U.S., Canada demand trade dispute talks over Mexican energy policies

·4 min read
FILE PHOTO: Excess natural gas is burnt, or flared, from Mexican state-owned Pemex's Tula oil refinery, located adjacent to the Tula power plant belonging to national power company Comision Federal de Electricidad, or CFE, in Tula de Allende

By David Lawder, Dave Graham and Steve Scherer

WASHINGTON/MEXICO CITY (Reuters) -The United States and Canada on Wednesday demanded dispute settlement talks with Mexico under a North American trade deal, charging that Mexican energy policies were discriminatory and "undermine" international firms and cross-border supplies.

The request, first announced by the U.S. Trade Representative's office, marks the most serious trade fight between Washington and Mexico City since the U.S.-Mexico-Canada Agreement on trade took effect two years ago. If unresolved, it could ultimately lead to punitive U.S. tariffs.

Canada's trade ministry later told Reuters it was launching its own energy consultations with Mexico and "supporting the U.S. in their challenge."

"We agree with the United States that these policies are inconsistent with Mexico's (USMCA) obligations," Ministry of International Trade spokeswoman Alice Hansen said in an emailed statement.

Mexico's economy ministry said in a statement late on Wednesday that it had received Canada's request, which presented some similarities presented by the U.S. request.

The ministry also said that it would look to coordinate with both governments to discuss the reach of their requests, and that it was willing to reach a "mutually satisfactory solution" to the energy dispute.

USTR said the requested consultations relate to Mexican measures that it argues disadvantage U.S. firms in favor of Mexican state-owned power utility Comision Federal de Electricidad (CFE) and oil producer Petroleos Mexicanos (Pemex).

Mexican President Andres Manuel Lopez Obrador, a leftist energy nationalist, has pledged to revive Pemex and CFE, which he argues his predecessors deliberately "destroyed" to cede Mexico's energy market to foreigners.

"We have repeatedly expressed serious concerns about a series of changes in Mexico's energy policies and their consistency with Mexico's commitments under the USMCA," U.S. Trade Representative Katherine Tai said in the announcement.

The U.S. move is a blow to Mexico, and comes just a week after Lopez Obrador met U.S. President Joe Biden in Washington, and announced that U.S. firms were planning to plow billions of dollars into the Mexican energy sector.

During a regular news conference, Lopez Obrador said "there is no problem" with the United States over energy and that his government will analyze the U.S. complaint. He added that his government was acting in line with Mexican laws.

INVESTMENTS AT RISK

USTR said it was challenging amendments to Mexican legislation that prioritize distribution of CFE-generated power over cleaner sources of energy provided by private-sector suppliers, such as wind and solar - moves that it said "disincentivize" U.S. investment in clean energy.

Mexico's Supreme Court in April upheld the contentious 2021 electricity legislation.

USTR is also protesting a 2019 rule that grants only Pemex extra time to comply with tougher environmental limits on the sulfur content of highway diesel fuel. And it said that Mexico has been "delaying, denying or failing to act" on permit applications for renewable energy facilities and to store, transload or sell fuels, making it difficult for private firms to participate.

Lopez Obrador argues his measures will benefit consumers and make Mexico more self-sufficient. His opponents say the moves will raise electricity costs, undermine investor confidence and violate Mexico's clean energy commitments.

At stake in the dispute are tens of billions of dollars worth of U.S. and Canadian investments in Mexico's energy infrastructure. Ken Salazar, the U.S. ambassador to Mexico, puts the U.S. figure at $30 billion, including planned projects.

Canada's trade ministry puts the investment figure for Canadian firms at C$13 billion ($10.1 billion), including more than C$5 billion ($3.9 billion) in renewable energy.

The U.S. Chamber of Commerce welcomed USTR's move, saying Mexico's policies "have unfairly disadvantaged U.S. companies and are at odds with our common goals of generating reliable energy, sustainable growth, and a durable economic recovery."

DISPUTES PILING UP

A USTR official told reporters that punitive tariffs were "a possibility" if the dispute could not be resolved through negotiations, which it hoped would lead to reopening of the market to U.S. firms.

Under USMCA rules, if the complaint is not resolved in 75 days, USTR can request a dispute panel to review the claims.

Such disputes are piling up under USMCA, which was negotiated during former President Donald Trump's administration to replace the 1994 North American Free Trade Agreement.

Mexico and Canada are challenging the U.S. interpretation of tighter regional automotive rules, arguing that a more flexible approach is needed.

And the United States has demanded a second dispute panel to settle a long-running dispute with Canada over its allocation of dairy quotas.

($1 = 1.2889 Canadian dollars)

(Reporting by David Lawder, Dave Graham, Steve Scherer and Anthony Esposito; Additional reporting by Kylie Madry; Editing by Chizu Nomiyama and Paul Simao)

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