The Evolving Mexico-United States Relationship, Amid a New Administration in Washington

Mexico continues to face challenges in 2021, as it continues to grapple with economic fallout from the global COVID pandemic and amid policy shifts emanating from the United States, as President Joe Biden assumed the office in January. Mexican President Andrés Manuel López Obrador, 67, also tested positive for coronavirus after a recent business trip; he is currently quarantining at the National Palace in Mexico City.

Within his first three days of office, President Biden issued several executive orders. Among these, executive action included halting funding for the construction of the wall along the U.S.-Mexico border and preserving a path forward for those individuals brought illegally to the United States as a child by their parents that are now adults (so called “Dreamers”/ Deferred Action for Childhood Arrivals “DACA” program recipients). President Biden also signed letters that had the United States rejoining the Paris Climate Agreement and halted the U.S. withdrawal from the World Health Organization. Notable for Mexico, President Biden appointed Ambassador Roberta Jacobson as his southwest border coordinator within the National Security Council.

President López Obrador spoke with President Biden on January 22, reviewing bilateral cooperation on a range of bilateral and regional issues. The two leaders agreed to work closely to address the flow of migrants from the broader southern region to Mexico and the United States, as well as to promote development in the Northern Triangle of Central America (El Salvador, Guatemala, and Honduras) to stem this flow. They also recognized the importance of coordinating on COVID-19, which included extending the agreement of keeping the land border closed to non-essential travel until at least February 21, 2021.

Mexico, the second largest economy in Latin America, was resilient prior to COVID and the government continues to seek out opportunities to improve the economy and citizens wellbeing. In January, the Mexican federal government laid out a COVID relief plan that includes providing loans to 60,000 small businesses affected by the coronavirus pandemic. Restaurants and tortillerías (tortilla shops) are among those small businesses able to qualify for the loans of up to 250,000 pesos (US$12,740).

Mexico also continues to expand its market access overseas.  This included securing a Trade Continuity Agreement with the United Kingdom (U.K.), as the U.K. transition period from the European Union concluded. Both countries established transitional mechanisms to maintain preferential tariff treatment for Mexican imports in the U.K., effective January 1, 2021. Meanwhile, U.K. imports will be subject to Most Favored Nation (MFN) rates in Mexico. Companies that import U.K. goods into Mexico should take into consideration the impact the impact the transitional mechanisms could represent to their supply chain, as the two countries work to reach a longer-term agreement.  Mexico and the U.K. are set to begin negotiations on a new free trade agreement this year.

Within the framework of the United States-Mexico-Canada Agreement (USMCA), Mexico has been supportive of the United States automobile industry by extending the time to transition and comply with the higher content requirements under the new trade deal, which includes a 75% North American content (compared with a 62.5% threshold under the old North American Free Trade Agreement).  Democratic lawmakers in Washington, however, are urging the Biden Administration to keep pressure on Mexico’s labor and environment obligations in the agreement.  A group of 122 Democratic lawmakers more recently sent a letter to President Biden urging him to incorporate the Paris Climate Agreement into the USMCA.

In agriculture, Mexico continues to maintain conversations with the U.S. agriculture sector, in hopes of resolving long-standing disagreements on tomatoes, strawberry and bell peppers (seasonal produce) and achieving a deal that supports both economies. While not a dispute, it is expected that avocado imports and consumption will continue to increase in the United States, especially guacamole consumption with the upcoming Super Bowl watching parties (February 7).

Under the Trump Administration, the U.S. International Development Finance Corporation (DFC) focused on Mexico’s energy sector, signing a letter of interest in 2019 to finance a natural gas pipeline developed by Rassini S.A.B. de C.V. in the country’s southern states. The Biden Administration, however, is moving away from a focus on oil and gas domestically toward green sustainable energy initiatives that align with Paris Climate Agreement targets and goals. It remains to be seen how supportive the Biden Administration will be toward gas pipeline projects in Mexico, including those that have the potential to serve other markets, such as the Northern Triangle countries. Nevertheless, the DFC and the U.S. Export-Import Bank remain a valuable resource for American investments in Mexico, especially those that align with the Mexican government’s economic agenda in 2021.

The End of Outsourcing in Mexico?

On November 12, President Andrés Manuel López Obrador announced a bill initiative that, if enacted, will have a significant impact on outsourcing and the use of service entities currently in use to minimize Mexican employee profit-sharing obligations. The initiative includes amendments to the Federal Labor Law, the Social Security Law, the Mexican Tax Code, including changes to income and value added tax regulations, and several others. The President submitted this initiative to Congress and it is expected to pass more or less as proposed. Labor Secretary Luisa María Alcalde said outsourcing hurts workers by allowing companies to avoid granting benefits to subcontracted employees, a local paper reported. She also cited other abusive practices the law aims to curtail, such as companies firing workers before Christmas and rehiring them early in the year to avoid paying year-end bonuses.

Here are the most relevant details of this initiative to the Federal Labor Law:

  • It aims to eliminate the subcontracting of personnel, which is defined in the reform proposal as one where an individual or entity provides or makes its own workers available for the benefit of another. Subcontracting specialized services will still be permitted, but these need to be different from those services generally provided by the hiring company. For example, an auto parts manufacturer could subcontract a company to provide canteen and meal services, but not similar manufacturing services.
  • Individuals or entities that provide specialized services must have authorization from the Secretary of Labor (STPS). The STPS will make a list of specialized service providers publicly available on the internet. The STPS has four months to issue the general provisions that determine the procedures related to this authorization.

This initiative also includes significant changes to the Social Security (Ley del Seguro Social) and Employee Housing Law (Ley del INFONAVIT), including limiting a company’s employee registration to its principal line of business. This would limit outsourcing companies’ current ability to register employees under the activity of their clients. Under these reforms, companies hiring subcontractors will now be jointly and severally liable for all the labor obligations of the specialized subcontractors they hire. If passed, reforms to the Federal Income Tax Law include limiting a company’s ability to claim a tax deduction for fees to unauthorized service companies.

These reforms could have a significant impact on the maquiladora industry, as well as manufacturing and high-employee services industries. We are monitoring this initiative closely and will update this blog with any developments.

How the U.S. Presidential Election Outcome Could Affect Latin America

US Election RallyAs US citizens go to the polls, Latin American governments, businesses and citizens should examine how a re-elected President Trump or a newly elected Vice- President Biden may shape Western Hemisphere relations.

The results of this election will certainly affect Latin America, as each candidate views the region through fundamentally different lenses.  President Trump has taken a transactional approach to foreign and trade policy, emphasizing trade deficits and surpluses while examining bilateral relationships in the context of narrowly defined US interests, such as stemming the flow of migration in the region. Former Vice President Joe Biden believes Latin America’s prosperity and security is fundamentally in the mutual interest of the US, and will adopt a far more comprehensive approach to Western Hemisphere relations.

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Mexico’s Infrastructure Plan 2020-2024

Mexico FlagOn Monday, October 5, Mexican President Andrés Manuel López Obrador presented a package of 39 infrastructure projects that he intends to move forward in conjunction with the Mexican private sector. These projects would invest approximately 300 billion pesos in the communications, energy, tourism and water sectors. This announcement represents the reactivation of the previous plan that was presented in November 2019, but postponed by the 2020 global health pandemic. It is estimated that this investment package will represent 1% of Mexico’s Gross Domestic Product (GDP) and will generate 185,000 jobs, according to Jorge Nuño, spokesman of the Unit of Investments of the Ministry of Finance.

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Mexican President Visits Washington

With the U.S.-Mexico-Canada Agreement (USMCA) recently going into effect on July 1, the President of Mexico made his first visit to the United States on Wednesday, July 8. This marks his first visit to the White House and his first foreign trip since taking office in December 2018; it comes ahead of the U.S. election cycle in November. President Andres Manuel López Obrador’s delegation includes Secretary of Foreign Relations Marcelo Ebrard Casaubon; Mexican Ambassador to the United States Martha Bárcena Coqui; Secretary of Economy Graciela Márquez Colín, and the head of the Office of the Presidency, Alfonso Romo Garza. Canadian Prime Minister Justin Trudeau declined to join the meeting, which initially had been envisioned as a two-day North American Leaders Summit but has been pared back to one day.
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Mexican Supreme Court issues an injunction of the SENER Policy

On June 22, 2020, Mexico’s independent antitrust regulator (“COFECE”) filed a legal claim (controversia constitucional) with the nation’s Supreme Court arguing that the Ministry of Energy’s (“SENER”) Agreement setting forth the Policy of Reliability, Safety, Continuity, and Quality of the National Electric System (“Policy”), as published in the Official Gazette of the Federation on May 15, 2020, not only violates articles 16, 28, and 133 of the Mexican Constitution, but also Mexican laws applicable to the energy sector. COFECE asks the Supreme Court to clarify the limits of SENER’s authority “concerning the constitutional principles of competition when [SENER] issues a regulation that severely affects the competitive dynamic[s] of a market.” On June 29, 2020, the Supreme Court agreed with COFECE granting an injunction against the “effects and consequences” of the Policy until the matter is definitively resolved. Continue Reading

Mexican Court Orders a Definitive Suspension of the Enforcement of SENER and CENACE Measures

On Wednesday, June 10, the Mexican court specialized in economic competition issued an order granting the definitive suspension of the Ministry of Energy’s (“SENER”) Agreement setting forth the Policy of Reliability, Safety, Continuity, and Quality of the National Electric System (“Policy”) and the independent system operator’s (“CENACE”) preoperative testing restrictions. This means that neither the Policy nor CENACE’s restrictions may be further pursued or enforced until a final judicial order on the matter is issued (“Order”). The Order is one of a growing number of judicial orders against the López Obrador administration’s recent attempts to restructure the Mexican electricity market to the detriment of renewable energy producers and outside of the established regulatory and legal parameters.

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CRE Adds its Name to the List of Agencies Disturbing Mexico’s Legal and Regulatory Certainty

Since our May 20 blog post, the Energy Regulatory Commission (“CRE”) added its name to the list of agencies disturbing Mexico’s legal and regulatory certainty. Additionally, the López Obrador administration has spent time publicly defending recent Ministry of Energy (“SENER”) and independent system operator (“CENACE”) regulatory changes affecting renewable energy projects.

On the evening of May, 28, 2020, CRE, in extraordinary session, passed two resolutions modifying the tariffs applicable to the transmission services used by “legacy renewable and cogeneration energy contracts” (those contracts executed prior to the 2013 Energy Reforms, “Legacy Contracts”), to bring them to 2018 tariffs. In support of the new tariff structure, the head of the Federal Electricity Commission (“CFE”) publicly asserted that renewable energy engages in unfair competition because they do not pay for access to the grid and get paid even when they do not consistently produce energy. This assertion is incorrect. Although Legacy Contracts receive “preferential” treatment, such projects are required to pay interconnection tariffs, albeit low interconnection tariffs. Legacy Contracts receive preferential treatment because, at the time they were executed, the Mexican government sought to promote renewable energy project development in Mexico. Since renewable energy projects were more expensive to develop versus projects using conventional energy sources, Legacy Contracts enjoyed an economic incentive to development in the form of low interconnection tariffs. Legacy Contracts were also specifically carved-out of the Ley de Industria Electrica’s application, which means the they should continue to enjoy such treatment and be governed by the Ley del Servicio Público de Energía Eléctrica until the end of their term.

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COVID-19 and Construction in Latin America

The impact of COVID-19 on global economies is being unfolded as we continue to experience the period of prolonged economic uncertainty. As the virus’ epicenter has shifted from Asia to Europe, and now Latin America, financial markets have plummeted and with them sectors such as the project development, infrastructure or construction sector on a worldwide scale. The construction sector, has started to experience the effects of the pandemic, nonetheless, the coming months will unravel the extent to which the effects will affect the sector in Latin America.

As witnessed, the majority of Latin American governments set strict quarantine measures almost at the same time as Europe began its lock down. Along with the international travel bans and internal mobility restrictions, measures to ensure employee health and safety, supply and material delay have decreased the expectations for the rest of 2020 and upcoming years. These factors have meant a major setback for the construction sector at all levels, from project planning, to proposals and bidding, to the most affected of all, ongoing construction projects. The impossibility of workers to go on site given lock down provisions, health and safety adjustment in the work place and job cuts, have slowed down the sector.

For Latin American workers, household incomes have reduced dramatically, causing a decrease and slow-down in the development of the local economy. As a response, the majority of Latin American governments have put in place stimulus packages with special focus in infrastructure and construction sectors as key areas of investment to get the economy back on track. In addition, mobility restrictive measures such as quarantines, have been eased for construction, maintenance or other project development purposes, in both private and public ventures in order for employees to attend the work sites, as well as for companies to continue carrying out their activities in order to meet execution dates, installments and deadlines. For companies, this means the possibility of executing projects within the foreseen terms, avoid entering into default and securing payment and cash flow to pay both employees and suppliers.

The region is also calling for a “green” recovery and a promotion of technological infrastructure with a special focus on improving or developing ports, roads, railways and transportation facilities. These go along with both multilateral organizations and investors looking over to align the projects with the United Nations Sustainable Development Goals.

Upcoming Dominican Republic Presidential Elections; Possible Challenges

With presidential and congressional elections scheduled to take place on July 5, 2020,[1] the President of the Dominican Republic, Danilo Medina Sánchez, announced last Sunday May 17, 2020, a set of measures for a staged reopening of the Dominican economy. This raises the question of what happens if these reopening measures result in drastic spikes of new COVID-19 cases and the elections are therefore not held on July 5, 2020.

There is a lot riding on this question as any postponement of the elections beyond the August 16 constitutional end-date of the terms of the President, Vice President and 222 legislators could result in a political, institutional and constitutional crisis. This in turn could deal a serious blow to the country’s democratic system, rule of law, and business and investment climate.

The Dominican legal system does not expressly address a situation where presidential and congressional elections cannot be held before the end of respective terms. For general guidance, one may look to basic constitutional principles and value, however, this may imply serious inconveniences. Two lines of thought of how the situation should be handled, based on interpretations of the existing Dominican Constitutional provisions, are currently being publicly debated. The first suggests the President and Vice-President should step down from office on August 16, 2020, because the Constitution provides such date as the term of their mandates. Pursuant to this line of thought, the President of the Supreme Court of Justice would provisionally act as President of the country according to the succession rules set forth by articles 126 and 129 of the Dominican Constitution or a Governance Board would temporarily manage the government until elections could be held. The second line of thought suggests that the current authorities should remain in office until their replacements are elected, based on the principle of continuity of government (a principle deriving from an interpretation of article 275 of the Dominican Constitution) and on the democratic principle considering that those authorities where duly elected. Both of these approaches, however, would require approval and implementation of certain measures by the National Congress (Senators and Deputies), the tenure of most members of which also will expire on August 16, 2020.

Another legal option under debate is an amendment to the Dominican constitution to address specifically the issue. A major hurdle to this option, however, is that the Constitution expressly prohibits any amendments being made during a state of exception[2]. Nevertheless, several proposals have been suggested, such as: (i) the modification to the presidential rules of succession to expressly include the possibility of the current authorities remaining in office until their replacements are elected; (ii) the inclusion of transitional language extending, on an exceptional basis and in light of circumstances, the current Executive and Congressional terms;[3] (iii) the inclusion of language that contemplates the possibility of some members of the National Congress assuming temporary executive functions until the elections can be held, and (iv) the inclusion of a provision holding that the Electoral Authority assumes the Executive Power until elections can be held.

These options seek to limit political influence in case elections cannot be held by August 16, 2020, and to ensure adequate governance and economic stability. The Dominican political panorama should be more clear on July 5, 2020, assuming elections are held, which are expected to conclude in a peaceful transition of power.

 

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[1] The Constitution of the Dominican Republic stipulates that presidential and congressional elections shall be held every four years on the third Sunday of May. This year, however, on April 13, 2020, the Electoral Authority passed a resolution rescheduling for July 5, 2020 these elections due to the COVID-19 coronavirus pandemic.

[2] Article 271 of the Constitution establishes that “Constitutional reform may not be made in the case of the effect of one of the states of exception given in article 262”.

[3] Article 274 of the Dominican Constitution.

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