US and Canadian companies have been clamoring for action against Mexico’s nationalist energy policies, but the trade complaint their countries filed this week could lead the North American region down a dangerous road.

President Andres Manuel Lopez Obrador, known as AMLO, has made strengthening Mexico’s state energy companies at the expense of private firms the hallmark of his administration, and there’s no sign he’ll give in enough to satisfy his neighbors. 

His insistence could lead to a protracted trade spat under the US-Mexico-Canada Agreement, known as USMCA. Former negotiators of the accord say the dispute would cost Mexico between $10 billion and $30 billion in tariffs. The fallout of a lengthy battle may put investment opportunities at risk for the entire region just as supply chain disruptions from Asia are expected to significantly energize trade within North America.

“We are watching a potential train crash between the US, Mexico and Canada,” Kenneth Smith Ramos, who was Mexico’s chief USMCA negotiator through 2019, said in an interview. “Mexico would need to completely overhaul two pieces of legislation that are essential to AMLO.”

The latest sign Lopez Obrador is digging in his heels came on Friday, when he said that Mexico’s trade relationship with the US can’t come “at the cost of our dignity.” He has insisted his energy policy doesn’t violate the USMCA and said he’ll announce his formal response to the complaint at a military parade to commemorate Mexico’s Independence Day on September 16.

“Given how strongly Lopez Obrador feels about his protectionist policies in the energy sector, it is unlikely that an agreement will be reached,” said Carlos Petersen, a political analyst at Eurasia Group. “This will not jeopardize USMCA as a whole, but will certainly create tensions and potential retaliatory measures from the US and Canada.”

The US and Canada requested USMCA dispute settlement talks earlier this week arguing that Mexico is violating free trade with its moves to prioritize energy from its state utility over private renewables companies. They argue that AMLO’s policies have led to denials and revocations of US firms’ abilities to operate in Mexico’s energy sector.

AMLO’s office downplayed the possibility of a dispute. 

“There’s no intention for conflict, just the opposite, peaceful dialogue,” Jesus Ramirez, AMLO’s spokesman, said in an interview after the president’s remarks. “We are interested in investments from US and Canadian companies.”

Lost Opportunities 

Ultimately, the battle could hurt Mexico and North America’s attractiveness to investors, Luis de la Calle, a former Mexico trade official, said in an interview.

Amid disrupted global shipping networks, the re-routing of supply chains from Asia could boost exports from Mexico by over $35.3 billion a year, according to estimates by the Inter-American Development Bank. But the trade dispute puts some of that at risk, De la Calle says.

China and Europe’s economic problems have made North America the “most competitive region in the world” at the moment, De la Calle said. If the three countries fail to come to an agreement, “the main cost is the opportunity cost for Mexico and North America to not take advantage of the international context that tremendously favors North America.” 

Under USMCA rules, the trade complaint gives Mexico up to 30 days to agree to schedule consultations. If after 75 days no agreement is reached, the US could request that a formal panel hear arguments from the two nations. While that process focuses on getting Mexico to agree to corrective actions, dragged-out conflicts can ultimately lead to the US imposing punitive tariffs on imports from Mexico under the two-year-old trade pact. 

Lopez Obrador has said the oil sector is excluded from the accord, an argument Smith and other trade experts dispute. At a daily press conference Wednesday after the US announced its complaint, he played a song titled “Oh, so scary,” seeming to downplay his concerns. He also said he was protecting the country against “voracious companies” and added that by starting the dispute, the Biden administration risked looking like it was supporting “corrupt” firms. 

Lopez Obrador has worked to return Mexico to energy independence by supporting state-owned oil and gas producer Petroleos Mexicanos, known as Pemex, and state power company CFE. The government has refused to hand out permits to several all-but-finished foreign energy projects.