Realization is dawning on the Mexican government that with President Joe Biden in the White House, it might not be as easy as they thought to overturn the reform that opened Mexican energy markets to foreign investors. 

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With President Joe Biden having assumed the U.S presidency and being committed to maintaining the trade deal limiting Mexico's leg room, President Andrés Manuel López Obrador's pledge to strengthen Mexico's hand in the energy sector may not be as straightforward as he imagined.

If unable to find another way to bend the rules and help Mexico's two big state energy firms, López Obrador threatened to overturn the last government's 2013-14 constitutional overhaul which opened the energy market to private capital.

López Obrador was free to intervene in the energy market due to former president Donald Trump's prioritization of putting a stop to illegal immigration. The move on López's part angered U.S. lawmakers and resulted in complaints to the White House stating that Mexico is compromising the USMCA trade deal between the United States, Mexico, and Canada.

Mexico's lead technical negotiator in 2017-2018 USMCA debates, Kenneth Smith, stated that the Mexican president had reached a dead-end and would have to make a decision soon. He is quoted as saying… "For practical purposes, [there can't] be a change in the constitution that would reverse the energy sector opening without violating [USMCA]".

The energy reform is widely regarded as a gauge of López Obrador's respect towards private sector contracts. When asked to comment on this story, the president's office did not respond.

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It is expected that Biden will heed to the rules more than Trump, and will champion renewable power generation, which Lopez Obrador sidelined in favor of supporting power utility the Comision Federal de Electricidad (CFE) and state oil firm Petroleos Mexicanos (Permex). One of Permex's fossil fuels consumers is the CFE. 

 

López Obrador stated that the energy reform was the work of corrupt politicians skewing the market to favor private companies, many of which argue he is not respecting USMCA.

However, López Obrador has hinted that he might be retreating from the threat, while officers are well aware of the risks to investment that could be created by reversing the reform.

After the coronavirus pandemic, the Mexican president embraced USMCA as vital towards the revival of the country's economy, and has also hinted to being apprehensive about failing to comply with the accord.

Earlier in the month, the president also ruminated about eliminating the Federal Telecommunications Institute (IFT), Mexico's telecoms regulator, to save costs.

However, the economy ministry soon advised him that doing so could conflict with USMCA.

The next day, López Obrador stated that he had been told that the IFT should not be abolished due to being in USMCA. He promised to analyze the matter but added that the government is unable to do anything that breaches the law.

When asked how she would view a government's move to appeal the energy reform, Economy Minister Clouthier pointed to Obrador's comments regarding the IFT and the risks of flouting USMCA.

Another official, who wished to remain anonymous, made clear that the reform would not be canceled, and that Mexico would reach its goals through negotiation and by working within the existing constitutional framework.

López Obrador is also willing to speak with companies who feel disgruntled by his market shake-up which has led to  investment worth billions of dollars.

A senior industry source stated that increasingly frustrated U.S. business groups are lobbying the Biden administration to defend them under USMCA.

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Biden described USMCA as a better deal than the earlier North American Free Trade Agreement (NAFTA), which he voted for as a senator in 1993.

USMCA entered force in July and has underpinned most of Mexico's exports and foreign direct investments. However, a Mexican diplomat argued that the deal would only really take effect with President Biden in office.

Mexico has insinuated it will bargain with other issues to defend the president's energy vision. Clouthier said that in energy disputes related to USMCA, the government would possibly voice concerns over the potential U.S. agricultural exportation barriers.

While the president's ability to help Permex and CFE is hindered by the constitutional reforms, his interventions are causing delays, frustration, and discouragement in private investment, thus changing the energy sector.

Judges have overturned many of the administration's measures on appeal. Derek Woodhouse, a lawyer at CMS, global law firm which has represented affected investors, stated that so far these rulings have persuaded most companies not to move to Mexico before the international arbitration panels.

If possible, most companies would prefer to avoid direct confrontation with the government, given that arbitration proceedings can drag out over up to three years.

However, Woodhouse added that the cost for investors to stay in Mexico is being increased by the regulatory paralysis, and could gradually allow the government to squeeze some out and attain their assets cheaply.

The USMCA was initially proposed by former president Donald Trump and was signed by Trump, former Mexican president Enrique Peña Nieto, and Canadian Prime Minister Justin Trudeau in November 2018 following renegotiations of the North American Free Trade Agreement (NAFTA).

A revised version was signed a little over a year later, on December 10, 2019, and was ratified by all three countries. The negotiations were mainly focused on steel and aluminum tariffs and auto exports, with a provision pretending any party from passing laws to restrict the cross-border flow of data. The USMCA also increased working and environment regulations and encouraged increased production of cars and trucks.

The USMCA borrowed provisions from NAFTA, and trade agreements from the Progressive Agreement for Trans-Pacific Partnership (CPTPP), and the Trans-Pacific Partnership (TPP). At the start of the coronavirus pandemic, Mexico announced it was ready to implement the agreement on April 3rd, 2020.

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