As the Mexican government’s commitment to energy independence smashes into US financial interests, President López Obrador threatens to put sovereignty above the USMCA trade deal.
The US is not only fighting (and to all intents and purposes losing) a proxy war against Russia in Ukraine while escalating tensions with its biggest geostrategic rival, China; it is also locked in a high-stakes game of economic brinkmanship with its second largest trading partner, Mexico, which could, in an extreme case scenario, end up shattering the US-Mexico-Canada (USMCA) Trade Agreement just four years after its inauguration.
The latest escalation occurred on July 20 when the US Trade Representative Katherine Tai revealed that the US has requested dispute settlement consultations with Mexico under USMCA over alleged violations of the trade agreement in the energy sphere. The news came just days after Mexican President Andres Manuel Lopez Obrador, or AMLO for short, had met with President Joe Biden to discuss shared policy interests. In her statement Ambassador Tai accused Mexico’s government of:
- Granting competitive advantage to the Mexican state-owned companies to the detriment of private companies.
- Obstructing the operation of private companies, particularly in the renewable energy sector; in the import, export and storage of fuels and electricity, as well as in the construction and operation of fuel stations.
- Granting Mexico’s state-owned oil company Petroleos de Mexico (Aka Pemex) a deadline extension to comply with sulphur content limits in automotive diesel.
- Favoring Pemex, the Federal Electricity Commission (CFE) and their products in the use of Mexico’s natural gas transportation system, again to the detriment of private companies.
Sovereignty Versus Trade
Canada quickly followed suit and requested its own consultations on the matter. Last Thursday, AMLO responded by upping the ante. In his daily morning press conference he argued that the US’s decision to request consultations under the USMCA trade deal is not only unfounded but infringes on Mexico’s sovereignty. Using his strongest language yet in the dispute, AMLO declared that if it came down to a choice between national sovereignty and the USMCA Agreement, he would choose the former.
“Even if [the US] is the most important market in the world, if having access to that market means giving up sovereignty, we do not accept it. We will not surrender our independence to any foreign government,” AMLO said, adding that such a rupture will not occur, since it is in the interest of neither country. But as Jacobin contributor Kurt Hackbarth noted in a tweet, the implicit threat is there.
This is not the first time that a dispute settlement consultation has been brought against a USMCA member. In fact, there have already been four since the trade agreement was signed in 2018, three of which have been brought by the US. The last one was brought last year by Canada and Mexico against the US over interpretation of content rules for automobiles. If the consultation against Mexico’s energy policies doesn’t lead to a resolution in 75 days, the US can request the formation of an arbitration panel to settle the dispute.
Trying to resolve the differences between Mexico and its two northern trading partners is not going to be easy. Crucially, the changes AMLO is seeking to make in Mexico’s energy policy mix are not administrative or technical in nature but structural. What AMLO ultimately wants to ensure is that control over Mexico’s energy resources lies in the hands of the Mexican nation. And that flies in the face of what Washington wants, which is ultimately an energy-rich neighbor to the south that is open to unrestricted foreign investment.
Another reason why AMLO is unlikely to back down in this battle is that energy independence is the capstone of his so-called “fourth transformation” program. What’s more, it enjoys even stronger public support today than on his election four years ago. This is partly due to the recent masterclass the European Union has given the world on the dangers of depending excessively on foreign states to meet your own energy needs, especially if you then decide to declare economic war against the state you most depend on.
Crucially, AMLO’s government is not even talking about nationalizing Mexico’s energy market — unlike, say, French President Emmanuel Macron, who is in the early stages of fully nationalizing France’s heavily indebted electricity giant EDF. By contrast, what AMLO seeks is to fortify Mexico’s public energy providers, Pemex and the Federal Electricity Commission (FCE), as a means of bolstering Mexico’s energy independence, while leaving plenty of room for private enterprise.
To that end, he has reversed some the 2014 liberalization reforms of his predecessor Enrique Peña Nieto. Those reforms were supposedly meant to usher in lower energy prices for domestic consumers as well as thrust Mexico into a more prominent position in the global hydrocarbons market. Instead, the opposite happened: domestic prices of gas, diesel and natural gas soared as public subsidies were withdrawn while Pemex got weaker and weaker as private companies, most of them foreign-owned, moved in on its turf.
Hilary Clinton’s Role
The irony is that much of the damage AMLO is now trying to undo, which the Biden Administration is trying its damnedest to prevent, was largely the result of behind-the-scenes pressure from Hilary Clinton’s State Department. As Desmog reported in 2015, Clinton and her staff at the State Department, many of whom would end up working in the US energy industry, were actively promoting the privatization of Mexico’s oil industry after then-Mexican President Felipe Calderon began speaking about possible reforms in 2008.
“Mexico officials remain extremely sensitive about any public — especially US — comments regarding energy reform and production,” reads a February 2010 cable from the U.S. Embassy in Mexico, prior to a visit to the country by Goldwyn. “We should retain the (U.S. government’s) long-standing policy of not commenting publicly on these issues while quietly offering to provide assistance in areas of interest to the (Mexican government).”
If AMLO is ultimately forced to backtrack, US companies would not be the only ones who would stand to benefit, as the Spanish corporate law firm Garrigues notes in an “alert” to clients:
…[A]lthough this dispute has been raised by the United States government in the State-to-State modality and for the benefit of its nationals, the effects of a favorable resolution could benefit private companies with investments in the energy sector in Mexico regardless of their nationality.
One company that will be keeping a very close eye on events is Houston-based Talos Energy. It leads a consortium of companies, including UK energy company Premier Oil and Sierra Oil, which is owned by Hamburg-based DEA Deutsche Erdoel, that is vying with Pemex for control of Zama, a disputed shallow-water field in the Gulf of Mexico that is among the 10 biggest oil discoveries in Mexico’s history, offering an estimated 850 million barrels of light crude. In 2021, Mexico’s government gave Pemex controlling interest of the project and that has not gone down well with Talos.
Pemex on the Mend?
The irony is that this is all happening as Mexico’s state-owned oil giant PEMEX just unveiled its biggest quarterly profits ($6.5 billion) in more than a decade. The company also appears to have put an end to an unbroken 15-year rough patch of sliding production. It was even able to increase its natural gas production 5.3% year on year. The ultimate irony is that in Mexico gasoline is now significantly cheaper than in both the US and Canada, largely due to Pemex’s substantial role within the country’s energy market.
Mexico will also soon be refining much of its own oil for the first time in decades, thanks to the AMLO government’s construction of the new Dos Bocas refinery as well as the rehabilitation of the six refineries already in operation. Chronic under-investment in the sector as well as Pemex’s declining output had played a key role in driving the country’s growing dependence on US gasoline. By 2017, a year before AMLO became president, Mexico’s refineries were operating at 51% of capacity. No new refineries had been built for 40 years.
This left Mexico with little choice but to ship its oil to the US and buy it back as gasoline, turning it, in the process, into the world’s second-largest gasoline importer. Since taking office AMLO has pledged to reverse this trend. In August 2021 he announced that Pemex would soon stop selling crude oil abroad and only extract the oil that it needs to produce the gasoline and diesel the country requires. It is all part of the president’s quest for energy self-sufficiency. But it is not good news for US refiners form whom Mexico was their biggest customer in 2021.
This is the crux of the issue: Mexico’s desire for energy independence flies directly in the face of US financial interests. And AMLO is not just talking about energy independence; he is also interested in bolstering Mexico’s food security and self-sufficiency. His government has already pledged to ban GMO corn. Thanks to NAFTA and US agricultural subsidies, Mexico has become a major importer of US-produced staples such as corn, rice and beans. In 2021, it was the world’s second largest importer of corn. As such, talk of food security and self-sufficiency is just as likely to raise the hackles in Washington.
The financial repercussions of Mexico’s pursuit of greater energy self sufficiency are likely to be significant on their own. If the consultation process over AMLO’s energy policies does not produce a resolution and the US then wins the subsequent international arbitration process, which it invariably tends to, Mexico could end up facing the imposition of potentially tens of billions of dollars of duties on some of its key export industries.
For the moment AMLO seems unperturbed. He insists that chapter 8 of the trade agreement, whose inclusion his government insisted on, gives his government the right to pursue energy independence regardless of the cost to US companies. Chapter 8’s two paragraphs make clear that both the US and Canada recognize that Mexico “has the direct, inalienable, and imprescriptible ownership of all hydrocarbons in the subsoil of the national territory” as well as “the sovereign right to reform its Constitution and its domestic legislation” as it sees fit.
Trade experts on both sides of the US-Mexican border beg to differ, arguing that Chapter 8 does not include any mention of Mexico’s electricity sector, which is the main focus of the dispute. What’s more, the ratchet clause in the original NAFTA states that once a sector is liberalized for investment or services — even unilaterally, as happened with Mexico’s 2014 energy reforms — this openness would become part of the agreement.
But AMLO does not seem to be in the mood for compromise. He knows that taking a firm stance against US economic demands will probably garner even more votes for his party, the National Regeneration Movement, or Morena.
AMLO’s Energy Secretary Rocio Nahle García has even said that Mexico’s energy balance and policy are “issues of national security.” For his part, AMLO seems content to troll Washington’s political establishment. A couple of weeks ago, he belittled the White House’s rhetoric, arguing that Mexico has not contravened the trade agreement and that the trade spat was merely a result of corrupt right-wing lobbying in Washington. He then asked his staff to play a popular ’70s Mexican song by Chico Che titled “Uyyyyy, que miedo” (Ooooh, I’m so scared).
In reality, the trade dispute between the US and Mexico bears all the hallmarks of a slow-motion train crash, says geopolitical analyst Jesus López Almejo. On the one hand, Mexico, a country that wants to protect its own energy sovereignty, is standing off against the US, a country that is determined to prise open Mexico’s energy markets for the benefit of US companies. As the world’s long-standing albeit declining hegemony as well as Mexico’s number one trading partner, accounting for 86% of purchases of Mexican exports, the US can inflict enormous damage on Mexico’s economy.
On the other hand, the US economy is already in a stagflationary recession and it desperately needs as much oil as it can get its hands on, including from Mexico. It is also true that Washington is rapidly losing influence across Latin America as a whole. What’s more, Joe Biden is the least popular president of the polling era. And in its dispute with Mexico, his administration is standing off against one of the most widely supported governments in recent Mexican history. In other words, there are a lot of dimensions to this brewing conflict.
In an article (in Spanish) for the Mexican news website Sentido Comun (translation below by yours truly) Kurt Hackbarth suggests that AMLO and his party, Morena, largely have themselves to blame for not subjecting the proposed USMCA trade agreement to the scrutiny it deserved:
In 2019, the USMCA was ratified by a Morena-dominated congress with hardly any discussion, a very different scenario from the heated debates surrounding NAFTA in the 1990s. The president of Mexico has even proposed a political and economic union of the Americas that would include the United States and Canada. Let us ask ourselves: if already with USMCA they intend to interfere in this way with the democratic decisions of Mexico, what would things be like within an even closer union? Just consider how the so-called core countries of the European Union (such as Germany) have treated the “peripheral” countries: through the mechanisms and treaties of the Union, in coordination with its central bank, they have imposed structural adjustment programs and onerous loans, project cuts and tax increases; they have even removed governments. Is that what we want?
It is worth recalling, as Yves has done on numerous occasions over the years, Dani Rodrik’s policy trilemma which holds that “democracy, national sovereignty and global economic integration are mutually incompatible: we can combine any two of the three, but never have all three simultaneously and in full.” In this case, of course, it is regional, not global, economic integration that is on the table.
For AMLO, national sovereignty appears to be sacrosanct. If that is indeed true, the question is: which of the other two is he willing to forego? If it is to be regional economic integration, AMLO may soon discover that it is a lot easier to enter a trade agreement with the US than it is to exit one, especially when the agreement in question (in its original NAFTA form) has been designed, in the words of Eastman Kodak chairman Ken Whitmore, “to lock in the opening of Mexico’s economy so that it can’t return to its protectionist ways.”