President Trump’s promise to build a border wall and have Mexico pay for it, possibly through new taxes on imported goods from that country, has economic analysts keeping a close eye on the evolving – and currently contentious – relationship between the U.S. and its neighbor to the south. Many wonder what impact the new Administration’s policies might have on energy trade between the two countries.
America’s natural gas has become extremely attractive to Mexico, due in large part to the low prices brought about by the shale boom in the U.S., coupled with Mexico’s deregulation of gas. In the past five years, pipeline capacity has doubled between the two countries. And the U.S. Energy Information Administration (EIA) predicts it could double again by the end of 2018. Along with the increases in pipeline capacity, LNG (Liquid Natural Gas) imports from the U.S. to Mexico’s Manzanillo terminal have also seen a sizable jump in recent months, according to ship tracking data compiled by Bloomberg. In fact, Mexico is now tied with Chile as the number one buyer of tanker shipments of U.S. LNG leaving Louisiana’s coast.
Simply put, U.S. natural gas plays a vital role in Mexico’s economy. In fact, nearly 60 percent of that country’s electricity generation currently relies on this export from America.
The role of free trade
The substantial investments of capital that were made to foster energy trade with Mexico were based not only on supply and demand and anticipated growth, but also on a supportive regulatory environment between the two countries. And this is where things could get dicey.
If the Trump administration follows through on its promise to do away with or renegotiate NAFTA – the free-trade agreement between the U.S., Mexico, and Canada – the impact to trade could be unsettling, especially in relation to energy.
Here’s how authors of an article on energy policy from the Columbia University explain the possible repercussions: Under current law, the Department of Energy must grant companies natural gas export authorizations “without modification or delay” to countries with which the United States has in effect a “free trade agreement requiring national treatment for trade in natural gas.” Exports to non-Free Trade Agreement countries require a public interest review, an opportunity for public comment, and an environmental review under the National Environmental Policy Act (NEPA).
Because of this difference in the way free and non-free trading partners are treated, analysts have pointed out that deconstructing NAFTA could greatly complicate U.S./Mexico energy regulations and subsequently hinder trade. Commenting on this possibility, Hamza Khan, head of commodities strategy at ING, said, “From the political side, anything’s possible, but as a commodity analyst, I don’t see how either party would want or benefit from reduced flows.”
Given the importance of the energy trade to both countries, analysts say it’s unlikely the Trump Administration will want to interfere with the free flow of America’s natural gas to Mexico. After all, in addition to bringing Mexico much needed low-cost fuel, gas exports from the states also support jobs in the U.S. and, of course, earn profits for producers.
Looking ahead, a more probable scenario is that trade restrictions with Mexico will be selective, rather than sweeping. And because of the importance of the energy trade to both sides, new restrictions on gas exports aren’t likely. But no one knows for sure.
In any event, it’s probably safe to say that given the complexities of the situation, preserving free trade in natural gas while revisiting other aspects of the economic relationship between the U.S. and Mexico will be a challenge.