President Andrés Manuel López Obrador is betting that a new trade agreement with the US and Canada will usher a flood of investment into Mexico that will help lift it out of the coronavirus crisis.
But instead of celebrating the launch of the USMCA on July 1 with champagne, US, Canadian and European companies are filing local lawsuits to protect their investments. They are also considering arbitration under the successor to the North American Free Trade Agreement (Nafta) and other international treaties.
The reason is the dramatic changes imposed by the government on the Mexican electricity market that investors say put at risk projects worth tens of billions of dollars.
The move puts the energy ministry rather than the independent market operator in charge of deciding who can generate electricity. The government says it was an emergency measure warranted by the coronavirus crisis, but companies counter that it gives preference to CFE, the state power utility.
“If you’re thinking of opening a plant, investing fresh money, chances are you won’t do it in Mexico now,” said one former top trade official. “These decisions will jeopardise the only part of the economy — export-linked activity — which was doing well. The rest of the economy is crumbling.”
The move has ramifications well beyond the power sector as Mexico braces for its most brutal recession in decades with as many as 2m jobs at risk and the economy set to shrink about 8 per cent this year.
The president describes Mexico as a land of opportunity and has trumpeted the fact that $10.3bn of foreign investment flowed into Mexico during the first quarter, according to preliminary figures — a 1.7 per cent rise compared with preliminary data from the same period last year. But the sum actually fell 26 per cent compared with the final number from January to March 2019 reported by the Bank of Mexico.
In addition, 76 per cent of the total in the quarter was from companies reinvesting profits and only 22 per cent were new investments.
Changing electricity rules overnight is the latest in a string of investor-unfriendly decisions by Mr López Obrador, a nationalist populist who says Chilean socialist Salvador Allende was Latin America’s best president and this week urged newspapers to reprint a letter from 1960 by Mexico’s then president, Adolfo López Mateos, nationalising the electricity sector.
Earlier this year, Mr López Obrador scrapped a partially built Constellation Brands plant after an informal poll; last year, the government renegotiated pipeline contracts with private companies it had slammed as “extortionate”; and as president-elect in 2018, he cancelled a $13bn Mexico City airport that was under construction.
“A country needs legal certainty and to stick to contracts and rules,” said Claudia Jañez, Latin American head of US chemicals group DuPont and president of Mexico’s Executive Council of Global Businesses.
Despite the logistical opportunities that Mexico offers for supply chains to move from Asia because of US-China trade tension, “they weren’t even coming to Mexico last year without the pandemic . . . we’re finding it harder to bring investment here, and that was before Covid”, she said.
Local courts have granted several injunctions against a first round of electricity market changes to limit generation from renewables companies that were announced at the end of April, but the government responded with legal action of its own.
Companies are also considering suing Mexico under USMCA and other free-trade treaties.
“We hear the president say ‘I have nothing against clean fuels’ but their actions say the opposite — they’re saying they need CFE to earn more and private companies to be less competitive,” said a senior executive at one private international power company.
“There’s a very strong ideological vision — they want government control to use energy as a lever of development.”
Business leaders complain the president meets them but rarely takes on board their concerns. “The government’s capacity for listening is virtually non-existent,” said one senior businessman in the northern industrial city of Monterrey.
The European Chambers of Commerce and Industry in Mexico said in a letter to the government that it was concerned that “confidence in Mexico on the part of a growing number of European investors has been damaged by the lack of legal security”.
Mexico and the EU had recently updated their free trade treaty, opening the door to “new investment and the creation of more jobs in Mexico. However, modification of the existing economic rules are a brake on interest and prevent the arrival of future investments,” the letter said.
Mr López Obrador has made clear he has no intention of reversing changes he says are “putting order” in the sector.
When faced with a welter of lawsuits against the new Mexico City airport he is now building, he declared the project of “national interest”.
“National security and public health are ‘umbrella exceptions’ under the World Trade Organization and free trade agreements,” said Armando Ortega, president of the Canadian Chamber of Commerce in Mexico and a former negotiator of Nafta. But the ministry would have to prove the new regulations were not invoking such reasons “frivolously”, he said.
“The real issue is the likelihood of these cases prevailing in upper courts . . . as happened with the [cancelled] airport, when they suffered horrendous pressure,” he said. The government denies leaning on judges to win favourable rulings, saying it is sweeping out such corrupt practices of the past.
But by changing the rules overnight in the electricity sector “you are facing a strong case of indirect expropriation — you’re not expropriating, but you’re changing the rules so that, in essence, you no longer have a viable business,” said the former official.
International arbitration under Mexico’s free trade treaties remained a “last resort”, according to Daniel Sánchez, partner at law firm Baker McKenzie.
But he added: “There can’t be a single foreign investor who’s not afraid every time they want to do a project in Mexico because they know there’s no stability in the rules.”
