The Mexican Government’s Failure to Comply with the USMCA Could Create Legal, Diplomatic, and Economic Turmoil

In mid-2020, U.S. lawmakers approved the United States-Mexico-Canada Agreement (USMCA). The deal replaced and modernized the North American Free Trade Agreement (NAFTA), though several provisions were left nearly unchanged. The USMCA’s terms influence each party’s decisions about issues like trade, labor, and energy. 

Mexican energy laws are different than those in the U.S. The Mexican Constitution provides that any oil or gas found underground, regardless of the finder, is government property (more specifically, “the Nation’s property”). This concept differs from U.S. jurisprudence, where the common law rule of capture applies instead: oil and gas generally belong to the finder. In 2014, then-Mexican President Enrique Peña Nieto signed a groundbreaking energy bill into law. One of the major highlights of this energy reform was opening up some of Mexico’s energy assets to private investment. The changes were generally received as a positive step for the country’s economic development, though some criticized the potential negative effects they could have on the state-owned oil company PEMEX. 

President Peña Nieto signed the USMCA in late 2018, only days before leaving office and passing the torch to the new president, Andres Manuel Lopez Obrador. To date, Lopez Obrador has frequently challenged the U.S., for instance, by refusing to attend the Summit of the Americas if Cuba and Venezuela were excluded. Recent changes in Mexican energy law, which were unexpected following the 2014 reforms, prompted the Biden administration to request consultations with their Mexican counterparts about policies that “unfairly favored” the government’s state-owned entities and hindered private investors’ interests (mainly, those of American and Canadian companies). 

Rather than appeasing the concerns raised by Mexico’s trade partners, President Lopez Obrador publicly doubled down by insisting his administration has not violated the agreement and relying on arguments of sovereignty and energy independence. Compliance issues related to the U.S. Foreign Corrupt Practices Act (FCPA) are also involved in how foreign companies allegedly paid bribes to secure better deals with PEMEX (one of the justifications offered by Lopez Obrador for his recent actions). 

Breaching the terms of the USMCA would be inconvenient at best, and economically disastrous at worst for each party — but perhaps not to the same extent. Per the USMCA, parties have 30 days to solve an issue raised in a consultation; if there is no agreement and an arbitration panel so decides, the U.S. may ultimately impose tariffs to make up for its economic losses. Such a result would not fare well for Mexico. Some predict that, if the USMCA’s terms were breached, the Mexican government would have to compensate private companies with at least $60 billion dollars. American representatives engaged in “quiet diplomacy” for months, but Lopez Obrador’s refusal to meaningfully engage has apparently exhausted their patience. 

President Lopez Obrador’s increasingly rash, populist, and nationalist public displays may serve him well politically, but the potential damage to a long-standing and critical trade relationship with its North American neighbors is too big to ignore. For the benefit of all parties with interests in this dispute, the Mexican government should carefully consider the potentially catastrophic consequences that would stem from breaching the USMCA. 

Article Written By Eduardo Kreimerman Meyohas

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