A New Fight

                                                                Luis Rubio

Those who play with fire, goes the saying, get burnt. That is how the Mexican government is presently operating regarding the issue of the trade dispute with the U.S. and Canada. Of course, the government seeks to defend its vision of the electricity industry, the grounds for the USTR action, but the president’s natural tendency to politicize everything and to convert it into a wedge issue entails risks that he has clearly not evaluated.


As always occurs between neighboring nations, relations between Mexico and the U.S. entertains dual dynamics: that of the daily reality and that of their political leaders. The reality derives from the constant, growing and frequently conflictive interaction that takes place at every level of the vicinity. It has ever been thus and there is no doubt that it will continue being so in the future: the exchanges move in both directions and each moment is different; suffice to illustrate this with the fact that Mexico was key in sourcing arms to both sides in the U.S. Civil War.


Certainly, it would be possible to improve what exists were the ideal institutional arrangements in place, but dynamism does not depend on the moods of the political leaders; instead, it derives from the true forces of the economy and of the human exchanges. Trump attempted to cancel NAFTA and AMLO would prefer it not to exist, but both had to cope in the face of the inexorable reality.

The conflict of the moment concerns the politics of the current government in matters of electricity. The treaty in force, the US-Mexico-Canada Free Trade Agreement (USMCA), establishes that the parties must afford equal treatment to all economic agents, regardless of their nationality. It also impedes modification of the rules of the game without a negotiation taking place, in that the objective of a contract of this nature is precisely that of conferring certainty on the potential investors. In this regard, there is not the least doubt that the Mexican government has been modifying the rules in electricity matters, formally (with the law approved in 2021) as well as in practice, with the extorsion to which the Federal Electricity Commission (CFE) has submitted private companies, coercing them to cast aside private energy suppliers. What is up for grabs in the procedure initiated by the U.S. government and seconded by the Canadian one is whether Mexico backs down in these practices or is sanctioned through the mechanisms that the trilateral treaty foresees.

The rationale of having negotiated in the nineties and re-negotiated the North American Free Trade Agreement (NAFTA) during the last five years lies in having established the rules of the game that oblige the three governments to abide by procedures that exit and that are known by all. This happened because as soon as commercial liberalization materialized in the eighties, a massive number of commercial clashes was untethered. NAFTA was conceived to avoid those disputes, to facilitate commerce and to make possible bourgeoning productive-investment flows toward Mexico.

NAFTA was born from an understanding between Mexico and the U.S. with respect to the relationship, the future, and their coexistence, a condition necessary to institute a base of trust for two nations that one hundred thirty years ago prior had been at war.  The agreement consisted of the development of a common vision concerning the direction of the incremental interaction that had been coming into being and that was sustained in shared fashion until Trump arrived at the U.S. government and, two years later, AMLO at that of Mexico. Both would have preferred to annul the geography and the reality of the burgeoning exchange.

From the Mexican perspective, the key to the original NAFTA (1994) resided in the implicit political guarantee that the U.S. Government conferred on investors. It did not do this with charitable aims, but instead due to its recognition that U.S. national security would be strengthened by way of a good relationship with a successful and prosperous Mexico.

USMCA no longer enjoys that political element (except for services), therefore a commercial conflict at this moment could be devastating for the Mexican economy.

The disappearance of a common vision has implied the degradation of the mechanisms of interaction between the two countries, the growth of sources of discord between the governments and the increasing indisposition to address their problems in common. The conflict on electricity is potentially major due to three reasons: a) because of the enormous amounts of investment at play; b) because of the transcendence of energy for the long-term growth of the economy; and c) because of the energy transition that the world is undergoing and, in particular, that of the most prominent industry in Mexico, the automotive. If something comes out wrong in that negotiation, these factors could place the stability of the Mexican economy in doubt.

The Mexican government has two options: the ideal would be to take seriously the challenge that this entails devoting itself to negotiating an exit, as it did with the gas pipelines in 2019, before time -or the reality- wins out. The other option, its natural inclination, would imply distracting the public and persevering in its nationalistic rhetoric, literally in the face of the tremendous opportunity that the U.S.–China conflict represents for Mexico. Proceeding via the rhetorical and satirical route would be equivalent to playing with fire.

Unlike the pipeline issue, the point in time of the political cycle and the already unleashed process of presidential succession guarantees an immense volatility that in no way are of benefit to the government and even less so to the country.