What’s behind the energy spat between Canada, Mexico and the US?

Mexican President Andres Manuel Lopez Obrador has said Mexico has ‘inalienable’ ownership of its energy resources.

Three leaders walking on a red carpet in what looks to be the White House - with Biden showing them around, as he has his arms wide open as if he is explaining the surroundings. All three are wearing facemasks
Mexican President Andres Manuel Lopez Obrador, left, has clashed with US President Joe Biden, centre, and Canadian Prime Minister Justin Trudeau, right, over parts of his signature energy policy [File: Susan Walsh/AP Photo]

The leaders of Canada, Mexico and the United States are due to hold a summit next week, where a significant bone of contention could be a dispute centring on whether Mexico breached a trade pact by tightening state control of its energy market.

Where does the dispute stand?

Tensions over Mexico’s nationalist policies boiled over into a formal dispute in July, when the governments in Washington, DC, and Ottawa filed a complaint against Mexico under the countries’ joint trade deal: the US-Mexico-Canada Agreement (USMCA).

The complaint argued that efforts by Mexican President Andres Manuel Lopez Obrador discriminated against US and Canadian companies, by changing the market to favour Mexico’s state oil company Petroleos Mexicanos (Pemex) and its national power utility Comision Federal de Electricidad (CFE).

The companies also complained that bureaucratic delays were stymieing their operations.

Talks to resolve the dispute began and, although progress has been halting, Canada and the US agreed last year to extend the process beyond its initial 75-day window.

Under USMCA, if the controversy is not resolved during consultations, a dispute panel can be called to adjudicate.

What is Mexico’s defence?

Lopez Obrador has put on a bullish front, saying Mexico has broken no laws and that “nothing is going to happen”.

It comes after he overhauled the electricity market in the name of national sovereignty, giving CFE priority over private companies in connecting power stations to the grid.

Often couching his opposition to foreign and private participation in the energy sector as part of his drive to eradicate corruption, he argues past governments skewed the market in favour of private capital.

He also says that energy is a domestic matter and points to an article he had inserted into USMCA stipulating Mexico’s “inalienable” ownership of its oil and gas. Critics say the article does not justify Lopez Obrador’s policies towards foreign firms.

Can Mexico fix the dispute?

Most analysts predict Mexico would lose if a panel were asked to resolve the dispute. That could be very costly to Mexico, raising the prospect of punitive US tariffs.

Both countries have previously stressed they want to sort out the disagreement before it reaches a panel.

Talks slowed down after Mexico’s economy minister resigned in October. Her successor cleared out several experienced trade negotiators, leaving an inexperienced team in charge.

The new team says it has put forward proposals that could deal with two of the four areas of consultations and that they are also addressing other US concerns. But there has been little clear indication of meaningful progress.

Resolution appears to hinge on whether energy nationalists inside the Mexican administration, who have taken their cues from Lopez Obrador, are prepared to compromise.

What are Mexico’s bargaining chips?

Lopez Obrador has made energy policy a cornerstone of his presidency, making it hard for him to back down.

His administration is also mindful that Mexico’s assistance on tackling illegal immigration tends to carry more weight in Washington, DC due to its prominence in US domestic politics, giving the government tacit, if unstated, leverage.

Mexican industry is also so heavily integrated with the US economy that a trade conflict could be painful for both countries at a time when the region is attempting to reduce its reliance on Asia and bring down soaring inflation.

Still, the spat has hit investor confidence in Mexico. Lopez Obrador is seeking US help to finance solar power output in northern Mexico and attract investment in greener manufacturing, particularly in car-making, a key industry.

Source: Reuters