U.S. trade gambit puts Mexican energy policies in firing line

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MEXICO CITY — The U.S. decision to formally challenge Mexico’s energy policies brings to a head a dispute that has grown steadily between President Andres Manuel Lopez Obrador and some of his country’s top trade allies and investors since he took power in late 2018.

On Wednesday, the U.S. government said it would request dispute settlement consultations with Mexico under a North American trade deal over policies championed by Lopez Obrador that Washington argues treat American companies unfairly.

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Canada quickly said it would join the U.S. complaint over those policies, which have helped to cloud investor sentiment in Mexico since the government first began trying to rework existing contracts in the sector in 2019.

Lopez Obrador, a leftist energy nationalist, responded defiantly, telling reporters that Mexico was not violating the United States-Mexico-Canada Agreement (USMCA), that there was “no problem” and that his government would set out its defense carefully.

However, Carlos Vejar, a former Mexican trade negotiator, said Lopez Obrador’s government would likely struggle to argue its case under the trade pact, which came into effect in 2020 as a replacement for the North American Free Trade Agreement.

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“It looks difficult for Mexico to defend all the measures that are being identified,” Vejar said.

Lopez Obrador has spent billions of dollars attempting to revive state-owned oil company Petroleos Mexicanos (Pemex) and has changed the law to favor national power utility Comision Federal de Electricidad (CFE) over private-sector energy investors.

Business associations argue the policies have led to unjust treatment of private firms, and breach laws liberalizing the energy market passed under the previous Mexican government.

The Mexican president says tweaks he made to USMCA give Mexico the right to put the interests of the state first.

Despite setbacks in lower tribunals that he says back his adversaries, Lopez Obrador has persisted in tightening state control of energy, and in April won a partial victory in Mexico’s Supreme Court on measures giving precedence to CFE.

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However, the challenge thrown down to Mexico by the office of the U.S. Trade Representative has escalated the dispute and, if unresolved, could lead to punitive U.S. tariffs.

Mexico’s economy ministry said it was willing to reach a “mutually satisfactory” solution to the dispute. How it pans out is also likely to be closely watched by investors from Europe and other parts of the world also irked by Mexico’s policies.

The USTR step was quickly hailed by the private sector in the United States, which is by far Mexico’s biggest trade partner and the main source of its foreign direct investment.

Ken Salazar, the U.S. ambassador to Mexico, said in June that Mexico’s energy policies had put at risk some $30 billion in existing and planned U.S. investment projects in Mexico.

Vejar, the former trade negotiator, said a resolution could be reached within a year if the controversy goes to dispute panels. But a lasting fix would likely depend on whether Lopez Obrador was prepared to negotiate a compromise, he added. (Reporting by Dave Graham; Editing by Paul Simao)