The U.S. challenge to Mexico’s nationalist energy policies creates a dilemma for President Andrés Manuel
López Obrador
—one that could either force him to retreat from his populist agenda or face retaliatory tariffs from Mexico’s biggest export market.
The U.S. Trade Representative Office this week filed for dispute settlement consultations under the U.S.-Mexico-Canada Agreement on grounds that Mexico’s energy policies undermine U.S. firms in favor of state-run companies, in a case that has bipartisan support and the backing of the energy industry in the U.S.
César Hernández, a Mexican energy and trade consultant, said the U.S. case is strong, as Mr. López Obrador’s policies favoring power company Comisión Federal de Electricidad and state-run oil firm Petróleos Mexicanos go against the level playing field mandated by the USMCA.
“Mexico has very high chances of losing the dispute,” Mr. Hernández said.
If that assessment is correct, Mr. López Obrador will likely have to choose between watering down landmark energy policies, which would be seen as a major political embarrassment domestically, or face punitive measures, said Kenneth Smith Ramos, who served as Mexico’s chief negotiator in the trade talks that led to the signing of the USMCA in late 2018.
“Mexico is in a pretty serious situation,” Mr. Smith Ramos said. Adding more difficulty to a possible solution, Mexico would have to modify several laws in Congress, he said.
Mr. López Obrador was dismissive of the U.S. case, but the stakes are high.
Retaliatory tariffs could put thousands of Mexican jobs at risk. The country sends around 80% of its exports to the U.S., which represent more than a third of Mexico’s annual gross domestic product. The U.S. and Mexico trade over $1 million a minute.
“In a hypothetical case of retaliation, the intention is that the measure is significant enough to force changes, and that generally means targeting products that are popular in the U.S. or that have a social impact” in terms of jobs or costs for exporters, said
Juan Carlos Baker,
who served as Mexico’s deputy trade minister during the USMCA negotiations.
U.S. officials say the trade dispute isn’t expected to affect broad U.S.-Mexico relations, but they have been nonetheless frustrated with Mr. López Obrador’s administration on the energy issue.
They emphasized the decision to initiate the dispute settlement process came after pressing Mexico to address their concerns repeatedly.
The last such occasion came on July 8, when U.S. Trade Representative
Katherine Tai
raised the energy policy issue with her counterpart, Economy Minister Tatiana Clouthier, during the second ministerial meeting of the USMCA in Vancouver, British Columbia.
“We’ve expressed our concerns with Mexico’s domestic energy policies in nearly all of our discussions with Mexico over the last 18 months,” a senior U.S. administration official said this week. “Fortunately, one of the unique features of USMCA is that when there are disagreements between countries, we have ways in the agreement to facilitate resolutions.”
Mexico’s Economy Ministry said the government expects a “mutually satisfactory” solution can be reached. But Mr. López Obrador’s reaction to the U.S.’s call for dispute settlement talks—“Nothing will happen,” he said—signals a hardening of his position that could strain ties and weaken cooperation in areas of vital interest for the U.S., such as migration, security cooperation and containing fentanyl smuggling.
State control of Mexico’s energy industry has been Mr. López Obrador’s rallying cry for years, arguing that the opening of the oil sector in 2013 was “the theft of the century” perpetrated by corrupt politicians.
“The energy issue is central to the president’s agenda and conception of Mexico as a nation. He is unlikely to acquiesce without a fight,” said
Eric Farnsworth,
vice president of Washington think tank Americas Society/Council of the Americas.
As president-elect in 2018, Mr. López Obrador was able to introduce during USMCA negotiations a “sovereignty clause” stating that Mexico has direct ownership of its hydrocarbons.
But he also agreed to recognize the rights of U.S. and Canadian investors by granting the same market access already given to other countries that had free-trade deals with Mexico, along with a clause specifying that once a trade barrier is removed in an industry or sector, it can’t be reintroduced.
SHARE YOUR THOUGHTS
What is your outlook on the U.S.-Mexico relationship? Join the conversation below.
“His challenge is that he signed up to an accord that says he can’t discriminate against the private sector to the advantage of state-owned enterprises and that investors have rights,” said Earl Anthony Wayne, a former U.S. ambassador to Mexico.
Politically, the timing is tricky for Mr. López Obrador. The trade dispute could stretch to the start of Mexico’s presidential elections cycle in late 2023. Under Mexico’s Constitution, presidents can’t run for reelection—but Mr. López Obrador would likely take into account how a decision might affect his party’s chosen successor.
“He’ll be tempted to play the anti-American card to rally his central and southern Mexico voting base on the eve of the 2024 presidential election at the expense of Mexico’s export sectors and the north of the country,” said
Shannon O’Neil,
a fellow at the Council on Foreign Relations in New York. She added that Mexico’s next president is likely to be the one facing the challenge of bringing the country in line with its USMCA obligations.
—José de Córdoba contributed to this article.
Write to Juan Montes at juan.montes@wsj.com and Yuka Hayashi at yuka.hayashi@wsj.com
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
The U.S. challenge to Mexico’s nationalist energy policies creates a dilemma for President Andrés Manuel
López Obrador
—one that could either force him to retreat from his populist agenda or face retaliatory tariffs from Mexico’s biggest export market.
The U.S. Trade Representative Office this week filed for dispute settlement consultations under the U.S.-Mexico-Canada Agreement on grounds that Mexico’s energy policies undermine U.S. firms in favor of state-run companies, in a case that has bipartisan support and the backing of the energy industry in the U.S.
César Hernández, a Mexican energy and trade consultant, said the U.S. case is strong, as Mr. López Obrador’s policies favoring power company Comisión Federal de Electricidad and state-run oil firm Petróleos Mexicanos go against the level playing field mandated by the USMCA.
“Mexico has very high chances of losing the dispute,” Mr. Hernández said.
If that assessment is correct, Mr. López Obrador will likely have to choose between watering down landmark energy policies, which would be seen as a major political embarrassment domestically, or face punitive measures, said Kenneth Smith Ramos, who served as Mexico’s chief negotiator in the trade talks that led to the signing of the USMCA in late 2018.
“Mexico is in a pretty serious situation,” Mr. Smith Ramos said. Adding more difficulty to a possible solution, Mexico would have to modify several laws in Congress, he said.
Mr. López Obrador was dismissive of the U.S. case, but the stakes are high.
Retaliatory tariffs could put thousands of Mexican jobs at risk. The country sends around 80% of its exports to the U.S., which represent more than a third of Mexico’s annual gross domestic product. The U.S. and Mexico trade over $1 million a minute.
“In a hypothetical case of retaliation, the intention is that the measure is significant enough to force changes, and that generally means targeting products that are popular in the U.S. or that have a social impact” in terms of jobs or costs for exporters, said
Juan Carlos Baker,
who served as Mexico’s deputy trade minister during the USMCA negotiations.
U.S. officials say the trade dispute isn’t expected to affect broad U.S.-Mexico relations, but they have been nonetheless frustrated with Mr. López Obrador’s administration on the energy issue.
They emphasized the decision to initiate the dispute settlement process came after pressing Mexico to address their concerns repeatedly.
The last such occasion came on July 8, when U.S. Trade Representative
Katherine Tai
raised the energy policy issue with her counterpart, Economy Minister Tatiana Clouthier, during the second ministerial meeting of the USMCA in Vancouver, British Columbia.
“We’ve expressed our concerns with Mexico’s domestic energy policies in nearly all of our discussions with Mexico over the last 18 months,” a senior U.S. administration official said this week. “Fortunately, one of the unique features of USMCA is that when there are disagreements between countries, we have ways in the agreement to facilitate resolutions.”
Mexico’s Economy Ministry said the government expects a “mutually satisfactory” solution can be reached. But Mr. López Obrador’s reaction to the U.S.’s call for dispute settlement talks—“Nothing will happen,” he said—signals a hardening of his position that could strain ties and weaken cooperation in areas of vital interest for the U.S., such as migration, security cooperation and containing fentanyl smuggling.
State control of Mexico’s energy industry has been Mr. López Obrador’s rallying cry for years, arguing that the opening of the oil sector in 2013 was “the theft of the century” perpetrated by corrupt politicians.
“The energy issue is central to the president’s agenda and conception of Mexico as a nation. He is unlikely to acquiesce without a fight,” said
Eric Farnsworth,
vice president of Washington think tank Americas Society/Council of the Americas.
As president-elect in 2018, Mr. López Obrador was able to introduce during USMCA negotiations a “sovereignty clause” stating that Mexico has direct ownership of its hydrocarbons.
But he also agreed to recognize the rights of U.S. and Canadian investors by granting the same market access already given to other countries that had free-trade deals with Mexico, along with a clause specifying that once a trade barrier is removed in an industry or sector, it can’t be reintroduced.
SHARE YOUR THOUGHTS
What is your outlook on the U.S.-Mexico relationship? Join the conversation below.
“His challenge is that he signed up to an accord that says he can’t discriminate against the private sector to the advantage of state-owned enterprises and that investors have rights,” said Earl Anthony Wayne, a former U.S. ambassador to Mexico.
Politically, the timing is tricky for Mr. López Obrador. The trade dispute could stretch to the start of Mexico’s presidential elections cycle in late 2023. Under Mexico’s Constitution, presidents can’t run for reelection—but Mr. López Obrador would likely take into account how a decision might affect his party’s chosen successor.
“He’ll be tempted to play the anti-American card to rally his central and southern Mexico voting base on the eve of the 2024 presidential election at the expense of Mexico’s export sectors and the north of the country,” said
Shannon O’Neil,
a fellow at the Council on Foreign Relations in New York. She added that Mexico’s next president is likely to be the one facing the challenge of bringing the country in line with its USMCA obligations.
—José de Córdoba contributed to this article.
Write to Juan Montes at juan.montes@wsj.com and Yuka Hayashi at yuka.hayashi@wsj.com
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8