As Bilateral Trade Between Mexico and US Hits Record High, Diplomatic Relations Sink to Lowest Point in Decades

All eyes are now on Mexico’s proposed electricity reform, which threatens the interests of some of the world’s biggest energy companies, many of them in the U.S.

Mexico’s President Andrés Manuel López Obrador (AMLO for short) said Wednesday that he will send a diplomatic note of protest to the United States if it withdraws the visas of 25 federal lawmakers who recently set up a pro-Russian group in Mexico’s Congress. A number of Democratic politicians, including Robert Memendez, the chair of the United States Senate Committee on Foreign Relations, sent a letter on Tuesday to the U.S. Secretary of State Antony Blinken calling for the Biden Administration to prevent the Mexican congresspeople from entering, traveling or investing in the U.S.

“I do not think it is fair and I do not think it is rational to want to suspend the visas of those who met to express their points of view regarding the Russian invasion of Ukraine,” López Obrador said during his morning press conference at the National Palace.

Burning Up Goodwill

That Democrats are now calling on the Biden Administration to sanction a handful of lawmakers in its neighboring country for daring to set up a pro-Russian group is illustrative of just how clumsy and heavy handed US foreign policy has become. In its attempt to bully countries into supporting the economic war against Russia, the U.S. is not only showing total disregard for the sovereignty of so-called allied countries, it is (as NC reader PlutoniumKun recently put it) burning up a lot of goodwill and credit in the process, even in potentially sympathetic countries.

Mexico is the U.S.’ second largest trade partner, after Canada. And trade between the countries has never been more robust. In 2021, bilateral trade between Mexico and the U.S. was worth $661 billion, the highest amount on record. That was second only to Canada, whose bilateral trade with the U.S. weighed in at $664 billion.

But diplomatic relations between the two countries are at a multi-decade low. As I reported in the article, “US-Mexico Relations Hit New Low Over Russia-Ukraine Conflict,” Washington’s already strained relations with Mexico deteriorated further at the end of March after AMLO refused to endorse sanctions against Russia. Like most governments in Latin America, Mexico has condemned Russia’s invasion of Ukraine but refuses to join the pile on to sanction the country. Matters were hardly helped when the U.S. Ambassador to Mexico Ken Salazar instructed Mexican lawmakers that Mexico could never have close diplomatic ties with Russia.

Another major bone of contention between the two countries is the AMLO government’s proposed energy reform bill, which will be voted on in the coming days. As it currently stands, the bill threatens to drastically dial back the privatization and liberalization of Mexico’s energy market, giving a much larger role in the market for the state-owned companies Petroleos de Mexico and the Federal Electricity Commission (CFE).

If passed, the reform would amend Articles 25, 27, and 28 of the Constitution as a means of consolidating the role of the public Federal Energy Commission (CFE). As a result, the CFE would become an autonomous legal entity, no longer hamstrung by the subsidiaries and commissions created in recent decades. The CFE would also control the production of at least 54% of the nation’s energy supply. The proposed reform also stipulates that lithium and other minerals considered strategic for the nation’s energy transition should be controlled by the state, which would possess sole exploration and mining rights.

The Wrong Sort of Message

While the reform appears to enjoy the support of most Mexican citizens, it is fiercely opposed by powerful domestic and foreign business interests, including some of the world’s biggest energy companies, many of them in the U.S. and Spain. Large domestic businesses and foreign multinationals with operations in Mexico that benefit from heavily subsidized renewable electricity will also be affected. They include maquilas (assembly plants), bottlers such as Coca Cola FEMSA and large retail firms such as FEMSA-owned convenience store chain Oxxo. According to government figures, an unsubsidised household or small business pays on average 5.2 pesos per kilowatt hour while OXXO pays 1.8 pesos and Walmart 1.7 pesos.

This means that large companies have a huge cost advantage over their small business competitors. The electricity reform, as it currently stands, will do away with that, much to the horror of the companies affected as well as the U.S. government. It’s not just about the threat the reform poses to business interests in Mexico; it could also send a message to other governments in Latin America that reversing privatization is now a distinct possibility. As I reported in February, resource nationalism is on the rise in Latin America even among countries traditionally aligned with the Washington Consensus.

It is the sort of message Washington would be keen to stamp out. To that end, the Biden Administration on April 1 dispatched its special climate envoy, John Kerry, to have a quiet word in AMLO’s ear. Also present at the meeting was the US Ambassador to Mexico, Ken Salazar, who has close ties with Texan oil interests, and 20 US company executives with an interest in investing in the Mexican energy sector.

Following the meeting Kerry told journalists gathered outside Mexico’s National Palace that he had proposed a set of measures for reaching consensus on the proposed electricity bill. They included, most controversially, the creation of a team led by Ambassador Salazar that would work with the White House and his office to help the AMLO Government tweak its reform efforts.

“President Lopez Obrador agreed that we need to work on this,” Kerry said, adding that the approach aligned with U.S. President Joe Biden’s vision. The next day AMLO denied that he had agreed to such an arrangement:

“Well, that, of course, we could not accept, whether from the United States, Canada, China or Russia. And yes, there was a proposal to maintain communication on the subject and for a group to participate. But they raised it; I remained silent. It was not accepted.”

Ratcheting Tensions

Shortly after AMLO’s statement U.S. Trade Representative Katherine Tai sent a letter to Mexico’s Economy Minister Tatiana Clouthier warning that AMLO’s government had still not addressed U.S. concerns about the electricity bill. According to the newspaper Reforma, which was privy to the private letter, Tai said the Electricity Industry Law poses significant risk to U.S. energy projects in Mexico. She also said U.S. companies faced arbitrary treatment, that over $10 billion in U.S. investment in Mexico was in danger and urged the Mexican government to suspend laws and policies about which the United States has raised concerns.

Tai told Clouthier that all options would be considered under the United States-Mexico-Canada (USMCA) trade deal if the Mexican government continued to pursue policies that the U.S. believes violate the three-way free trade pact. Those options presumably include suing the Mexican government for any future losses caused by any changes in energy regulation. This is made possible by the investor-state dispute settlement (ISDS) clauses in USMCA, which allow foreign corporations to sue host governments for supposedly causing them losses due to policy or regulatory changes that reduce the expected profitability of their investments.

While Canada is not a party to the USMCA’s chapter on ISDS (Chapter 14), meaning that ISDS claims cannot be asserted by Canadian investors or against Canada, ISDS provisions between the US and Mexico remain in effect albeit in somewhat different form than under NAFTA’s Chapter 11 (as laid out in this document by the global law firm DLA Piper). ISDS provisions have been and can be invoked, even when rules are non-discriminatory, or profits come from causing public harm. ISDS will thus strengthen perverse incentives for foreign investors at the expense of local businesses and the public interest.

Tai wrapped up the letter by urging the Mexican government to “discontinue these concerning actions and ensure the rights of U.S. investors and exporters are protected.”

Rigging the Market

For the moment, there’s no sign that the Mexican government is willing to do that. AMLO himself asserts that past governments beholden to foreign capital had rigged the electricity market in favor of private firms. As such, he believes that any ISDS claims will ultimately end up ruling in Mexico’s favor.  He also accused the U.S. government of working together with Mexico’s opposition parties to lobby against the proposed reform program:

“”They have put to us that they don’t agree with it, and even to insinuate that it violates the deal, when that’s not true. There are meetings of political opponents with officials of the United States government. We respect everyone, just that we act independently and with sovereignty.”

Shortly after the press conference, Ambassador Salazar arrived at the National Palace for a private meeting with the President, one of many that have taken place in recent months. As Kurt Hackbarth insinuated in a recent Jacobin piece, for Salazar, himself a long-time energy lobbyist, the ambassadorship represents a golden opportunity “to refine a schtick he’s spent his career perfecting: paying lip service to renewable energy while filling the coffers of the fossil fuel sector.” :

Under his leadership, the [U.S.] Interior Department blocked federal regulators from regulating greenhouse emissions through the Endangered Species Act, green-lit oil drilling in the Arctic for Royal Dutch Shell, approved gas drilling in Utah’s Uintah Basin, and, most infamously, exempted British Petroleum (BP)’s drilling operations in the Gulf of Mexico from an environmental impact analysis barely a year before the Deepwater Horizon disaster.

Not only did the Interior Department proceed to provide a further twenty-seven exemptions in the wake of the explosion; following a temporary moratorium it went on to lease millions of new acres for oil and gas drilling in the Gulf of Mexico, all while hiring a former BP executive to run its Minerals Management Service.

Upon leaving Interior in 2013, Salazar went through the revolving door to work for WilmerHale, a law and lobbying firm with close ties to the Trump family, whose roster drilling- and mining-related clients included none other than — you guessed it — BP. From his lucrative new perch in the private sector, Salazar used his clout to support the Keystone Pipeline and the Trans-Pacific Protocol (TPP), whose “investor-state” provisions would let corporations challenge environmental regulations in private tribunals; fought against ballot initiatives that would limit fracking and distance oil wells from buildings and bodies of water; opposed climate lawsuits against the fossil fuel sector; and, in a highly questionable skirting of ethics rules, provided legal counsel to the same company, Anadarko Petroleum, that benefitted on multiple occasions from his stint in government.

Now, Salazar is continuing his mission to defend U.S. energy interests, this time south of the border. But the AMLO government still refuses to buckle. It is determined to push through the energy reform, even if it means raising the hackles of its biggest trading partner. For AMLO energy independence is a central plank of his so-called Fourth Transformation.

On Thursday (April 7), Mexico’s Supreme Court finally gave its blessing to the proposed Electricity Bill. Now, the question is whether or not AMLO’s government can secure two-thirds majority support for the bill in Congress. If it can, the next question is: how will Washington retaliate?