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US And Canada Request USMCA Dispute Settlement Consultations Over Mexico’s Energy Policies – Oil, Gas & Electricity


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

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.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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