Washington and its nearest neighbors are entering a packed election cycle with a familiar list of disputes on the docket -- and not a lot of time to resolve them ahead of a 2026 review of their renegotiated trade agreement, analysts say.
“The issue that I'm seeing here is that a lot of issues are being channeled, but they're not being resolved,” said Antonio Ortiz-Mena, partner at Dentons Global Advisors and former head of economic affairs at the Mexican Embassy, citing prolonged consultations under the U.S.-Mexico-Canada Agreement on Mexico’s energy policies, a stalled dispute over the U.S.’ interpretation of the deal’s rules of origin for automotive vehicles and a long list of investor-state dispute settlement cases, among other issues.
“It's not one observation here or there. I'm seeing a pattern, I think that's a negative pattern, and I think that could be very problematic by 2026,” Ortiz-Mena added.
The three countries in 2026 will conduct a formal review of USMCA and decide whether to let it sunset after another 10 years. Before then, all three countries will hold elections: Mexican voters will go to the polls in June to choose its next president; Canadian Prime Minister Justin Trudeau has until 2025 to call an election but could do so early, in 2024; and President Biden will be on the ballot in November.
Former Mexican negotiator for USMCA Kenneth Smith Ramos echoed Ortiz-Mena's concern about unresolved disputes – and contended that “in reality, 2026 is around the corner.”
The agreement is “working well,” Smith said, citing rising trade flows and foreign investment, but having a “bunch of mini trade wars going on between the North American countries” could complicate the review. He argued that 2026 should be “an opportunity to consolidate joint positions” on issues like climate change and artificial intelligence – not a “renegotiation.”
Idling autos
As the year closes, the U.S. has given no sign about whether it intends to comply with a one-year-old USMCA dispute settlement panel ruling faulting its interpretation of rules of origin for automotive vehicles, a row that pitched Washington against both of its neighbors soon after the agreement went into effect.
According to the panel, the U.S. breached the deal by applying more restrictive rules for calculating regional value content requirements than the three parties had agreed to during renegotiations of the North American Free Trade Agreement.
Under the agreement, Mexico and Canada could have taken retaliatory measures against the U.S. beginning 45 days after they received the report.
The countries to date have maintained a quiet truce. However, Smith contended, “the case is not going away.”
“There's still the risk that when companies get audited, the U.S. could use their wrongful interpretation and make it harder for these OEMs exporting automobiles from Mexico to the U.S. to comply with the rules of origin as the U.S. is interpreting it,” he said, referring to original equipment manufacturers.
Changes to come on Mexico’s energy, GM corn policies?
According to analysts, the Biden administration has been disinclined to escalate a dispute over policies Washington says unfairly favor Mexico’s state-owned energy companies and hinder renewables investments while officials prioritize other bilateral issues, in particular migration.
While the upcoming elections might generate greater political pressure on the Biden administration to escalate the dispute, immigration likely will remain a higher priority.
“I think that the White House is going to do everything in its power to guarantee or to ensure Mexico's cooperation” on addressing migration, Juan Carlos Baker, a former Mexican vice minister for foreign trade and USMCA negotiator, said. “And if that implies just kicking down the can for a few more months on the energy panels, well, that's what they will do.”
Mexico’s elections, meanwhile, have implications for policies at the heart of the case.
The frontrunner, former Mexico City mayor Claudia Sheinbaum, belongs to Mexican President Andrés Manuel López Obrador’s MORENA party, but her position on some issues remains “a bit of a mystery,” Smith said, citing the outsized role López Obrador plays in the party.
Sheinbaum has been “very careful not to contradict” or “move away from” positions staked out by the current president, he said, while adding that it’s possible the former mayor, an environmental engineer, could take a different approach in some areas, including energy -- an issue analysts describe as central to López Obrador’s political identity.
Opposition candidate Mexican Senator Xóchitl Gálvez, lagging Sheinbaum in the polls, has pledged to roll back López Obrador’s energy policies if elected, telling Bloomberg ore private investment would be needed to spur cleaner energy production in Mexico.
Former Mexican Economy Minister Ildefonso Guajardo, who led renegotiations of the North American Free Trade Agreement under López Obrador’s predecessor, has been advising Gálvez. In an interview with The Hill, Guajardo said a Gálvez administration would seek to restore what he described as a “compartmentalization method” to bilateral relations with the U.S., reversing efforts by López Obrador to concentrate power in the presidency and aiming instead to handle issues like trade, migration or law enforcement separately, at agency-to-agency levels across the border.
More broadly, Smith said, an opposition government likely would signal a return by Mexico to a more “pro-business” approach and more active participation by the country in international fora, including the World Trade Organization, among others.
While consultations on energy have stretched on, the U.S. earlier this year launched a panel in another dispute with Mexico, over its prohibitions on genetically modified corn, after unsuccessfully pressing the country for years to reverse the restrictions.
“It's a situation in which there was enough, I think, political pressure created in the U.S. by different groups -- by producers, exporters in the ag sector, legislators, et cetera -- for the U.S. to finally decide to ask for the panel,” Smith said.
The panel could deliver its report mid-2024, a senior official in the Office of the U.S. Trade Representative has said, meaning any resolution likely would be in the hands of the next Mexican administration.
Agriculture Secretary Tom Vilsack has suggested that Sheinbaum, if elected, might take a different view than the current administration on the safety of genetically modified corn.
RRM on the rise
A notable exception to the pattern of unresolved issues, Ortiz-Mena said, is the rising number of labor disputes resolved cooperatively by the U.S. and Mexico under USMCA’s novel rapid-response mechanism.
The U.S. in 2023 expanded its use of the tool, bringing the total case count to 18 (up from five at the end of 2022) and targeting facilities outside the auto sector for the first time.
RRM cases likely will continue to pile up in the coming year, in part “because labor is such a critical vote in Mexico and in the U.S.,” Baker said.
2024 also might bring the resolution of the first RRM case -- and, so far, the only one -- to move to a panel. It involves a long-running labor dispute at a mine in Zacatecas, Mexico.
At issue in the dispute are a couple of jurisdictional questions that could have broader implications for how the tool is used. Mexico says the case falls outside the scope of the RRM because the events at issue predate USMCA’s entry into force and the mine does not export to the U.S. The U.S., meanwhile, claims there are ongoing labor violations and that the facility is covered under the agreement because it mines copper and other minerals and there is “significant bilateral trade between Mexico and the United States in copper and other minerals.”
Mexico also has accused the U.S. of acting “in a secretive manner,” including by not sharing a copy of the petition that led to the case.
The panel has yet to set a date for a hearing.
A DST test for U.S.-Canada ties?
Canada’s plan -- long in the works -- to implement a 3 percent digital services tax on Jan. 1 could throw a wrench in bilateral trade relations, according to an industry representative, though Canadian Prime Minister Justin Trudeau has downplayed U.S. concerns about the measure.
“We think that it could be damaging to the U.S.-Canadian relationship,” John Dickerman, Business Council of Canada’s vice president for the U.S., told Inside U.S. Trade, saying the U.S. likely would take retaliatory actions if the plan were to go through.
“And it'd be damaging not only in the near and immediate term” but also “in the medium or long term when we look to reauthorization around USMCA,” he contended.
USTR in February 2022 warned Canada that a unilateral digital services tax would be actionable under Section 301 of the Trade Act of 1974. Treasury Secretary Janet Yellen, too, has urged Canadian officials against implementing “a discriminatory DST,” a senior Treasury official told lawmakers on the House Ways & Means subcommittee on tax during a July hearing.
In an interview earlier this month with The Canadian Press Trudeau acknowledged U.S. concerns but contended the issue was not a priority for President Biden, saying it hadn’t come up in their conversations.
The tax was part of Trudeau’s Liberal Party platform during elections in 2019. His government has delayed introducing such a measure while international negotiations for a global tax deal proceeded at the Organization for Economic Cooperation and Development. One pillar of that deal, still under negotiation, would preclude unilateral digital taxes.
Lumber, dairy, steel and more ...
The U.S. and Canada also have a series of ongoing binational disputes over U.S. antidumping and countervailing duties on Canadian softwood lumber -- a disagreement that predates USMCA by decades. Ottawa this year brought a challenge over the antidumping duties to the U.S. Court of International Trade, bypassing for the first time a binational panel system it had fought to preserve during renegotiations of the North American Free Trade Agreement. Panel formation has proceeded slowly under the system, spurring some frustration on the Canadian side.
U.S. officials, meanwhile, have pledged to continue to press Canada on access to its dairy market after a USMCA dispute settlement panel rejected U.S. claims that Ottawa’s implementation of its dairy tariff-rate quota system violated the agreement. The dispute settlement mechanism, though, does not include an appeals process -- and what the U.S.’ next steps might be remain unclear.
Another irritant drawing concern in Washington: A “surge” in steel and aluminum imports from Mexico that some lawmakers say violates a bilateral 2019 agreement.
Also on tap: U.S. plans to increase its engagement with the Mexican government to monitor and address “security risks” posed by foreign investment as Washington casts a wary eye on increasing Chinese interests in the country.
Treasury Secretary Janet Yellen announced the plans during a trip earlier this month to Mexico City, saying the two countries had “signed a Memorandum of Intent that reaffirms our joint commitment to counter the threat certain foreign investments pose to our national security and establishes a bilateral working group to exchange technical knowledge and best practices.”
“Like our own investment screening regime, [the Committee on Foreign Investment in the United States], increased engagement with Mexico will help maintain an open investment climate while monitoring and addressing security risks, making both our countries safer,” she added in a statement.
Mexico has “never really attempted” to implement a CFIUS-like system, according to Baker, who said details about the new plan remained “scarce” and that it was not clear whether Mexico’s commitments would amount to monitoring and information gathering or something more. -- Margaret Spiegelman (mspiegelman@iwpnews.com)
