Overview
The United States has requested dispute settlement consultations with Mexico under Chapter 31 of the United States-Canada-Mexico Agreement (“USMCA”) concerning a range of energy policies adopted by the Government of Mexico that the United States believes discriminate against U.S. interests in violation of the USMCA. According to a press release issued by the Office of the U.S. Trade Representative Katherine Tai:
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. Mexico’s policy changes threaten to push private sector innovation out of the Mexican energy market. To reach our shared regional economic and development goals and climate goals, current and future supply chains need clean, reliable, and affordable energy.
Canadian Trade Minister Mary Ng has indicated that Canada has joined the United States in challenging these actions through the same dispute settlement mechanism. This is the first time that the United States and Canada have both pursued USMCA dispute settlement consultations with Mexico on policies of mutual concern.
Pursuant to USMCA Article 31.4, the United States and Canada will each enter into consultations with Mexico within 30 days of their requests for consultations, unless the parties decide otherwise. If the issues covered in the requests for consultation are not resolved within 75 days of the requests, the United States and Canada can then request the establishment of a panel, which will oversee and decide the outcome of the dispute (USMCA Article 31.6). If the panel rules in favor of the United States and Canada, and Mexico fails to comply with the decision, the United States and Canada would then be authorized to pursue retaliatory measures against Mexico, such as tariffs on imports from Mexico, equivalent to the amount of the economic harm incurred (USMCA Article 31.19) (U.S. officials have estimated the amount of economic harm to U.S. companies to be over USD $10 billion).
The U.S. request for consultations covers four specific areas of Mexican energy policy and points to potential inconsistencies across a number of USMCA chapters, including those governing trade in goods, investment, and state-owned enterprises:
- The Electric Power Industry Law, As Amended: The first target of the U.S. request for consultations relates to March 2021 amendments to Mexico’s Electric Power Industry Law requiring grid operator Centro Nacional de Control de Energía (“CENACE”) to prioritize electricity produced by the Comisión Federal de Electricidad (“CFE”), a state enterprise, over electricity produced by private producers, in dispatching electricity to Mexico’s grid.
According to the request for consultations, these provisions of the Electric Power Industry Law, as amended, are inconsistent with USMCA Article 2.3, because Mexico has failed to accord national treatment to U.S. goods in accordance with Article III of the General Agreement on Tariffs and Trade 1994 (“GATT 1994”). The obligation to provide “national treatment” is a common provision in trade agreements like the USMCA, and requires that parties treat imported goods no less favorably than like products of national origin “in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use.” The United States also alleges that the Electric Power Industry Law, as amended, violates USMCA Article 14.4, because Mexico has failed to accord to U.S. investors and their investments treatment that is no less favorable than that it accords, in like circumstances, to Mexican investors and their investments.
- Inaction, Delays, Denials, and Revocations of Private Companies’ Abilities to Operate in Mexico’s Energy Sector: The U.S. request for consultations asserts that Mexico is or has been engaging in action or inaction that prevents private company participation in the Mexican energy sector. Such conduct includes: delaying, denying or failing to act on applications for new permits or permit modifications; suspending or revoking existing permits; or otherwise blocking private companies’ ability to operate renewable energy facilities, such as wind and solar installations, import and export electricity and fuel, store or transload fuel, and build or operate retail fuel stations.
According to the request for consultations, such measures run afoul of several USMCA obligations, including: USMCA Article 2.3, because they violate Mexico’s “national treatment” obligations under the USMCA; USMCA Article 14.4, because they fail to accord to U.S. investors and their investments treatment that is no less favorable than that it accords, in like circumstances, to Mexican investors and their investments; USMCA Article 2.11, because they prohibit or restrict imports or exports of a good; USMCA Article 22.5.2, because the relevant administrative body is not exercising its regulatory discretion in an impartial manner with respect to enterprises that it regulates, including enterprises that are not state-owned enterprises; and USMCA Article 29.3, because Mexico is not administering its laws in a consistent, impartial, and reasonable manner.
- Postponement of Requirement to Supply Ultra-Low Sulfur Diesel for Pemex Only: The U.S. request for consultations identifies a December 2019 regulation issued by the Comisión Reguladora de Energía (“CRE”) that grants only Petróleos Mexicanos (“Pemex”), a state enterprise, and no other companies, a five-year extension to comply with maximum sulfur content requirements under its applicable automotive diesel fuel standard which, as of December 2018, requires ultra-low sulfur diesel to be sold throughout Mexico.
According to the request for consultations, the CRE regulation is inconsistent with USMCA Article 2.3, because it fails to accord national treatment to U.S. goods in accordance with Article III of the GATT 1994, and USMCA Article 22.5.2, because, by granting state-owned enterprise Pemex such an extension, CRE has not exercised its regulatory discretion in an impartial manner with respect to enterprises that it regulates, including enterprises that are not state-owned enterprises.
- Actions Regarding the Use of Mexico’s Natural Gas Transportation Service: The U.S. request for consultations additionally cites a June 2022 letter from Mexico’s Secretary of Energy to the CRE and the Centro Nacional de Control del Gas Natural (“CENGAS”) announcing an energy policy and “supply guarantee strategy” that incentivizes or requires current or future users of Mexico’s natural gas transportation service to source natural gas from CFE or Pemex and imposes restrictions on the importation of U.S. natural gas.
The letter includes new requirements for CENGAS, including that it require users of Mexico’s natural gas transportation service to prove that they “receive the supply of Natural Gas from any of the productive companies of the State or its subsidiaries or affiliates,” and also prioritizes the use of the natural gas transportation service by CFE and its related companies.
According to the request for consultations, the June 2022 letter from the Mexican Secretary of Energy and related policies violate USMCA Article 2.3, because they fail to accord national treatment to U.S. goods in accordance with Article III of the GATT 1994, for example, by incentivizing or requiring users of Mexico’s natural gas transportation service to source natural gas from CFE or Pemex, and USMCA Article 2.11, because they prohibit or restrict the importation of a good of the United States destined for Mexico, for example, by requiring users of Mexico’s natural gas transportation service to contract with CFE or its subsidiaries to utilize their reserved natural gas transportation capacity.
The announcement of the U.S. request for consultations has received bipartisan praise among U.S. lawmakers, who have long taken issue with the Mexican energy policies cited in the request. Senate Finance Committee Chair Ron Wyden (D-OR) noted in a statement that he was “pleased that Ambassador Tai is using the improved enforcement mechanism … in USMCA to hold Mexico accountable, protect our environment, and ensure open markets for American renewable energy provider.” House Ways and Means Committee Ranking Member Kevin Brady (R-TX) stated his view that “{a}fter two years of increasing engagement on these issues, the United States is taking proper action to enforce USMCA by addressing the many ways Mexico has been flaunting its USMCA obligations in the energy sector, harming American businesses and North American competitiveness, as well as Mexico’s own consumers and environment.”
Mexico’s President, Andrés Manuel López Obrador (“AMLO”), dismissed the U.S. request for consultations as a serious threat. Given the importance of these energy policies to AMLO’s administration, it appears unlikely that U.S. concerns will be addressed fully during consultations, and that the dispute will thus likely proceed to the panel stage.
