United States and Canada Request USMCA Dispute Resolution Consultations Over Mexico’s Energy Policies | Dickinson Wright

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[co-authors: Juli Kim and Navneet Garcha]

Introduction

On July 20, 2022, the United States (“WE”) and Canada demand dispute settlement consultations with Mexico under Article 31.4 of the United States-Mexico-Canada Agreement (“USMCA”). The United States and Canada consultation request stems from Mexico’s new energy policies, which the United States and Canada claim favor Mexican state-owned enterprises, Federal Electricity Commission (“CFE”) and Petroleos Mexicanos (“Pemex”).

The USMCA, which came into effect on July 1, 2020, is the multilateral trade agreement between Canada, the United States and Mexico. Among other relevant provisions, sections 2.3 and 14.4 of the USMCA prohibit the parties from offering local products, investors and investments more favorable legal or regulatory treatment than the United States or Canada.

To date, the parties have filed only Three Requests for consultation under Article 31.4. Therefore, how the parties resolve this dispute will provide a first test of the effectiveness of the initial stages of the USMCA’s dispute resolution proceedings.

The dispute

In December 2019, the Mexican energy regulator granted Pemex a five-year extension to comply with maximum sulfur content requirements for automotive diesel fuel. This extension was not granted to any US or Canadian company. Without the exemption, Pemex would likely have had to import ultra-low sulfur diesel from the United States or upgrade its production facilities.

The United States is also alleging that Mexican agencies have imposed heavy regulatory hurdles on US companies seeking to operate in Mexico’s energy sector. The United States alleges that Mexico has delayed or denied applications for new permits, suspended and revoked existing permits, and/or outright prevented U.S. companies from operating renewable energy facilities and retail gas stations in Mexico. .

In March 2021, Mexico’s energy policies were amended require Mexico’s transmission system operator to prioritize CFE-generated electricity over private companies, regardless of cost or environmental impact. In June 2022, the Mexican Secretary of Energy announced that users of the Mexican gas transmission system would be required to source natural gas from Pemex or CFE.

The United States and Canada allege that these measures have unfairly disadvantaged private companies. They allege that Mexico is in violation of Sections 2.3 and 14.4 of the USMCA, which prohibits domestic products, investors and investments from receiving more favorable treatment under national laws and regulations. Further, they allege that Mexico violates USMCA Sections 2.11, 22.5.2, and 29.3 for restricting imports or exports of a commodity, failing to exercise its regulatory discretion impartially and failed to enforce its laws consistently, impartially and reasonably.

USMCA Chapter 31 Dispute Resolution

Chapter 31 of the USMCA sets forth the procedure for resolving commercial disputes between the parties. The first step under Chapter 31 is consultation – a process that involves each party providing each other with relevant information to consider the matter and how it affects the operation of the USMCA.

The consultations must be initiated within 30 days of the formal request, which means that they will begin no later than August 20, 2022, in this case. If the parties fail to reach a settlement within 75 days of the request for consultations, the complaining party may request the establishment of a dispute resolution panel to consider whether the respondent’s policy is inconsistent with the USMCA. The panelists (3 or 5) are selected from a listing established by the parties.

Within 150 days of its appointment, the committee must submit a report to the parties. The panel report must contain:

  • Findings of fact regarding the circumstances and allegations leading to the litigation;
  • Determinations of whether the measure at issue is inconsistent with USMCA obligations; and
  • Recommendations.

The parties are entitled to at least one hearing to present their observations before the committee. Non-governmental entities present in the territories of the parties may also submit observations relevant to the dispute.

If the panel finds that the measures at issue are inconsistent with the USMCA, the parties must work together to reach a solution. If the parties are unable to do so within 45 days, the complaining party may suspend the defending party’s benefits under the USMCA equivalent to the adverse effects the complaining party suffered as a result of the discriminatory practices of the defending party. In many cases, this will be done through retaliatory tariffs on the defending party’s products.

Next steps

Although Mexico denies that its energy policies violate the USMCA, Mexico’s economy minister said Mexico hopes to achieve a resolution during the consultation phase. Similarly, the United States and Canada have expressed interest in reaching a resolution before requesting the establishment of a dispute settlement panel.

Because the USMCA recently came into effect and parties have rarely invoked Section 31, these consultations will provide a first test of the USMCA’s dispute resolution procedures. If the parties fail to reach a solution during the dispute settlement phase, observers will eagerly await the establishment of a panel and its report on the matter. Such a report would only be the third report published by a USMCA Dispute Resolution Panel.

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