A U.S.-Mexico-Canada Agreement dispute settlement panel in the coming weeks is expected to hand Washington an adverse ruling on its interpretation of the trade deal’s automotive rules of origin. How the Biden administration responds to that ruling, analysts say, could have impacts on the credibility of the recently reformed dispute settlement system -- and on how a major disagreement over Mexico’s energy policies plays out in 2023.
The U.S.’ response to the final ruling in the autos rules-of-origin dispute is critical both “in terms of ensuring clear and stable rules for investment in the automotive sector” and, “equally as importantly, for the precedent it will set about how countries are behaving under the USMCA,” Antonio Ortiz-Mena, senior vice president at Albright Stonebridge Group and former head of economic affairs at the Mexican Embassy in the U.S., said in a recent interview.
The panel’s preliminary report on the autos dispute, filed confidentially on Nov. 14, favored a more flexible interpretation of the deal’s automotive rules of origin, preferred by Mexico and Canada, over one pushed by the U.S., according to a report last month by El Universal. The three countries have since filed confidential comments to the panel on the initial report. A final report is expected to be made public in January.
That report will be the third such decision issued under USMCA Chapter 31 dispute settlement proceedings since the deal went into effect in 2020. So far, analysts noted, the countries have made efforts to comply with panel rulings.
Canada earlier this year introduced changes to its dairy tariff-rate system to comply with a ruling in a case launched by the U.S.; the U.S., however, deemed those changes inadequate and launched two more disputes over Ottawa’s dairy policies. Washington and Ottawa, meanwhile, in July reached an agreement under which Canada is exempted from U.S. safeguard measures on imports of solar products after a panel ruled the duties violated U.S. commitments under the deal. Mexico joined as a third party in the solar dispute but did not participate in the ensuing agreement.
Earl Anthony Wayne, a public policy fellow at the Wilson Center and former ambassador to Mexico, noted that a panel report can provide what he described as “general guidance” while leaving “a lot to work out in the specifics” after it is issued. Under USMCA, if a party is found to have violated the agreement, countries have 45 days after receiving a final report to agree to a resolution to the dispute before complainants can move to suspend benefits.
“There could be room for disagreement even if the United States says ‘Yes, we comply,’” Wayne said, referring to the soon-to-be-released report on autos.
According to Ortiz-Mena, handling the autos dispute ruling could prove thornier for the Biden administration than compliance with the solar panel decision, in part because of the import of the auto industry in the U.S.
In addition, Ortiz-Mena said, “the stakes are higher” in the autos case because of its timing. The U.S., he noted, could escalate ongoing consultations over Mexican energy policies to a USMCA panel -- a dispute that he and other analysts say Mexico could lose. If that were to happen, a failure by the U.S. to comply with the autos ruling could give Mexico “more political space” to reject an adverse ruling on energy, he contended.
The U.S. and Canada this summer launched parallel disputes with Mexico over efforts led by Mexican President Andrés Manuel López Obrador to undo market-opening reforms in the country’s energy sector. According to Ken Smith Ramos, who served as Mexico’s chief trade negotiator for USMCA, the countries in October likely had to “start from scratch” on those consultations after Mexico’s then-economy minister, Tatiana Clouthier, stepped down, followed by a number of key personnel at the ministry. Smith is a partner at the consulting firm AGON.
Clouthier’s resignation came just days after the Office of the U.S. Trade Representative, citing “positive momentum,” said the U.S. and Mexico were extending negotiations past a statutorily required consultation period.
While the U.S. could choose to extend those talks indefinitely, some analysts contend the Biden administration is likely to request a panel if Mexico does not fully resolve its concerns by next month, when López Obrador, President Biden and Canadian Prime Minister Justin Trudeau meet for a summit in Mexico City.
“I think the U.S. is reaching a breaking point,” Smith said, adding that he sees a “high probability” that the countries will not be able to resolve their differences before the three leaders come together.
“My impression is U.S. will not be satisfied with half-measures,” he said.
Mexico’s new trade minister, Raquel Buenrostro, earlier this month proposed a “work plan” to accelerate efforts with the U.S. and Canada on the negotiations. The plan noted that Mexico had provided proposals to resolve two of the four categories of concerns flagged by its trading partners, but did not provide details about those proposals or specify which of the four categories they covered.
Some of the issues flagged by the U.S. in its consultation request can be resolved via administrative action, Smith said. Such “low-hanging fruit,” he said, include concerns about Mexico’s postponement of new sulfur content requirements for its state-owned oil and gas company, among others.
But concerns at the heart of the dispute -- namely, those related to a 2021 amendment to Mexico’s Electric Power Industry Law -- could prove more challenging to resolve, he said. The amendment requires Mexico’s grid operator to prioritize electricity produced by the state-owned company over private competitors.
Analysts noted that the energy sector carried a strong political valence for López Obrador, who has continued to take a “hard position” on the issue, as described by Aristeo Lopez, special legal consultant at the law firm Clark Hill and a former Mexican Embassy official who served as lead negotiator of the investment and government procurement chapters in USMCA.
While there have been some “positive signals” from Mexico in recent months, Lopez said, citing approvals for new permits, he contended that from the U.S. and Canada’s perspective, meaningful change would require a shift in policy -- “and that comes directly from the president.”
According to Hogan Lovells partner Juan Francisco Torres-Landa Ruffo, pressure on the U.S. to request a panel is building in part because the disputed policies are creating challenges not just for U.S. energy investors in Mexico but also for companies in other sectors “in need of clean and reliable energy” -- a concern amplified by near-shoring efforts and “other growth patterns,” he said.
Torres-Landa Ruffo contended that upcoming presidential elections in Mexico and the U.S. -- both in 2024 -- also are adding pressure to reach a swift resolution to the energy spat. If a mutually acceptable resolution is not reached ahead of the summit, he said, the U.S. likely will “push the pedal to the metal” to seek a resolution via a panel before those election cycles get into gear.
Guillermo Garcia Sanchez, associate professor at Texas A&M University School of Law, however, cited several reasons why the U.S. has not yet moved to panel -- and could want to keep drawing out the consultations. For one, he said, aspects of the 2021 electric power legislation are continuing to face challenges in Mexico’s court system. For another, key non-trade issues -- such as migration -- are weighing on the bilateral agenda.
In addition, if Mexico were to lose the dispute, the U.S. potentially would have to craft retaliatory measures, which could have impacts on inflation on certain products in the U.S., he noted. “I don’t think they …have an immediate sense of how that would play out,” he said.
The U.S. also could be put in an “awkward” position, Garcia Sanchez said, if Mexico were to argue to a panel that the disputed policies are critical to country’s “energy security” -- as López Obrador has contended. The U.S. recently rejected WTO panel rulings saying U.S. tariffs on steel and aluminum did not qualify for national security exception.
He added, however, that advancing a national security claim could prove tricky because an exception essentially implies a “recognition that you’re breaching the treaty.” Mexican officials have repeatedly insisted the country has not violated the agreement, he noted.
López Obrador in the past has asserted Mexico’s energy sector was excluded from USMCA -- an argument that Smith and others have disputed, pointing to provisions that essentially link Mexico’s energy-related obligations under USMCA to certain commitments under other free trade agreements.
Smith said Mexican officials, including the president, have not advanced that argument publicly since consultations were launched in July.
“So I think that has evolved,” he said.
But exactly what Mexico could be proposing in the consultations is unclear, he said, noting that the content of the talks is kept “highly confidential.”
Buenrostro in November told the Mexican Senate that Mexico needed to better explain to its trading partners how new energy regulations would be implemented.
Analysts were more positive overall about the status of negotiations to resolve U.S. concerns about a Mexican ban on genetically modified corn -- the other major U.S-Mexico trade issue percolating ahead of the summit next month. Corn industry groups in the U.S. have said the ban would be a major blow to U.S. exporters and could threaten food security in Mexico.
Bilateral talks about the issue seem to be “ongoing and constructive,” Ortiz-Mena said.
Mexican officials earlier this month said the country could delay implementing the ban -- initially set to go into effect in 2024 -- by one year, as part of a proposal presented to U.S. officials during a meeting in Washington. The delay would essentially punt the issue to López Obrador’s successor.
“I think that's fine,” Torres-Landa Ruffo said of the delay. “Because that way we can avoid too many bombs exploding at the same time.” -- Margaret Spiegelman (mspiegelman@iwpnews.com)
