Mexican President Lopez Obrador’s investment policies, aiming to return Mexican energy law and policies to the protectionist, state-led approach of the 1960s and 1970s, seem almost certain to make Mexico’s economy — which has mostly seen expanded investment, exports and jobs since 1994 (under NAFTA and now the USMCA) — stagnant again, reverting to a time when Mexico had relatively few exports, limited foreign investment, little job creation, shoddy goods and services, and poverty for at least half of the country’s citizens.
AMLO seems to believe that broadening state control of petroleum through Pemex (the oil monopoly), electric power production and distribution under CFE (the electricity monopoly) and erosion of Mexico’s independent agencies, such as the Energy Regulatory Commission (CRE), will establish a higher level of Mexican “sovereignty.” The problem is that Pemex and CFE are generally incompetent, corrupt and incapable of overseeing the increased, dependable, reasonably priced and cleaner energy production that a healthy Mexican economy demands today. Moreover, in recent decades — at least until AMLO became president in December 2018 —many Mexican administrative agencies had achieved a reasonably high level of autonomy and competence.
Under AMLO, Pemex’s oil production remains in decline, with few to no prospects for a reversal. The very small increases in oil production are primarily due to private contracts signed before AMLO eliminated the possibility of additional private investment. Thus, new offshore oil fields, which under Mexican law were to be jointly exploited by Pemex and private foreign investors, will not be developed now that Pemex has been given full authority over them, since Pemex has neither the expertise nor the funds to commercialize them. Rather, AMLO seems fixated with gasoline production, pouring billions into his pet “Dos Bocas” refinery in his home state of Tabasco, and spending $1.5 billion to acquire full ownership of an older Shell refinery near Houston. Given the lack of profitability of gasoline production worldwide, Dos Bocas will be a white elephant well before it reaches full production in 2023.
The pending indirect expropriation in 2019 of some $12 billion to $15 billion worth of foreign- owned (principally U.S., Spanish and Italian) investments in clean energy production — a process that is still tied up in Mexican courts — means that CFE’s electricity production will continue to depend largely on Pemex’s fuel oil and on coal burning rather than windmills and solar panels. Like Pemex, CFE has neither the funds nor the expertise to venture into clean energy production. Also, according to experts, CFE’s power production will be more expensive and less dependable at a time when major industries and “cloud” services providers depend on 24/7 power. (Some such industries could legally produce their own clean energy through independent power production, but AMLO’s bureaucracy is no longer granting permits for the IPPs.)
These policies are both extremely unwise and in several instances a violation of the USMCA. AMLO’s attempts to roll back the Peña Nieto reforms of 2013 violate Article 32.11 of the USMCA, which gives the U.S. “most favored nation” or equivalent treatment for energy investments provided in other Mexican trade agreements. Since the Peña Nieto reforms are guaranteed in the Comprehensive and Progressive Trans-Pacific Partnership to Mexico’s 10 CPTPP partners (including Canada), failure to afford equivalent treatment to U.S. investors in the energy sectors is a breach of the USMCA.
Mexico’s energy policies favoring fossil fuel production at the expense of clean energy are also inconsistent with Mexico’s undertakings under the Paris Accord to reduce greenhouse gas emissions in Mexico. They are thus inconsistent with the USMCA’s environmental chapter 24, which calls for the parties to “promote mutually supportive trade and environmental policies and practices; promote high levels of environmental protection and effective enforcement of environmental laws; and enhance the capacities of the parties to address trade-related environmental issues, including through cooperation, in the furtherance of sustainable development.” Needless to say, AMLO’s policies are conflict with all of these objectives, even though Mexico retains like other states its sovereign right to kill or injure thousands of its citizen through its promotion of dirtier air.
If the only impact of the AMLO energy policies were to discourage new investment in the petroleum and electricity sectors, one might well say, “AMLO has only a few months more than two years remaining in his term, so the policies will not do any lasting harm.” However, this is false. To the extent that these energy policies make fuel and electric power for manufacturing and service industries dirtier, less dependable and more expensive, they will impact new investment and job creation over a much broader group of sectors. In effect, AMLO’s legacy will be to effectively cap Mexico’s ability to grow in the future.
Many enterprises now operating in Mexico, ranging from General Motors to Microsoft Mexico, have made broad commitments to carbon neutrality within the next 25-30 years. Such companies are becoming less and less interested in investing in Mexico. For example, high officials of General Motors have warned that GM will not increase its presence in Mexico as long as current energy policies are in place. Microsoft Mexico, which was scheduled to add massive “Azure” cloud computing services in Querétaro, Mexico, as soon as 2023, has reportedly put such new facilities on hold because Mexican regulatory authorities refuse to authorize Microsoft to contract with IPPs for clean energy for its facilities.
Among the most important large investments being considered for North America today are factories that produce electric vehicles and their batteries. Various auto and battery manufacturers have already committed billions of dollars for new facilities in many U.S. states (e.g., Michigan, North Carolina, Alabama, Kentucky and Tennessee) and at least one in Windsor, Canada. (The promise of generous U.S. federal or state subsidies, which Mexico cannot match, is also a factor.) Not a single new facility has been announced for Mexico (although a few manufacturers, such as Ford, will be producing EVs in existing facilities). These are long term investments in the EV revolution that are taking place in the auto industry world-wide. Once a new factory is created it will be maintained and expanded where originally located; it won’t suddenly be moved to Mexico if AMLO’s successor is more friendly to foreign investments.
Thus, a significant result of AMLO’s unwise policies will be to reduce foreign investment (along with exports and job creation) for 3-5 years and probably much longer, despite the fact that in 2021 Mexico was the United States’ second-largest trading partner (after Canada) with $661.2 billion in total goods traded. It was all very well for AMLO to scoff on July 20 when the U.S. and Canada requested formal consultations under USMCA’s dispute settlement chapter 31. (AMLO made light of the U.S. complaint at his morning press conference by saying “Ooh, how scary” and “nothing is going to happen.”) He is right in assuming that a decision against Mexico will probably require at least two years, and perhaps not be issued and trade sanctions applied until after he leaves office in September 2024. But he is reckless in making light of what could be an existential and long-term challenge for the Mexican economy, one which in the short- to medium-term could result in estimates ranging from $10 billion to $30 billion in investor claims and, ultimately, massive sanctions on Mexican exports to the U.S. should Mexico lose the case brought by the U.S. and ultimately fail to correct its treaty violations.
Regardless of how an arbitral panel rules on the legal issues, the Mexican economy and Mexico’s workers will be the losers. As the proceeding moves forward with widespread publicity in the U.S., many U.S. and other foreign investors will reconsider plans for investment in Mexico, and those who have already been directly affected will not wait for this state-to-state case to end before suing Mexico for violations under NAFTA chapter 11 or USMCA chapter 14. Potential new investors after all have other investment options in the U.S., Canada, Latin America or elsewhere. Win or lose the arbitration, Mexico’s general reputation at least since 1994 as a favorable destination for foreign investment (despite endemic corruption and drug violence) may eventually join the ranks of Argentina, Bolivia and Venezuela. Mexico’s proximity to the U.S. and solid work force are major advantages and will likely keep investment in the border industries stable or increasing. That being said, the government would be extremely unwise to neglect the negative impact of arbitrary policies that denigrate the rule of law and will inevitably lead to a long-term decline in investment, job creation and exports, and prevent Mexico as a middle-income country from moving its production up the value chain.
This material may be quoted or reproduced without prior permission, provided appropriate credit is given to the author and Rice University’s Baker Institute for Public Policy. The views expressed herein are those of the individual author(s), and do not necessarily represent the views of Rice University’s Baker Institute for Public Policy.