Watch for trade deal's impact on state-owned businesses, says Baker Institute expert

Mexican Flag in Puebla

While it is difficult to accurately predict which changes made by the United States-Mexico-Canada Agreement (USMCA) will have a significant effect on North American trade, several of them, such as those relating to state-owned enterprises like Mexico's Pemex, could have a major impact, according to a report from the Center for the United States and Mexico at Rice’s Baker Institute for Public Policy.

The report, "The USMCA: Updating NAFTA by Drawing on the Trans-Pacific Partnership," was authored by David Gantz, the Will Clayton Fellow in Trade and International Economics at the Baker Institute.

Significant portions of the USMCA have been taken either verbatim or with some modifications from the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) enacted in 2018, Gantz said. "This was a very logical approach given that the North American Free Trade Agreement (NAFTA) was negotiated more than 27 years ago (in 1991-92), and what was at the time the world’s most modern and deepest free trade agreement was the Trans-Pacific Partnership (TPP) as negotiated by the Obama administration on behalf of the United States and 11 other countries," Gantz wrote.

"The USMCA also confirms that it may be easier to reach agreement on some innovations where there are only three parties at the table, compared to 12 with the original TPP (even if all the NAFTA parties were among the 12)," Gantz wrote.

Gantz's paper marks the eighth installment in a series he has authored on the USMCA. The agreement has been signed and ratified by the United States and Mexico; Canada is expected to approve it within the next four to seven weeks.

Gantz discussed many of the most important CPTPP/TPP innovations in his other reports. These include provisions for the protection of the environment and for the protection of investors in Mexico’s petroleum sector, in addition to provisions for intellectual property, telecommunications services and, perhaps most importantly, digital trade, Gantz said.

In the USMCA, an enterprise is considered state-owned if a party directly or indirectly owns more than 50% of the share capital, directly or indirectly controls more than 50% of the voting rights, has the power to control the enterprise through any ownership interest (including a minority interest), or holds the power to appoint a majority of the board of directors, Gantz said. "For many observers, such bright-line rules make much more sense than the vagueness of the WTO Agreement on Subsidies and Countervailing Duties, which has given the appellate body an opportunity to exclude the term 'public body' and thus exclude many state-owned enterprises that are effectively controlled and heavily subsidized by the government from the WTO subsidies disciplines," Gantz wrote.

"Interestingly, the USMCA chapter applies to state-owned enterprises, state enterprises and monopolies that could affect trade or investment within North America or activities 'that cause adverse effects in the market of a nonparty,'" Gantz wrote. "Essential elements, inter alia, are intended to assure that a party’s state-owned enterprises 'act in accordance with commercial considerations in its purchase or sale of a good or service,' and that the enterprise 'accords to a good or service supplied by an enterprise of another party treatment no less favorable than it accords to a like good or a like service supplied by enterprises of the party, of any other party or of a nonparty' and treats covered investments in a nondiscriminatory manner as well."

As in NAFTA, similar rules apply to designated monopolies, Gantz said. Small entities, with revenues of less than about $250 million, are excepted. "Other provisions of the lengthy chapter include requirements that courts be provided with jurisdiction over civil claims against enterprises based on commercial activity carried on in a party’s territory and restrictions on subsidies," Gantz wrote. "Among other transparency requirements, each party within six months after the entry into force of the USMCA must publish a list of such enterprises on an official website and update the list annually. The USMCA creates a SOE (state-owned enterprise) and Designated Monopolies Committee, similar to the Working Group on Trade and Competition under NAFTA."

Gantz noted that the USMCA was signed Nov. 30, 2018, one day before Andrés Manuel López Obrador became Mexico's president. "This is significant, because one of López Obrador’s key policies to date has been to significantly increase the powers and authority of Mexico’s petroleum monopoly, Pemex," he wrote.

"There is no evidence to date that the expansion of Pemex and the reduction of private enterprise participation in oil exploration and development is a violation of the USMCA’s Chapter 22 on state-owned enterprises," Gantz wrote. "However, the situation bears watching."