Authored by Haley Zaremba via OilPrice.com,
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The United States and Mexico have a vital energy trade relationship, with U.S. natural gas exports to Mexico increasing dramatically in recent decades, creating a high level of economic interdependence.
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Experts argue that the energy trade between the U.S. and Mexico is so crucial for both nations’ economies that it may be largely shielded from tariff threats, which are possibly being used for diplomatic leverage.
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The U.S. strategy of near-shoring its energy supply chains heavily involves Mexico, making the maintenance of good relations between the two countries’ leaders essential for both nations’ economic and energy goals.
Tariff whiplash under the Trump administration has raised a lot of concerns about the United States’ relationship with its first- and second-largest trading partners, Canada and Mexico. This is especially true for energy trade, which all members of the United States-Mexico-Canada Agreement (USMCA) depend on to keep their economies healthy. Experts contend that recognizing the vital role of energy trade for all parties, and strengthening those relationships, is critical in these volatile times.
While this is true for all of North America, it is particularly true of the energy trade relationship between the United States and Mexico, which has massively expanded in recent decades. In January of this year, pipeline exports of natural gas from the United States to Mexico reached a whopping 199.2 billion cubic feet. That marks a more-than ten-fold increase since 2012, and a nearly 200-fold increase since 1990. This rapid growth has made the two economies more inextricably interlinked than ever before.
Because of the scale and rapid expansion of this relationship, the United States and Mexico both need a healthy energy trade relationship for their respective economic well being, according to experts.
“For Mexico, reliable access to competitively priced U.S. energy is essential to sustaining economic growth, enabling industrial competitiveness and stabilizing the electric grid,” states a recent opinion piece from The Hill, written by Duncan Wood.
“At the same time, for the U.S., Mexico has become an indispensable customer, so much so that any downturn in Mexican demand would ripple through U.S. refineries, gas producers and the infrastructure companies that have built pipelines and terminals to serve the southern market,” Wood continues.
This means that tariffs could pose a major threat to what is a foundational piece of the continental trade agreement and economy. But it could also mean that the tariffs never really stood a chance. In April of this year, Carlos Guadarrama, a senior energy consultant at the World Bank, said that energy trade between the two countries is so integrated and important that it is essentially shielded from tariffs, and implied that Trump’s tariff rope-a-dope with Mexico is founded on empty threats.
“I don’t think the tariffs will impact bilateral energy trade because at this point, we’ve seen the U.S. threaten tariffs on Mexico several times,” Guadarrama told Natural Gas Intelligence.
“I think Trump is using the tariffs as a threatening mechanism so that the Mexican government complies with the U.S. on other requests and areas of interest beyond energy, and I personally don’t think they will have any effect in bilateral trade when it comes to energy,” he went on to say.
This means that the two new presidents of the United States and Mexico, Donald Trump and Claudia Sheinbaum, will need to maintain good relations and a high level of diplomacy if the United States wants to keep making money off of Mexico’s grid, and Mexico wants to keep growing its own economy using relatively cheap and abundant American energy imports.
What is more, maintaining energy trade relations with Mexico is paramount to the United States’ own energy strategy, which is moving away from global supply chains and toward friend-shoring and near-shoring. Around this time last year, the Atlantic Council reported that cooperation between the two new regimes in the United States and Mexico would be critical for loosening trade reliance on China. The United States’ plans for nearshoring its energy supply chains – moving their lines of production closer to home – feature Mexico prominently.
At that time, when the potential outcome of the United States election was still the subject of much debate, the Atlantic Council advised that “The United States should seize the opportunity to work with the incoming Sheinbaum administration to strengthen the Mexican energy sector, thereby enabling supply chain security gains through nearshoring.”
So far, Trump has worked against Mexico as much as with them. But with such complementary mutually beneficial energy market needs, he may just be blowing smoke.
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