Mexico is importing around 7 Bcf/d of natural gas from the United States this summer, but unresolved issues related to a trade treaty binding the two economies could complicate this relationship.
For now, the trade relationship is thriving, but there are unknowns. Mexico’s new president Claudia Sheinbaum takes office in October, and Americans go to the polls to vote for a new head of state in November. Meanwhile, Mexico faces disputes in energy related to the United States-Mexico-Canada-Agreement (USMCA), the free trade pact that, four years ago, replaced the North American Free Trade Agreement (NAFTA).
“In a year with a change in federal government in Mexico and presidential elections in the United States, and with the possibility of institutional changes and modifications in regulations and public policy, resolving pending disputes and aligning regulatory frameworks among the three USMCA countries is crucial,” according to a new joint analysis by think tanks Instituto Mexicano para la Competitividad (IMCO) and the Wilson Center in Washington, DC.
The analysts underlined the risk involved in a proposed constitutional amendment that is set to go to Mexico’s congress in September. President Andrés Manuel López Obradror’s Morena party has enough seats in both houses of congress to push through the reform.
“Actions such as introducing constitutional or legal reform initiatives that may conflict with the USMCA, or generate uncertainty and diminish legal certainty, affect regional competitiveness,” the analysts said. They added, “Fully implementing the agreement is vital to ensure its longevity and enable the countries to fully benefit from its provisions.”
The reform proposals include eliminating energy regulator Comisión Reguladora de Energía (CRE) and granting Comisión Federal de Electricidad (CFE) precedence over private companies in the power sector.
CRE oversees natural gas regulations and permitting. It also publishes the IPGN monthly natural gas price index, a compilation of post-transaction prices reported anonymously by shippers.
According to the analysts, the changes would conflict with investment clauses in Chapter 14 of the treaty, which state that if a signatory country “further opens its economy by allowing more trade or foreign investment, it cannot reverse those measures or close previously opened sectors to private participation. Introducing new restrictions for private companies in the energy sector could, therefore, conflict with USMCA.”
Ongoing Dispute
Any constitutional overhaul would only add to ongoing disputes under the clauses of the treaty.
In 2022, the Office of the U.S. Trade Representative (USTR) announced a request for dispute settlement consultations under Chapter 31 of the USMCA, claiming that Mexico’s public policy and regulatory actions during the current administration have negatively impacted U.S. companies in the energy sector. Canada subsequently initiated a parallel process with the same grievances.
After two years of consultations and discussions, there has been little progress in the matter. It could end up reaching a panel process before the end of the López Obrador sexenio, or six-year term.
The analysts highlighted the benefits of the USMCA as global supply chains rearranged after the Covid-19 pandemic. “This stability has allowed Mexico and Canada to increase their roles as suppliers of U.S. imports and to surpass the amount of U.S. imports from China,” they said.
In two years, the USMCA faces its first review by the governments of Canada, Mexico and the United States. As it stands the USMCA is set to expire in July, 2036.
President-elect Sheinbaum said any changes to the treaty in the planned review would be “minor.” London-based Capital Economics said previously that if former President Donald Trump, the Republican frontrunner, were to win the election, he could potentially move to alter or scrap the treaty “given tensions with Mexico over the southern border.”
