Introduction
On July 20, 2022, the United States (“US”) and Canada requested dispute settlement consultations with Mexico under Article 31.4 of the United States-Mexico-Canada Agreement (“USMCA”). The US and Canada’s request for consultations arises from Mexico’s new energy policies, which the US and Canada allege favours Mexican state-owned enterprises, Federal Electricity Commission (“CFE”) and Petróleos Mexicanos (“Pemex”).
The USMCA, which entered into force on July 1, 2020, is the multilateral agreement governing trade between Canada, the US, and Mexico. Among other relevant provisions, Articles 2.3 and 14.4 of the USMCA prohibit parties from offering local products, investors, and investments more favourable legal or regulatory treatment than US or Canadian ones.
To date, the parties have only filed three Article 31.4 consultation requests. Therefore, how the parties resolve this dispute will offer an early test as to the efficacy of the initial stages of the USMCA’s dispute settlement procedures.
The Dispute
In December 2019, Mexico’s energy regulator granted Pemex a five-year extension to comply with maximum sulfur content requirements for automotive diesel fuel. This extension was not provided to any US or Canadian companies. Without the exemption, Pemex would have likely had to import ultra-low sulfur diesel from the US or upgrade its production facilities.
The US is also alleging that Mexican agencies have imposed burdensome regulatory obstacles on US companies seeking to operate in Mexico’s energy sector. The US alleges that Mexico has delayed or denied applications for new permits, suspended and revoked existing permits, and/or outright blocked US companies from operating renewable energy facilities and retail fuel stations in Mexico.
In March 2021, Mexico’s energy policies were amended to require Mexico’s energy transmission system operator to prioritize the electricity produced by CFE over private companies, regardless of cost or environmental impact. In June 2022, Mexico’s Secretary of Energy announced that users of Mexico’s gas transportation network would be required to source natural gas from Pemex or CFE.
The US and Canada allege that these measures have unfairly disadvantaged private companies. They allege that Mexico is violating Articles 2.3 and 14.4 of the USMCA, which prohibits products, investors, and investments of national origin from receiving more favourable treatment by domestic laws and regulations. In addition, they allege Mexico is violating Articles 2.11, 22.5.2, and 29.3 of the USMCA for restricting imports or exports of a good, not exercising regulatory discretion in an impartial manner, and failing to administer its laws in a consistent, impartial and reasonable manner.
Dispute Settlement Under Chapter 31 of the USMCA
Chapter 31 of the USMCA sets out the procedure for settling trade-related disputes between the parties. The first step under Chapter 31 is consultations – a process that involves each party providing relevant information to one another to examine the matter and how it affects operation of the USMCA.
Consultations must be entered into within 30 days of the formal request, which means they will begin no later than August 20, 2022, in this case. If parties cannot achieve a resolution within 75 days of requesting consultations, the complaining party can apply for the establishment of a dispute settlement panel to examine whether the respondent’s policy is inconsistent with the USMCA. Panelists (3 or 5) are selected from a pre-determined roster established by parties.
Within 150 days of appointing the panel, the panel must issue a report to the parties. The panel’s report must contain:
- Findings of fact concerning the circumstances and allegations leading to the dispute;
- Determinations as to whether the measure at issue is inconsistent with the obligations in the USMCA; and
- Recommendations.
Parties are entitled to at least one hearing to make submissions before the panel. Non-governmental entities in the parties’ territories may also make submissions relevant to the dispute.
If the panel concludes that the measures at issue are inconsistent with the USMCA, the parties must work together to achieve a resolution. If the parties are unable to do so within 45 days, the complaining party can suspend the responding party’s benefits under the USMCA, equivalent to the negative effects the complaining party has suffered due to the responding party’s discriminatory practices. In many cases, this will be through retaliatory tariffs on the responding party’s products.
Next Steps
Although Mexico denies that its energy policies violate the USMCA, Mexico’s Minister of the Economy has stated Mexico is hopeful it can achieve a resolution during the consultation phase. Similarly, the US and Canada have expressed interest in achieving a resolution before requesting a dispute resolution panel be established.
Given how recently the USMCA entered into force and how rarely the parties have invoked Article 31, these consultations will provide an early test of the USMCA’s dispute settlement procedures. If the parties cannot achieve a resolution during the dispute settlement phase, observers will keenly be awaiting the establishment of a panel and their report on the issue. Such a report would only be the third report issued by a USMCA dispute resolution panel.
How We Can Help
Dickinson Wright is one of a few North American law firms with trade at the core of its international practice. Dickinson Wright’s lawyers have assisted clients in the US and Canada on cross-border matters since the 1860s and in Mexico via network partners since the 1960s.
Dickinson Wright was involved in negotiating objectives and advocating on behalf of stakeholders during the USMCA’s negotiating rounds, particularly in the automotive, agriculture, customs and trade facilitation, and digital chapters negotiations.
Dickinson Wright has a specialized program and fee schedule to assist clients with USMCA compliance. These include document checklists, consultations, training, and self-assessments to ensure that companies have a competitive advantage in North America.