There has been considerable friction between Mexico’s government and U.S. investors in the energy sector recently, but conditions are in place for booming trade between the two nations according to a new analysis from Washington, DC think tank Center for Strategic and International Studies (CSIS).
“The next four years present a once-in-a-generation opportunity for the new Biden administration to engage with Mexico and with President Andrés Manuel López Obrador to reinforce the trade relationship between the two countries,” the authors of a CSIS report said.
Last year’s signing of the United States-Mexico-Canada Agreement (USMCA), global economic disruption due to the Covid-19 pandemic, and administration changes on both sides of the border “present a unique combination of circumstances that should be seized upon throughout the next four years.”
López Obrador’s approval rating makes him the most popular president in the Americas. This, the authors said, is “the massive popular support necessary to enact sweeping reforms.”
Meanwhile, the coronavirus “represents a unique window of opportunity for the United States and Mexico to work together through the USMCA to not only promote their own economic recovery, but to prepare for the future in a way that will make the entire North American market competitive.”
The USMCA, or the revamped North American Free Trade Agreement (NAFTA), has made the commercial zone uniting the three countries one of the richest trade blocs in the world. Mexico alone saw exports to the United States rise tenfold from $39.9 billion in 1993 to $358.1 billion in 2019.
López Obrador has repeatedly praised the benefits of the treaty as key to the country recovering from two straight years of economic contraction.
But the authors acknowledged that the recent actions of López Obrador in the energy sector to give preference to state giants Comisión Federal de Electricidad (CFE) and Petróleos Mexicanos (Pemex) in everything from power dispatch to permitting could be harmful to trade.
“The energy sector is one of both growing importance and consistent dispute between U.S. and Mexican administrations, and it will be a frontier of negotiation in the coming years.”
Mexico is the largest export destination for U.S. natural gas and exports continue to rise as new infrastructure comes online. Last week analysts at EBW Analytics Group said from November through early February, U.S. net exports of natural gas had grown an average of 1.9 Bcf/d year/year, representing almost 200 Bcf of incremental demand, led by growing liquefied natural gas and pipeline exports to Mexico.
Mexico is also the number 1 export destination for U.S. petroleum products.
According to the CSIS report, López Obrador’s interference in the energy sector adds obstacles “to environmental accountability” and disincentivizes foreign investment in “more than 200 energy projects.”
They added that these protectionist energy policies would violate the USMCA.
Changes to LIE
Last Tuesday, Mexico’s senate approved changes pushed for by the president to the nation’s Electricity Law, or LIE as it is known in Spanish.
The U.S. Chamber of Commerce, the Global Wind Energy Council, the Global Solar Council, and Mexican business chamber Consejo Coordinador Empresarial are among numerous groups that have denounced the law.
Analysts at Mexico City’s Zumma Consulting said they “expect that some of the modifications to the LIE included in the reform will be legally challenged in courts,” and that “uncertainty could persist in Mexico’s electricity market during 2021.”
They added that U.S. President Biden’s position to support the energy transition foreshadows “a stronger position from the U.S. government regarding Mexico’s energy policy.
“With all this, a larger engagement in public discussions regarding energy policy may be expected and, possibly, a more open dialogue and exchange may be held among private and public actors in order to find the best solution for the development of a competitive, inclusive, reliable and efficient power market.”
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