel's conclusions should favor the US government, the consequences would entail high costs for Mexico's economy.

An additional reason for concern has to do with the fact that, in the face of the complex challenge that this commercial dispute represents, there is no technically sound response that can satisfy the concerns of the US government. As if that was not enough, the technical complexity pales in comparison to the political. By now, the perception prevails that these disagreements are subject to the political will of López Obrador, who has publicly stated that his government will not change the course of its energy policy.

In times as complex as ours, it would help if the Mexican president adopted a medium-term perspective for better addressing both the current and future challenges of Mexico’s relationship with the US.

The inevitable frictions are many and highly frequent. Only with our sights set on the future, aware that even then Mexico and the US will still be neighbors, are we going to be able to take care of what we must do today.