How can a modernized NAFTA improve North American energy market integration and the region’s global energy competitiveness?
With North American Free Trade Agreement (NAFTA) renegotiations now finishing their second round, one aspect of the agreement that has eluded greater attention is its enormous success in the energy space. All three signatory countries—the United States, Canada, and Mexico—have abandoned protectionist policies2 through NAFTA, and both the United States and Canada have committed to zero tariffs and open market access for a range of conventional and emerging energy products.
Mexico’s historic energy reforms in 20133 opened the country’s fast-growing market to imports of US natural gas, petroleum products, and electricity.4 The results have been phenomenal and particularly favorable to the United States. Although the US-Canada energy trade balance favored Canada by approximately $39 billion in 2016, the value of US energy exports to Mexico are now double that of US imports from Mexico.5 US-Mexico energy trade is poised to grow further, favoring greater US natural gas and product exports and increased investment in Mexico’s energy sector. Still, renegotiations create opportunities to make NAFTA work even better for our energy market.
The original NAFTA lacked a consolidated energy chapter that many in the industry would like to see added to a new agreement. The treaty currently covers energy trade under its investment and services clauses in Chapter 11. The Investor-State Dispute Settlement (ISDS) clauses in the same chapter have been criticized by the Trump administration in the renegotiations, but they are robustly supported by all three countries’ oil and gas industries.6 In the original NAFTA, Mexico required exemptions from allowing foreign investors into its domestic energy industry, as such investment was at the time banned by Mexico’s constitution. Mexico has since undertaken a set of historic energy reforms that have liberalized its oil and gas development and allowed for an influx of US and other foreign industry investors. A modernized NAFTA would remove those outdated exemptions, give Mexico’s reforms treaty status, and expand energy trade by covering digital services, which would harmonize standards for energy efficiency and renewable technology and allow for more efficient trade in energy services.
Since 1990, Mexican imports of gasoline and diesel (largely supplied from US refineries) have tripled, while imports of piped US natural gas have increased at an average of 26 percent annually over the past five years. Today, US imports meet around 40 percent of Mexico’s natural gas demand.7 Indeed, US natural gas piped exports—the catalyst behind the positive energy-related trade balance—doubled between 2009 and 2016 based on US Energy Information Administration (EIA) data; nearly all of these exports went to Mexico. Mexico’s Energy Ministry (SENER) has planned twelve new pipelines that will add nearly 3,200 miles of natural gas pipeline across the border and throughout Mexico, the largest of which will have a transport capacity of 2.6 billion cubic feet per day.8 The US border with Canada, on the other hand, is seamless, with mature two-way trade in crude oil, petroleum products, electricity, and a highly-integrated transmission network of multiple pipeline, road, and rail links.
This deep integration has maximized the comparative advantages of each country. The United States, with its highly efficient refining sector, exports products to Mexico and Canada, which are then refined with low-cost heavy crudes. US natural gas exports to Mexico continue to increase, providing it with lower-cost electricity, lower carbon emissions, and energy security. The United States exports light oil to Canada—the fifth largest oil producer in the world—for consumption by its refining system and blending with its native heavier crudes. Bilateral trade in electricity between the United States and its neighbors provides each with increased reliability.
For these reasons, the main message from the energy sector,9 experts,10 and policy makers11 in all three countries has been: “Do no harm.” But there are tremendous gains to be made in exports, investment, employment, new energy trade, and energy system reliability if NAFTA is modernized to foster deeper market integration and maximize the competitiveness of the North American energy economy.
Renegotiations create opportunities
to make NAFTA work even better for our energy market.