AMLO feeds speculation of Mexico exiting USMCA but how likely is it?

Mexico is in a trade dispute with the US and Canada related to its energy policy and the United States-Mexico-Canada Agreement (“USMCA”). Both the US and Mexico need to tread carefully as a souring of relations between the two countries could have catastrophic consequences on both sides of the border.

A senior political analyst commented, “AMLO has previously stated that Mexico will not leave the USMCA but with him, anything can happen. It’s a case of tell me who your friends are and I’ll tell you who you are. Well, AMLO has invited the daughter of Ernesto ‘Che’ Guevara, the parents of Julian Assange, Evo Morales of Bolivia and Mugica, the former Uruguayan president to his upcoming Independence Day parade.”

“AMLO has previously stated that Mexico will not leave the USMCA but with him, anything can happen.”

Senior political analyst, Mexico

The USMCA, entered into force on 1 July 2020 replacing the North America Free Trade Agreement (“NAFTA”). The agreement aimed to create a more balanced, stable, and reciprocal trade agreement that would support high-paying jobs while, at the same time, growing the economies of its member states.

Since its implementation, the potential benefits of USMCA have been overshadowed by the economic crisis caused by the Covid-19 pandemic and, after two years, on 20 July 2022 the US Trade Representative (“USTR”) initiated a dispute with Mexico. In the first instance, USTR requested consultations over Mexico’s energy policies, arguing that they undermined US-produced energy in favour of Mexico state-owned energy companies, CFE and Pemex. Canada reinforced the US position just a day later.

AMLO responded to the dispute as a political threat and said that he would provide a full response to the consultations on 16 September, Mexico’s Independence Day. Since then, local media in Mexico has speculated about the possibility of AMLO announcing Mexico’s exit of USMCA, although the former Minister of Economy, Ildefonso Guajardo, who negotiated the deal, recently ruled this out.

The economic costs of such a decision would include a significant increase in tariffs and a downgrade in credit ratings which would have a dramatic impact on Mexico’s investments, higher borrowing costs and, eventually, the country’s moderate economic recovery. Mexican exports to the US account for 80% of the country’s total and exiting the USMCA would put all bilateral relations in danger.

A Mexican ambassador and former trade adviser believed the economic costs were not a consideration for AMLO, “Like any good tyrant AMLO’s primary interest is to preserve political power, appealing to a false nationalism and an irresponsible sense of patriotism, he is not thinking about the economic cost …. yet. He argues that Mexico must protect its sovereignty but he says nothing about Mexico’s electricity being 60% dependent on Texas natural gas.”

“Like any good tyrant AMLO’s primary interest is to preserve political power, appealing to a false nationalism and an irresponsible sense of patriotism, he is not thinking about the economic cost …. yet.”

Mexican ambassador and former trade adviser

Despite President López Obrador’s belligerent rhetoric our sources believe there is a high likelihood of Mexico reaching an agreement with US and Canada due to the strategic nature that energy policies have for AMLO’s administration. A Mexican Professor of economics summarised, “There are no serious discussions about Mexit, just some analyst speculation. To follow through with such an act of economic self-harm would require Mexico to have credible alternatives to US exports and foreign direct investment, which it doesn’t have.”

However, the stakes are high as legally, there is no deal that can prevent Mexico from being sanctioned for favouring its state monopolies. The US claimed that Mexico’s nationalist position had cost US companies USD 10 billion and USTR expects compensation to be paid.

The former trade adviser didn’t expect a rapid resolution, “The legal processes for claims under the USMCA would take years but both parties need to think carefully. Mexit would cause an immediate energy crisis in Mexico and immigration and security crises in the US. The relocation of large companies would cause a fiscal and employment crisis in Mexico and drive up costs for the US consumer. President Biden has long tolerated AMLO’s belligerence but at some point he must act to protect US interests. We could see some wild cards being played, such as the Drug Enforcement Agency investigations into high-ranking Mexican politicians in alleged drug trafficking networks.”

In summary, Mexit is an unlikely scenario but the trade dispute is unlikely to be resolved overnight. Our sources expect AMLO’s nationalist rhetoric to continue but stop short of action while the US considers all possible levers to force a resolution.

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