U.S. Initiates Trade Fight With Mexico Over Energy Policy

Source: By Yuka Hayashi at yuka.hayashi@wsj.com and Juan Montes, Wall Street Journal • Posted: Thursday, July 21, 2022

‘Ooooh, I’m so scared,’ Mexico’s López Obrador says, dismissing complaint that Mexico favors its state energy interests at the expense of American companies

The U.S. says Mexican policies are undermining American companies and U.S.-produced energy in favor of state-owned Pemex.PHOTO: JOSE LUIS GONZALEZ/REUTERS

The U.S. is seeking dispute settlement consultations under the U.S.-Mexico-Canada Agreement—the first step in what could lead to tariffs on a range of Mexican products. It also represents a challenge by the Biden administration to Mr. López Obrador’s effort to regain government control over the country’s oil and electricity markets.

Mr. López Obrador was dismissive of the U.S. action, chalking it up to intense lobbying by what he called corrupt right-wing rivals in Mexico.

“Ooooh, I’m so scared…,” he said at his daily morning press conference, paraphrasing a line of a popular song by a musician of his tropical Tabasco state. He then ordered his staff to play the song in the middle of the press conference.

“Nothing will happen,” he said, referring to the trade dispute, arguing that President Biden has always been respectful of Mexico’s national sovereignty.

In launching the dispute, U.S. Trade Representative Katherine Tai said an array of Mexican policies undermine American companies and U.S.-produced energy in favor of Mexico’s state-owned power company Comision Federal de Electricidad, or CFE, and oil company Petróleos Mexicanos, or Pemex.

“We have repeatedly expressed serious concerns about a series of changes in Mexico’s energy policies and their consistency with Mexico’s commitments under the USMCA,” Ms. Tai said.

The policies discourage “investment by clean-energy suppliers and by companies that seek to purchase clean, reliable energy,” she said. U.S. officials said that Mexican officials haven’t been responsive to U.S. concerns raised repeatedly over the past 18 months.

Canada said it supported the U.S. action and launched its own challenge to Mexico’s energy policy.

“Canada has consistently raised its concerns regarding Mexico’s change in energy policy,” a government spokeswoman said. “We agree with the United States that these policies are inconsistent with Mexico’s…obligations.”

Top U.S. energy industry groups applauded the Biden administration’s action.

“The Mexican government’s escalating pursuit of discriminatory policies that favor state-run energy companies and hinder private sector investment directly threatens the prosperity of U.S. companies and their workers,” American Petroleum Institute and American Clean Power Association said in a joint statement.

President Andrés Manuel López Obrador spoke at a Pemex refinery in Mexico’s Tabasco state earlier this month. Photo: Alejandro Cegarra/Bloomberg News

The action fuels the tension between the two neighbors, days after they marked the second anniversary of the USMCA, the successor to the North American Free Trade Agreement.

U.S. officials and businesses have complained since last year that Mexico’s energy industry policies implemented by Mr. López Obrador harmed U.S. businesses and investors.

Since he took office in 2018, Mr. López Obrador, a leftist-nationalist, has sought to regain state control of the energy industry. While he has fallen short of repealing the 2013 constitutional change that opened up both sectors to private investors, he has gradually changed regulations and laws to strengthen the dominant role of CFE and Pemex.

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The Mexican president says, without offering evidence, that past governments were paid off by multinationals to allow them to enter the Mexican market and destroy the state energy companies, leaving the country’s energy security at risk and harming consumers.

The U.S. Trade Representative’s office said it would contest Mexico’s actions including amendments to its electricity law that would give priority to the distribution of CFE-generated power over wind and solar power generated by private-sector companies.

The U.S. also contends that Mexico has obstructed the ability of U.S. companies to operate in Mexico’s energy sector, including in renewable energy projects, oil storage and retail fuel stations, through various delays, denials and revocations in the approval process.

“Mexico’s policies have largely cut off U.S. and other investment in the country’s clean energy infrastructure, including significant steps to roll back reforms Mexico previously made to meet its climate goals under the Paris Agreement,” the USTR said.

Under the USMCA, the U.S. and Mexico must start consultations within 30 days. If the consultations don’t lead to a resolution, the U.S. could request the establishment of a panel of experts. If an agreement isn’t reached there, the U.S. could impose import tariffs on Mexican products to offset the damage suffered by U.S. companies.

The dispute settlement mechanism is a two-way street, Mexican officials have argued. In January, Mexico and Canada requested the establishment of a panel over the interpretation of rules of origin for the auto industry, which accounts for more than 3% of Mexico’s gross domestic product. Mexico disagrees on how the U.S. treats certain parts and materials from outside the region in calculating regional content of vehicles.

A new law in Mexico gives priority access to the grid to CFE power plants at the expense of wind and solar plants that are mostly owned by private investors.Photo: Mauricio Palos/Bloomberg News

If energy consultations between the U.S. and Mexico fail, it could take around a year for the panel to reach a decision, based on its record, said César Hernández, a public policy consultant specialized on energy and trade.

The action is likely to further raise tensions between Mr. Biden and Mr. López Obrador, who have sparred over energy, trade and even the extradition of WikiLeaks co-founder Julian Assange to the U.S.

Before visiting Mr. Biden at the White House on July 12, the Mexican president boycotted Mr. Biden’s regional Summit of Americas in June, encouraging other Latin American leaders to stay away from the Los Angeles meeting.

Mexico was the U.S.’s largest trading partner after Canada in 2021, with $665 billion of goods shipped between the countries.

Some U.S. business groups have complained about Mexico’s alleged failure to adhere to the terms of the USMCA.

“By disrupting supply chains, raising the prices of consumer goods, and boxing American companies out of the Mexican market, Mexico’s USMCA violations impact a range of industries and severely undercut our nation’s economy,” the Alliance for Trade Enforcement, a group made up of various U.S. industry associations, said in a recent statement.

A U.S. energy company backed by investment firm KKR & Co. said in February it planned to sue the Mexican government for $667 million in damages linked to the takeover of its fuel terminal.

Houston-based Talos Energy said it would pursue international arbitration over the government’s decision to seize operating control of its Zama field, which shares oil with a neighboring field under Pemex’s control.

The Mexican government passed a new electricity law last year giving priority access to the grid to CFE power plants, regardless of their cost and efficiency, at the expense of wind and solar plants that are mostly owned by private investors.

By a narrow margin in April, Mexico’s Supreme Court fell short of declaring the electricity law unconstitutional, leaving it in force. Still, companies have filed hundreds of injunctions before federal judges, who will decide case-by-case whether the law violates the constitution.

President Biden met with President Andrés Manuel López Obrador at the White House this month. Photo: KEVIN LAMARQUE/REUTERS

In 2020, the Energy Ministry issued an executive order that sought to curtail the ability of private firms to import and export oil and fuel. The new rules allowed the government to quickly cancel existing import and export permits, reduced permits to five years from 20 years and made it much more difficult for companies to obtain new permits, among other provisions.

Later, Mr. López Obrador’s Morena party passed in Congress some changes to the country’s oil laws giving the government the power to cancel permits in the mid- and downstream sectors “on grounds of national security,” including allowing the government to temporarily take over facilities of private companies when permits are canceled

A judge ordered last year the indefinite suspension of the oil law after several injunctions were filed. Mexico’s Supreme Court has yet to hear the case.

Write to Yuka Hayashi at yuka.hayashi@wsj.com and Juan Montes at juan.montes@wsj.com