USMCA Heads Into Review; Energy Under the Spotlight

Bilateral trade discussions in Washington ahead of the USMCA’s mandatory July 1, 2026, joint review deadline highlight an escalating conflict between Mexico's newly enacted constitutional energy modifications and the treaty's strict competitive neutrality obligations. The United States and Canada are demanding nondiscriminatory market access, challenging the Sheinbaum administration's legal mandates that grant CFE priority grid dispatch and guarantee state-owned entities a minimum 54% stake in private electricity and renewable generation. While Mexico seeks to defend its sovereign energy protections, its severe 80% import dependency on Texan natural gas pipelines grants Washington massive commercial leverage, raising policy, investment, and currency volatility risks across the integrated North American trade corridor as the possibility of prolonged negotiations or a shift to unstable annual reviews looms large.

US and Mexican negotiators met in Washington on June 16 for a two-day round of trade discussions with agriculture and energy as headline topics, the second in a series of bilateral rounds ahead of the USMCA's mandatory July 1 joint review deadline. A third round is already scheduled for July 20 in Mexico City. The talks unfold against a statement by President Trump on June 10 that he is "not looking to renew" the agreement, a direct challenge to a framework that governs roughly US$1.6 trillion in annual trilateral trade and that Mexico's economy depends on for approximately 80% of its exports.

Energy's prominence in the USMCA discussions reflects a collision between two fundamentally different legal frameworks. The USMCA does not have a standalone energy chapter and moved some of NAFTA's energy provisions to other parts of the agreement. It added a new chapter specifically recognizing Mexico's constitutional prohibitions on foreign investment or ownership of Mexico's energy sector, while other provisions, including certain investor-state dispute settlement protections for covered investments, aim to help protect private US energy projects.

That architecture worked reasonably well under the 2013 energy reform framework. It has been under sustained stress since 2019 and effectively broken since 2025. Several US dispute matters include a 2022 Biden-era request for consultations challenging the consistency of Mexico's energy reforms with the USMCA, matters the United States is expected to raise during the review process, especially considering how Mexico's fulfillment of its USMCA obligations may be at risk due to the formal repeal of the Peña Nieto administration's 2013 energy reforms.

The legal dimension of that challenge has been elaborated in detail from Mexico's own public consultation process. Chapter 8 recognizes Mexico's sovereignty over its hydrocarbons, but this recognition does not operate in isolation. Other provisions remain fully applicable, including national treatment and market access under Chapter 2, and disciplines on state-owned enterprises under Chapter 22, which require competitive neutrality and prohibit discriminatory conduct affecting trade or investment.

The US and Canadian Demands

The United States and Canada will seek assurances that energy prices, electricity generation, and market access are nondiscriminatory, that is, there is no favoritism for PEMEX and CFE at the expense of foreign investors or importers. Both countries have already launched USMCA consultations over Mexico's policies, alleging breaches of chapters on market access, investment, and state-owned enterprises.

The breadth of those demands intersects directly with the Sheinbaum administration's energy architecture. The 2025 constitutional reform requiring CFE to generate at least 54% of national electricity supply, the priority dispatch rules giving CFE precedence in grid dispatch, and the mixed development schemes that require CFE to hold a minimum 54% stake in every private renewable project are all structural features of the energy policy that Washington considers inconsistent with USMCA's competitive neutrality obligations.

From Mexico's position, each of those features is a constitutional matter, not a regulatory preference that can be adjusted at the negotiating table. That is the fundamental tension: the United States is raising obligations under a trade agreement, while Mexico is defending provisions embedded in its constitution.

Natural Gas Dependency 

Mexico imports more than 80% of its natural gas from the United States, primarily via Texas pipelines, a dependence SENER Minister Luz Elena González has publicly characterized as a national vulnerability. The CENAGAS forum in early June committed more than MX$87 billion to expanding domestic gas transport and storage infrastructure, and the Sheinbaum scientific panel evaluating unconventional gas development is expected to deliver its recommendations imminently.

The 2026 review may revisit energy market access issues. If so, Canada and Mexico would benefit from entering the review with a shared understanding of energy security, investor protection, and regulatory alignment. Moving from defensive litigation to proactive coordination would strengthen both countries' negotiating positions.

Mexico's structural gas dependency is also a point of commercial leverage for Washington: the threat of disruption to gas supply through Permian Basin pipelines, whether from pricing, infrastructure policy, or export restrictions, is a backstop US negotiators hold that Mexico must weigh carefully in calibrating how far its constitutional energy defense can extend before it encounters countervailing commercial risk.

Three Realistic Scenarios

The base case remains a painful extension, with negotiations stretching into late 2026 or beyond, concentrated in autos, energy, China-related disciplines, and enforcement architecture. Under this scenario, the USMCA stays in force but negotiations are protracted, generating sustained investment uncertainty that is already visible in the data: investment in Mexico is down roughly 10% year over year, and more than 100,000 full-time jobs were lost in Canada in the first two months of 2026.

A second scenario involves serial annual reviews with no deal in 2026, keeping the agreement in force under a cloud of sustained uncertainty. A third, withdrawal as a negotiating tactic that triggers an unrecoverable reaction, remains unlikely as a final outcome but is structurally available to Washington as leverage in ways it has not been in prior negotiations.

For Mexico, the binding constraints are domestic. The exact procedure for conducting the review remains undecided and there is no precedent to follow. The USMCA's text describes the review only in broad terms. Sheinbaum's administration has consistently framed the review as an opportunity to defend and improve the agreement rather than renegotiate it fundamentally, a position that the US energy and automotive demands are placing under direct pressure.