Protecting Mexico’s Energy Reforms

By Duncan Wood

When President Salinas Gortari signed the North Atlantic Free Trade Agreement for Mexico in 1992, he provided certainty and stability for investors hoping to benefit from Mexico’s emerging manufacturing base. The trade deal locked in the benefits of domestic economic reforms and liberalization introduced in the late 1980s and early 1990s. The steady flow of foreign investment that followed turned Mexico into a manufacturing powerhouse.

When negotiators from Mexico, Canada, and the United States start talks on Wednesday to renegotiate aspects of the 23-year-old agreement, they too hope to lock in recently won gains in Mexico that are of enormous interest to all parties. One priority must be to defend hard-won reforms in Mexico’s energy sector — reforms meant to change a sector that was closed and monopolistic for 75 years. Since U.S. President Donald Trump’s inauguration in January, a broad-based movement has emerged that aims to defend two decades of free trade in the region and to insist on the urgency of “doing no harm” during renegotiation. NAFTA’s defenders have managed to influence a change in language: Where commentators once spoke of renegotiating a pact Trump characterized as the worst trade deal signed by the United States, the negotiations are now widely framed as an opportunity to modernize a venerable trade deal so that it more accurately reflects the needs and priorities of the 21st century economy.

The North American energy sector has adjusted its own approach. Oil and gas companies pushed hard to leave the agreement untouched, but once Trump notified the U.S. Congress that he intended to enter into talks, there emerged an unrelenting focus on the need to protect key elements of NAFTA. Early in the Trump administration, there was a fear that Congress might approve measures leading to a 20 percent tax on oil entering the U.S. market, and risking retaliatory measures from Mexico. Initially lauded by President Trump and the Republican Party, this option was recently discarded by Congress and is unlikely to be resurrected soon.

Promoting Energy Trade and Investment

Two other elements in the NAFTA negotiations stand out regarding Mexico’s energy sector. The first is an emphasis on the importance of Mexico as an energy market for the United States. Although Mexico has traditionally been a net exporter of hydrocarbons to the United States, that situation has reversed since 2014. This is due in part to declines in crude oil production combined with low crude oil prices, but also due to rising Mexican imports of natural gas and refined products. This growth is largely due to the reform process, which has driven investment in new natural gas-powered electricity generation and the retail gasoline market. By 2016, the United States registered close to a $10 billion surplus in its energy trade with Mexico. Trump has spoken repeatedly about the need to assert U.S. energy “dominance,” and the growing importance of Mexico’s post-reform natural gas and fuels markets has surely not gone unnoticed.

A second element of focus for the hydrocarbons industry is the dispute settlement mechanisms included in the agreement. These mechanisms, especially Chapters 11 (which provides investor-state dispute settlement) and 19 (on state-state dispute settlement), ranked among Trump’s favorite rhetorical targets. Both chapters have been useful in defending the interests of the U.S. government and American companies, but the Trump administration sees them as an encumbrance and a limit on U.S. sovereignty.

For the oil industry in Mexico, Chapter 11 in particular has been of critical importance in providing confidence for U.S. and Canadian firms. These firms know that their multi-billion dollar investments are protected under NAFTA provisions. This is especially vital now, as Mexico’s July 2018 elections may bring to power a president who is unfriendly to the new energy model. These chapters have substantial support in the trilateral negotiations: Mexico and Canada have both emphasized the importance of the energy trade. Mexico has specifically called for a modernization of NAFTA’s energy chapter (chapter 6) — in particular the reservations made under Annex 602.3, whereby Mexican oil and gas were excluded from the agreement.

Although the United States has not identified energy as a priority among its objectives, it nonetheless seeks to “preserve and strengthen investment, market access, and state-owned enterprise disciplines benefiting energy production and transmission and support North American energy security and independence, while promoting continuing energy market-opening reform.” Mexico’s own statement of objectives uses language on energy that is consistent with this.

There is much at stake in the upcoming talks, and the North American oil and gas industry appears to be well positioned to defend its interests. However, it is essential that a positive result not be taken for granted. To lock in the benefits of Mexico’s new energy model, investor protections must be enshrined into the agreement, and access to regional energy markets must be guaranteed.

 

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