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Potential US Retaliation in Energy Matters

By Luis Burgueño Colín - Von Wobeser y Sierra, S.C.


Luis Burgueño Colín By Luis Burgueño Colín | Partner - Thu, 07/20/2023 - 15:00

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It has been over four years since Mexico underwent a significant political transition, marking the second instance of a true democratic system. The first transition occurred in 2000, with the election of the National Action Party (PAN) candidate as the head of the federal executive power. The second transition led to Andrés Manuel López Obrador, also known as AMLO, assuming the presidency of Mexico, representing his party, the National Regeneration Movement (MORENA).

While the differences between the two transitions are not the focus of this article, it is worth mentioning that AMLO's government has been centered around the idea of making Mexico free from foreign influences. However, this approach disregards the fact that the Mexican economy is interconnected within a global trading ecosystem.

Providing this context allows readers to better understand the reasons behind the AMLO administration’s failure to comply with international treaties. By using economic sovereignty as a justification, this administration has created national and international problems that have a detrimental impact on long-standing relationships and institutions.

One specific repercussion arising from Mexico's non-compliance with the Treaty Between Mexico, the United States, and Canada (USMCA) is the discrimination against US companies due to the energy policies implemented by the AMLO government. Although AMLO has attempted to downplay this issue, the real effects it could have within Mexico will be impossible to hide.

A key element of the USMCA is the guarantee of "National Treatment," which requires each government to provide equal treatment to investors from the three countries involved. This implies that investors from any of the treaty's party states should receive treatment in foreign territories "no less favorable" than that received by the nationals of those territories. Furthermore, the USMCA emphasizes equitable and "non-discriminatory" treatment of state-owned companies and regulatory authorities, prohibiting the use of resources to create anti-competitive practices against investors from the treaty's party states.

Unfortunately, during AMLO's government, various administrative acts and legislative changes have been implemented to restrict the participation of foreign companies in the national electricity market. This includes prioritizing the state-owned Federal Electricity Commission (CFE) over other energy producers in the market, revoking self-supply authorizations granted to companies (mainly foreign-owned), and reforming energy auction criteria and procedures to favor CFE.

Consequently, the US and Canada consider these measures a clear violation of the principles of "National Treatment" and "Non-discrimination" outlined in the USMCA. In July 2022, the US initiated a consultation period on this issue, which precedes arbitration. However, an international arbitration panel has not yet been established.

It is important to note that according to Article 31.19 of the USMCA, when a state fails to comply with its obligations under the treaty, the affected party has the right to "suspend the application to the breaching party of benefits of equivalent effect to the non-conformity or the annulment or impairment." This means that if an arbitration panel determines a treaty breach, the affected party may suspend equivalent benefits to the breaching party, matching the damage caused. The affected party must first attempt to apply sanctions in the same sector in which the breach occurred.

The problem arises considering that the US has a greater presence in Mexico's energy industry than Mexico does in the US. Consequently, the US would likely focus on suspending benefits (increasing tariff quotas) for products that it imports most from Mexico, such as beer, tequila, avocado, tomato, raspberry, capsicum, beef, strawberries, bakery and confectionery products, train carriages, cars, and auto parts.

Tariffs on these products, or others of similar importance, would be raised to compensate for the damages caused by the measures taken by the AMLO government against fairness and equity in the electricity market. Some experts estimate these damages could reach up to $2 trillion pesos ($117 billion dollars), considering the investments made by individuals to compete in the electricity market.

Mexico relies on exports, which constitute approximately 40% of its Gross Domestic Product. The US is the primary destination for these exports, accounting for 75%-80% of Mexico's yearly exports. Any conflict related to the USMCA would directly and indirectly harm Mexico. In addition to increased tariffs, many Mexican companies would suffer significant losses, leading to job cuts and substantial divestments.

Considering the aforementioned consequences, the Mexican government must carefully consider its actions regarding the USMCA. The government's intention to provide anti-competitive support to state-owned companies in the electricity market could result in severe economic problems that would critically harm Mexico in the medium and long term, ironically draining energy from its economy.

Photo by:   Luis Burgueño Colín

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