Mexico is seen risking $30B hit in U.S.-Canada trade spat

Image: Pemex

Mexico could be hit with between $10 billion and $30 billion in tariffs if it loses a trade spat with the U.S. and Canada, according to two former officials who negotiated the pact under which the dispute was brought.

The U.S. and Canada have requested dispute settlement talks under the US-Mexico-Canada Agreement, known as USMCA, arguing that Mexico is violating the North American free trade deal with its moves to prioritize energy from its state utility over private renewables companies. They argue the policies of President Andres Manuel Lopez Obrador, known as AMLO, have led to denials and revocations of U.S. firms’ abilities to operate in Mexico’s energy sector. 

If there is no resolution and Mexico loses the dispute, then in the summer of 2023, the U.S. and Canada can slap tariffs equal to the losses their companies have faced, Kenneth Smith Ramos, who was Mexico’s chief USMCA negotiator through 2019, said in an interview. Former Economy Minister Ildefonso Guajardo, now an opposition lawmaker, said the same in an interview with Mexican journalist Carmen Aristegui. 

U.S. officials have already quoted losses of anywhere between $10 billion and $30 billion, which Canada would only add to, and BloombergNEF has calculated at least $22 billion in all private investment is at risk.

“This looks very difficult to be resolved during the consultation period because the violations are so precise, specific,” said Ramos, who saw this as one of the most potentially expensive trade spats since USMCA’s predecessor took effect in 1994. “Mexico would need to completely overhaul two pieces of legislation that are essential to AMLO.”

The fight could have a wide-ranging impact beyond Mexico’s energy sector, hitting automakers and farmers, Guajardo added. 

Ultimately, the battle could hurt Mexico and North America’s attractiveness to investors just as the region is expected to see a boom in trade. 

Lopez Obrador defended his policies Thursday, saying the oil sector was excluded from the trade pact, an argument Smith and other trade experts dispute. At a daily press conference Wednesday after the U.S. announced its complaint, he played a song titled “Oh, so scary,” seeming to downplay his concerns. He also said he was protecting the country against “voracious companies” and added that by starting the dispute, the Biden administration risked looking like it was supporting “corrupt” firms. 

Lopez Obrador has worked to return Mexico to energy independence by supporting state-owned oil and gas producer Petroleos Mexicanos, known as Pemex, and state power company CFE. The government has refused to hand out permits to several all-but-finished foreign energy projects. 

“We are watching a potential train crash between the U.S., Mexico and Canada,” Smith Ramos said.

© 2022 Bloomberg L.P.

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