In 1938, Mexico nationalized its energy sector, putting Petroleos Mexicanos (PEMEX) firmly under centralized government control where it remained for decades.
During this time, PEMEX developed the reputation of a bloated bureaucracy, inefficient and incapable of keeping up with the nation’s energy needs. Although Mexico is one of the largest oil producers in the world, it is forced to import most of its refined fuels.
As a cornerstone of his administration, former Mexican President Enrique Peña Nieto (2012 to 2018) led the reform of Mexico’s energy industry. This allowed more badly needed foreign investment in this sector in order to modernize PEMEX and to allow for more growth in renewable energy.
Peña Nieto’s successor and current Mexican President Andrés Manuel López Obrador (AMLO), a strong nationalist, has made it a cornerstone of his presidency to roll back energy reform with the objective of Mexico becoming energy self-sufficient. This has resulted in increasing restrictions on foreign companies participating in PEMEX-related projects. Last year, Mexico moved to provide preference to the nationalized Comisión Federal de Electricidad (Mexico’s electricity company) over foreign companies in renewable energy projects. Mexico’s actions under AMLO have frustrated American companies who saw promise in participating in the country’s energy sector.
For the better part of the last two years, U.S. officials have been voicing their concerns to Mexico about American companies being shut out. With no resolution at hand and the level of frustration rising, on July 19, the Biden administration, via the Office of the U.S. Trade Representative, announced that it believed Mexico’s actions violated the United States-Mexico-Canada Agreement (USMCA).
Most likely a contributing factor to this complaint was the meeting between President Joe Biden and President AMLO on July 12 in Washington, D.C. At this meeting, which had its awkward moments, AMLO suggested that the U.S. pass laws to lower gas prices, stating that Americans were crossing the border to gas up in Mexico, where gas can be up to one dollar cheaper. He didn’t mention that Mexico subsidizes gas prices.
Per the USMCA dispute resolution process, the U.S. and Mexico will have 30 days to negotiate in order to try to resolve the dispute. If no resolution is reached, the U.S. can petition a USMCA panel to investigate the matter. If it finds that Mexico has violated the terms of the USMCA, it can grant the ability to the U.S. of imposing tariffs on Mexican products equal to the estimated amount that U.S. companies have lost. U.S. Trade Representative Katherine Tai made it clear that the U.S. would prefer to negotiate a resolution rather than go down the road of tariffs.
Since the day he took office, AMLO’s attempts at the rolling back of Mexico’s recently opened energy policies have been on a head-on collision with the former North American Free Trade Agreement and its successor, the USMCA. Disagreements among trading partners are common, and dispute resolution mechanisms are almost always set in place before problems occur. However, AMLO’s actions are testing the limits of nationalism when faced with the obligations of being a signatory to a multi-lateral trade agreement.
Since both have been in office, AMLO and Biden have never had what one could call a “cozy” relationship. When Biden was elected, it took some time for AMLO to recognize his election. He was roundly criticized for this. The current energy dispute could further frost relations, as AMLO continues to define himself as a Mexican nationalist and Biden as a president who is apt to lean heavily on diplomacy rather than a sledgehammer to get things done.
It is clear that in order for Mexico to continue to provide energy for its growing population, it will need foreign investment and technology to modernize its energy sector. Like all other responsible nations committed to battling climate change, it will also need to focus on and invest in renewable energy. Mexico, with its abundant sunshine, winds and geothermal capabilities, could become the model for renewable energy in Latin America.
Disputes aside, it is imperative that both countries continue to have dialogue to prevent problems before they occur and to work through them when they do. Working through the energy dispute amicably and efficiently will demonstrate to the world that the U.S. and Mexico are good neighbors, adhering to a trade agreement that is working. At the end of their July 12 meeting, AMLO stated, “President Biden, we trust you because you respect our sovereignty.” Biden replied that AMLO brought up a lot of pertinent points at the meeting. Both should agree that their respective nations need each other to compete economically in the world. This should be a good starting point for a future productive relationship.
Jerry Pacheco is the executive director of the International Business Accelerator, a nonprofit trade counseling program of the New Mexico Small Business Development Centers Network. He can be reached at 575-589-2200 or at email@example.com.