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US-Mexico Energy Spat: Origins, Defense, and Outcome

The United States, Canada, and Mexico are set to hold a summit next week, during which a significant point of contention could be a dispute over whether Mexico has violated the United States-Mexico-Canada Agreement (USMCA) trade deal by increasing state control over its energy market.

Flags of U.S. and Mexico
Flags of U.S. and Mexico

The dispute began in July when the US and Canada filed a complaint against Mexico, alleging that President Andres Manuel Lopez Obrador's efforts to favor state-owned Petroleos Mexicanos (Pemex) and the national power utility Comision Federal de Electricidad (CFE) discriminated against the US and Canadian companies.

Talks to resolve the dispute have been slow and have yet to produce meaningful progress. A dispute panel will be called to adjudicate the case if the controversy is not resolved during consultations. Most analysts predict that Mexico would lose if the panel were to be called, which could result in costly tariffs for Mexico.

Mexico's Defense and Bargaining Chips in the US-Mexico Energy Spat

Mexico has argued that it has not broken any laws and that the energy sector is a domestic matter. President Lopez Obrador has justified his actions as a way to combat corruption and restore national sovereignty. He has also pointed to an article in the USMCA that states Mexico's "inalienable" ownership of its oil and gas. Critics, however, argue that the article does not cover the treatment of foreign firms. It is difficult for Lopez Obrador to back down on energy policy, which he has made a cornerstone of his presidency.

The Mexican government is also aware that its assistance in tackling illegal immigration carries more weight in Washington due to its importance in US domestic politics, giving it leverage in the dispute. Additionally, the Mexican and US economies are so heavily integrated that a trade conflict could be detrimental to both countries when the region is trying to reduce its reliance on Asia and curb rising inflation.

The dispute has already affected investor confidence in Mexico. Lopez Obrador is seeking US help to finance solar power output in northern Mexico and attract investment in greener manufacturing, particularly in the automotive industry.