An acid test for the US-Mexico-Canada trade agreement

The request by the United States, followed by Canada, for consultations regarding Mexican laws, policies and practices related to its energy sector is a major test for the dispute settlement procedures of the United States-Mexico-Canada Agreement (USMCA). Though the U.S. and Canadian complaints are directed toward Mexico’s energy policies and treatment of private investors, the outcomes of the dispute will be crucial for the credibility of the agreement itself.

The USMCA governs the massive trade and investment relationship between the three countries, totaling more than $2.6 million in trade each minute. When the agreement turned two on July 1, U.S.-Mexico-Canada trade had surpassed pre-pandemic levels. It provided most of Mexico’s economic growth over the past two years.

Reviews of the agreement’s performance were positive, but it was clear that issues of disagreement would test the USMCA and impact how to measure its success going forward. Controversy over Mexico’s energy-related practices is now front and center.

The way in which these consultations and a potential dispute settlement panel proceed will send strong signals about how the three countries can manage sensitive problems. Key will be how Mexico handles this process: whether through serious engagement to find solutions that reflect specific USMCA commitments, or otherwise.

The complaint lodged by the U.S. and Canada focuses on a top priority of Mexico’s President Andrés Manuel López Obrador, or AMLO, to strengthen the role of the state in the energy sector. He has been seeking ways to achieve that goal since taking office. However, a number of U.S. and Canadian companies allege they have faced discriminatory treatment that undermines their investments and violates the USMCA. Up to $30 billion in private sector investments, which include substantial renewable energy projects, potentially could be at risk.

The specifics raised in the U.S. and Canadian requests are important, but more broadly, how the USMCA complaint proceeds will send strong messages about Mexico’s investment environment and the government’s attitude toward international investors.

This case comes as many believe Mexico could be attracting massive amounts of new nearshoring investments because of the global supply chain problems. A recent Inter-American Development Bank study, for example, found that Mexico could be the biggest winner by far in nearshoring exports across Latin America. However, this is not reflected in investment figures, which show Asian countries doing relatively better. Worries about Mexico using regulatory and other means to pressure U.S. and Canadian companies will not help.

It is positive that the U.S. and Canada are using the agreed upon USMCA provisions for a dispute resolution panel to try to resolve differences over whether Mexico is indeed violating its commitments.  

Difficult and politically sensitive cases such as this highlight why the USMCA improved dispute resolution processes compared to the agreement’s predecessor, the North American Free Trade Agreement (NAFTA). The state-to-state process is being used in other sensitive disagreements because it gives clear steps for sorting through the merits of a difficult disagreement.

Mexico and Canada, for example, have an active complaint against the U.S. over its interpretation of the USMCA’s rules of origin for vehicles; a decision is expected later this year. The U.S. has filed a second complaint against Canada over its domestically sensitive dairy practices, arguing that Canada did not follow guidance in the first case. In addition, the United States is using the USMCA’s rapid response labor mechanism for labor rights cases in Mexico.

Under the agreement, the U.S. and Canada have a short period to seek resolution through consultations and then, if necessary, one or both countries can request that a disputed settlement panel be created to obtain a judgment by experts pre-selected by the three countries. In this case focused on Mexico’s energy-related practices and treatment of private investors, if the experts determine that Mexico broke its commitments, it could face trade reprisals.

U.S. officials have raised concerns about the Mexican practices for months. To encourage cleaner energy approaches, they have suggested ways that would help Mexico develop green and climate-friendly solutions for its energy future, which might allow improved cooperation with private companies. These efforts have included conversations with Mexico’s president and private talks between Mexican authorities and U.S. companies.

Independent of the USMCA complaint, AMLO faces critics who claim his current energy approach is bad for Mexico. However, the U.S. and Canada are not questioning his basic reform measures, just certain steps that they allege violate specific chapters of the USMCA.

How Mexico responds is fundamental. The Economy Ministry says it looks forward to pursuing consultations to resolve the dispute, but AMLO has responded with nationalist rhetoric about not backing down on principles of sovereignty. At first, he appeared to mock the complaint; more recently, he suggested he will write to President Biden to clarify Mexico’s policies and stated that there will not be a “rupture” in the USMCA.

Negotiated solutions are possible, especially if Mexico is willing to adjust practices to meet the USMCA commitments to which it agreed. Broader audiences, including potential investors and Congress, will be watching the evolution of this dispute.  

Earl Anthony Wayne, a former U.S. ambassador to Mexico and Assistant Secretary of State for Economic and Business Affairs, is board co-chair of the Wilson Center’s Mexico Institute and a Distinguished Diplomat at American University’s School of International Service. Follow him on Twitter @EAnthonyWayne.