A CUSMA fight with Mexico is brewing over energy policies Canada considers protectionist

Canada joined forces Wednesday with the United States in a bilateral effort to push back against what they consider protectionist energy policies in Mexico that violate both the spirit and the letter of North America's new trade rules.

U.S. Trade Representative Katherine Tai said her office would be seeking dispute resolution talks on the grounds that Mexico is unfairly prioritizing its state-owned energy operations, and shutting out American firms, including solar and wind producers.

Within hours, Trade Minister Mary Ng's office was saying much the same thing, and describing Mexico's policies as offside with the U.S.-Mexico-Canada Agreement, known in the U.S. as USMCA and in Canada as CUSMA.

"Canada has consistently raised its concerns regarding Mexico's change in energy policy. We agree with the United States that these policies are inconsistent with Mexico's CUSMA obligations," spokeswoman Alice Hansen said in a statement.

"We will be joining the United States in taking action by launching our own consultations under CUSMA to address these concerns, while supporting the U.S. in their challenge."

U.S. energy producers have been complaining for months that Mexico provides preferential pricing and emissions standards for its two main companies: oil and gas producer Pemex and the Federal Electricity Commission.

Not only are the 2021 changes to Mexico's electricity laws keeping U.S. companies out of the Mexican market, they are discouraging investment in clean-energy suppliers and would-be customers seeking to buy clean energy, Tai said.

"We have tried to work constructively with the Mexican government to address these concerns, but, unfortunately, U.S. companies continue to face unfair treatment in Mexico," she said.

"We will seek to work with the Mexican government through these consultations to resolve these concerns to advance North American competitiveness."

The USTR is also accusing Mexico of using "delays, denials and revocations" to thwart U.S. access to Mexico's energy sector, including on renewable energy sources.

"To reach our shared regional economic and development goals and climate goals, current and future supply chains need clean, reliable, and affordable energy."

The show of Canada-U.S. solidarity marks a pivot of sorts for a trade relationship that has largely been marked by disputes between the two countries since the trilateral trade agreement went into effect two years ago.

The two countries have been regularly at odds over how Canada uses the agreement's rules to provide U.S. dairy producers access to the supply-managed market north of the border. And the Biden administration only agreed earlier this month to lift Trump-era tariffs on Canadian-made solar products imposed back in 2018.

Softwood lumber, too, remains a long-standing bone of contention between Canada and the U.S., where two senior members of Congress are urging Tai to make a deal to ease the inflationary pressure on the U.S. housing market.

Democrat Sen. Bob Menendez of New Jersey and South Dakota Republican Sen. John Thune also want the Biden administration to provide further tariff relief on imports from Canada.

Doing so would "make home construction and homeownership more affordable for communities across our country," Menendez and Thune wrote Monday in a letter to Tai and Commerce Secretary Gina Raimondo.

Since the last softwood lumber agreement between the two countries expired in 2015, softwood lumber prices have more than doubled, they write.

"Addressing lumber trade inefficiencies would help reduce unnecessary financial pressures on the U.S. housing market," the letter reads. "We urge the U.S. trade representative to prioritize a new softwood lumber agreement between America and Canada."

In November, the Department of Commerce doubled the softwood lumber tariff rate to 17.9 per cent, but decided earlier this year to lower it to 11.64 per cent.

Tai says the U.S. is willing to talk, but that Canada must address the federal fee regime that American producers say creates an uneven playing field — the core issue in a trade dispute that has persisted for decades.

Federal officials in Ottawa say while Canada will always come to the table, Tai is asking for a significant and fundamental change to the way the government manages a Crown resource before the two sides have even sat down — something that's simply not on.

Ottawa sets stumpage fees for lumber harvested from federal and provincial land that producers in the U.S. — forced to pay market rates — have long insisted amount to an unfair subsidy.

A panel of emissaries from all three countries gathered virtually Wednesday to mark the two-year anniversary of the trade agreement taking effect, and hailed it for providing a consistent framework and rules of the road for what's proven to be a tumultuous era in global trade.

"This agreement thoroughly rebuts the misguided view of some that free trade agreements are 20th century tools that should no longer be the focus of U.S. trade policy," said Texas Republican Rep. Kevin Brady, who helped shepherd the deal into law in 2019 as chair of the powerful House Ways and Means Committee.

Brady described Tai's decision to play offence against Mexico's energy policies as "overdue but very welcome."

"The government in Mexico has been walking away from its obligations in the energy sector," he said. "This harms our businesses and North American competitiveness, and I think it hurts Mexico's own consumers and its efforts in the environmental area."

Louise Blais, a former Canadian ambassador to the UN, noted that the USMCA framework has resulted in a number of disputes being resolved over the last two years, "some more quietly than others."

"It has provided that intangible, that thing that it's not always possible to quantify: predictability," she said. "It's made it easier for investment flows to come in from Europe and Asia into all three of our countries."

This report by The Canadian Press was first published July 20, 2022.