When I first moved from Toronto to Mexico City in January of 1996 to pursue a career as a young professor, I entered an entirely new world. Having grown accustomed to the order, stability, and relative prosperity of Canada, Mexico seemed chaotic, volatile, and impoverished. Although I soon experienced the diversity of Mexican society and came to understand the country’s huge economic potential, I remained mired in a narrow-minded view that was based on the contrast with Canada, a country that had been my adopted home for the previous six years.

This, perhaps understandably, led me to be naively critical of Mexico. I would complain about the failings of Mexican bureaucracy, of the economy, of social norms, and of the rule of law. However, a distinguished colleague of mine at the Instituto Tecnológico Autónomo de México, Professor Jesús Velasco Márquez, soon called me to task. He impressed upon me, in kind but stern terms, that the real question was not “Why isn’t Mexico more like Canada or the United States?” but rather, “Why isn’t Mexico more like Guatemala?” This juxtaposition of two alternate realities, one North American and the other clearly Latin/Mesoamerican, made me stop in my tracks. It made me consider not just how much remains to be done in Mexico, but how far Mexico has come and how successful the country has been.

I soon came to see Mexico as unique in the hemisphere – a country that refuses to fit neatly into preconceptions of North versus Latin America. It is a country that has made an extraordinary transition over the past 25 years, advancing in its economic development, its democratic practice, and its place in the global system. And yet, it continues to suffer from the imperfect implementation of the rule of law, grinding poverty, and weak institutions. Mexico is 

 in developmental terms, and yet still so far away. Over the next two decades, I became convinced that Mexico is on the right path. At the same time, I recognized that in the Mexican context, progress would definitely not be linear, that it proceeds in fits and starts, and that the country’s embrace of a revolutionary identity is really far more evolutionary in reality. 

Then, in July 2018, Andrés Manuel López Obrador, or AMLO, won the Mexican election in stunning fashion. Along with a landslide victory in the presidential poll, his Morena party now also dominates Congress and state legislatures. AMLO has argued that Mexico has passed through three major transformations in its history: its independence movement, the reform period of the 1850s and 1860s, and the Mexican Revolution of the early 20

” of Mexico, one that will propel the country towards a more just, prosperous, and corruption-free future, with the result as revolutionary as the first three. 

But it would be a mistake to assume that this new direction will divert Mexico from its path of convergence with North America. Mexico has become so deeply embedded into the region, and has become so dependent on trade, investment and joint production with the United States and Canada, that such a departure would cause severe economic and political disruption – and an existential crisis. That holds true even with the ongoing tensions of the Trump era in bilateral affairs. AMLO appears committed to a North American destiny, and, in fact, he may even be better equipped to deal with President Trump than his predecessor was.  

In the early 1980s, Mexico faced a moment of reckoning. The confluence of a deep Latin American debt crisis; the return of Mexican technocrats educated in U.S. neoliberal economic practices; pressure from the World Bank and IMF; and the demands of international investors pushed the country to embrace market principles and open its economy to the world. By 1994, Mexico had joined the General Agreement on Tariffs and Trade, the Organisation for Economic Co-operation and Development, and, most importantly, the North American Free Trade Agreement (NAFTA). Fundamentally deeper ties with the United States and Canada, in particular, were being forged.

These changes, in turn, led to a change in the very identity of Mexico as a country and as a people. From being a closed and inward-looking nation, Mexico and Mexicans gradually, slowly began to explore new horizons. The country saw a flood of imported goods hitting supermarkets and the arrival of new products from around the world, seen most obviously in the availability of new car brands and models. Textbooks were rewritten to include foreign affairs and there was an explosion of interest in international relations programs at universities. By the early 2000s, Mexico had become a globalized economy, relying on foreign direct investment, engaging enthusiastically in multilateral forums, and exporting more manufactured goods to the world than the rest of Latin America combined. 

Because of increased commercial and social intercourse, and as millions of Mexican migrants made new lives up north, the United States ceased to be viewed as the country that had stolen half of Mexico’s territory.

Mexican foreign policy itself began to change. Adherence to the long-standing Estrada and Carranza doctrines – which warned against interference in the internal affairs of other countries (thereby protecting Mexico from such outside interference) – gradually weakened. The country became a more vocal critic, especially within Latin America. When Foreign Secretary Jorge Castañeda began to openly criticize the Cuban government of Fidel Castro in 2002, it marked a sharp and controversial break with Mexican diplomatic tradition. New civil society organizations and think tanks were founded to reflect these changes, raising new awareness and understanding of international affairs. 

Central to this broadly-based internationalization was the concept of Mexico as a North American nation. Because of increased commercial and social intercourse, and as millions of Mexican migrants made new lives up north, the United States ceased to be viewed as the country that had stolen half of Mexico’s territory. Mexico was moving past its traditionally contentious, confrontational, and controversial relationship with the U.S., which became increasingly viewed as a partner, in the region and the world. This change, of course, did not happen overnight and was far from linear; Mexicans continue to harbor suspicions of the U.S. government, and public opinion depends heavily on the current phase of relations and the current occupant of the White House. 

Especially since the signing of NAFTA – which holds the status of a legally binding treaty in Mexico, unlike in the U.S., where it is an 

 – the Mexican government has defined its place in the world firmly as a member of the North American region. Today, the country has deeper trade, investment, manufacturing, and energy ties to its continental neighbors than to the rest of the world – at the center of which is an overwhelming dependence on 

 with the United States, which receives about 80 percent of Mexican exports. 

Canada was embraced first as a necessary extension of the relationship with the U.S., and then as a strategic partner in its own right. (Notably, during the 2003 invasion of Iraq, Canada and Mexico found themselves joined as close allies of the U.S. and heavily dependent on good economic relations with their neighbor, but unable to join the “coalition of the willing.” Throughout the trying period, Mexico and Canada emphasized the importance of their bilateral relationship in ways that had hitherto been unexpressed). Economic ties have quadrupled since 1994, and Mexico is now Canada’s 

 trading partner. The inseparability of North American manufacturing systems (seen in a wide range of sectors, but none more clearly than the automotive industry), have made “North Americanness” an undeniable fact for Mexicans. While Mexicans continue to see themselves as Latin Americans in a cultural sense, in economic and political terms the transformation has been clear.

During the administrations of Presidents Vicente Fox Quesada, Felipe Calderón Hinojosa, and Enrique Peña Nieto, this continental identity became something of a diplomatic mantra, with regular meetings of the North American Leaders Summit (NALS), a series of regional initiatives on security and economic competitiveness, and even the recent three-country 

. The NALS, in fact, has been perhaps the most impressive manifestation of the North American partnership. Taking place on eight occasions since 2005, the leaders of the three countries have engaged in a process of socialization that has brought their bureaucracies and policies into closer alignment. What’s more, it has focused the attention of all three administrations on the region. After the 2016 summit, the governments agreed to put in place a trilateral coordination process to ensure that NALS commitments were fulfilled. That vision has been stymied by tensions arising from President Trump’s attacks. 

However, notwithstanding the preceding decades of growing North American identity, political developments in Mexico over the past year have raised doubts about the sustainability of this convergence. While Mexico’s president-elect has shown little interest in foreign relations during his lengthy political career, his rise in popularity in 2017 and 2018 generated concern that he would distance the country from the U.S., and would instead focus on outreach to Latin American countries for common cause. 

Some analysts have pointed to AMLO’s criticism of NAFTA in previous campaigns for the presidency, when he attacked the agreement for benefitting the United States and Canada more than Mexico. During the 2018 election campaign, of course, he had to contend with repeated verbal attacks by President Trump on Mexico and its people. In response, AMLO published a book titled “

” in which he seized on bilateral tensions as a way to define his own plan for Mexico. He also fervently opposed Mexico’s landmark 2013 

, seeing it as a betrayal of sovereign control over the nation’s hydrocarbon resources. As U.S. firms have won a number of major contracts thanks to the reform, some have seen his opposition as a challenge to ongoing good relations. 

Fears of a break from the country’s northern neighbors (its bordering neighbor in particular) have so far proven unfounded.

What’s more, the president-elect’s left-wing political bent has drawn comparisons to Latin American socialist figures such as Hugo Chávez, Evo Morales, and Luiz Inácio Lula da Silva, each of whom adopted a more-or-less antagonistic approach to the United States during their presidencies. Additionally, AMLO’s Morena is an “umbrella party,” one that incorporates members from across the political spectrum, and some of the more radically anti-American voices in Mexico have previously been heard from within its ranks. 

However, these fears of a break from the country’s northern neighbors (its bordering neighbor in particular) have so far proven unfounded. It appears that AMLO does not intend to pivot his country away from its continent-facing orientation. Part of that calculus, he seems to realize, is making nice with the controversial U.S. president. During the election campaign, AMLO generally resisted the provocations from Washington, as he repeatedly emphasized the importance of bilateral ties – and the importance of avoiding a rupture between the two nations. On NAFTA, he reversed his previous skepticism and criticism, arguing that the agreement had generally been good for Mexico, while recognizing that it needs an update. And AMLO was the only candidate to give a 

 in Washington during the presidential campaign. 

Thus far, the relationship between the president-elect and Trump gives the appearance of being dramatically friendlier than that between Trump and Peña Nieto. It has also emerged that the U.S. president has nicknamed AMLO “

,” reflecting the fact that he sees some of himself in his soon-to-be counterpart’s character and behavior. AMLO has already met with Secretary of State Pompeo, Secretary of Homeland Security Nielsen, Treasury Secretary Mnuchin, and Senior Adviser Kushner, the latter meeting notable for its congratulatory and exceedingly friendly tone. For his part, a number of AMLO’s decisions appear to have been made with U.S. relations in mind; his choice for foreign minister, Marcelo Ebrard, has been interpreted as an olive branch to Washington.

Perhaps most dramatically, AMLO has released the wording of 

 immediately following their half-hour phone conversation on July 2. In that missive, AMLO lays out much of his plans for government, while emphasizing key points of concern for the United States, including economic development, trade, migration, and security. In a strikingly personal tone, the letter ends on a note of empathy, comparing the two men’s career struggles and their respective commitments to serving voters and displacing the “establishment” (the English word is used in the otherwise Spanish-language message). The letter is a remarkable statement of purpose, and one intended to reassure the northern neighbor at the same time as it opens the door to further dialogue.

 was also released. The exchange, in today’s electronic age, especially with a U.S. president who has used Twitter as his preferred medium for diplomacy, is a remarkable thing. In Mexico, it is often said that the “forms” matter as much as the message, and in this case, the two leaders have resurrected a more “formal form.” It allowed AMLO to lay out his message uninterrupted, and committed Trump to a long-form, written response. In the short term, at least, this is a diplomatic success for Mexico’s president-elect.

Importantly, AMLO and his team have signaled that they are looking for a rapid conclusion to NAFTA negotiations, hoping to make significant progress during the summer of 2018, before he actually assumes the presidency. Although this positive outlook on NAFTA is difficult to support with evidence, there does at least appear to be a new air of optimism on both sides of the border. Moreover, as the negotiations advanced at the end of July, AMLO’s team reaffirmed their commitment to a trilateral deal, refusing to exclude Canada in favor of a bilateral agreement. (Shortly after 

 on July 13, AMLO received a delegation led by Canadian Foreign Minister Freeland. Again, the meeting was 

, with Canada keen to impress upon the president-elect that a trilateral approach in NAFTA is essential). The Mexican president-elect has bought into the North American idea, and knows that the success of his presidency depends on NAFTA’s survival. Mexico should to aim to “diversify our trade relations,” AMLO recently said, but “without neglecting the importance of the economies of the United States and Canada.”

Of course, there remains much about which to be concerned in the relationship with the U.S., which obviously constitutes much of Mexico’s North American anchor. Beyond the huge issues on the agenda – and we must recognize that agreement on key points of contention, such as NAFTA, the border wall, and migration remain as elusive as ever – there is only so much that Mexico’s president-elect can do to set the tone. He should expect that Trump will continue to berate Mexico, especially over issues that are popular themes with his supporters. Mexico is now, and will remain, as much an issue of domestic politics in the U.S. as it is one of foreign policy. Political expediency, therefore, will guide interactions as much as national interest.

I have come to see myself as a “North American citizen.” What’s more, I have also come to view the three NAFTA countries as sharing a similar destiny.

But despite the tensions, despite the temptation to fight back against taunts, despite the political incentive to fight fire with fire, tweet with tweet, AMLO has opted for a cautious, formal, and balanced diplomatic approach to Trump. This reflects the deep dependence shared by the two nations, one that is certainly asymmetrical, but definitely mutual. The United States may currently be a cause of anxiety for Mexico, and will often be a diplomatic foil; but each country will always be the other’s essential partner and inescapable neighbor. Canada, too, is essential to Mexico’s equation, including to balance the overwhelming power of the United States.  

It is now 22 years since I moved from Toronto to Mexico City. I now live in Washington, but visit Canada and Mexico every few weeks. In crisscrossing the continent over the years, I have come to see myself as a “North American citizen.” What’s more, I have also come to view the three NAFTA countries as sharing a similar destiny. Over the past two decades, Mexico, in particular, has tied itself irrevocably to the region, and the region is stronger for it. The new government there seems to have recognized that, in addition to being inescapable neighbors, the three North American nations need each other and will continue to share common cause, far beyond the terms of their current leaders.

) is the director of the Wilson Center’s Mexico Institute. The former head of the Department of International Studies at the Instituto Tecnológico Autónomo de México, he has lectured and published widely in the United States, Mexico, and Canada on intracontinental issues.

Cover photo: Mexican President-elect Andrés Manuel López Obrador (right) hosts U.S. Secretary of State Mike Pompeo in Mexico City, July 13, 2018. (Courtesy of U.S. State Department/flickr)

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Mexico’s identity as a North American nation has crystallized in the years since NAFTA was signed. Despite questions about its incoming president and major pressure points with Washington, that identity will not erode.

Mexico’s New President Chooses North America 

Four years ago, as the administration of Enrique Peña Nieto began, the Wilson Center’s Mexico Institute outlined a number of areas in which productive collaboration could take place between the Mexican and U.S. governments. Those areas focused on non-oil related energy issues for an obvious reason: at the time, Mexico’s oil and gas sector remained closed to private and foreign investment, and collaboration in this area was stifled at best.

The constitutional reforms of December 2013 (and the implementing legislation of the following year) changed this scenario dramatically and profoundly. A full opening of the hydrocarbons value chain to private and foreign investment, and the gradual construction of a competitiveness marketplace for energy suppliers have revolutionized the Mexican energy model. This is not just the case in oil and gas, of course: the electricity sector too has been extensively liberalized, and 2016 saw two major generation auctions successfully carried out by the government. There has been impressive progress in developing Mexico’s renewable energy potential — and remarkably, given the expected expansion of its hydrocarbons sector, ongoing commitments to limit carbon gas emissions.

Mexico’s energy sector and the energy relationship between Mexico and the United States have experienced notable progress over the past four years. But looking to the future, there are even more meaningful paths for collaboration in light of the transformation of energy systems worldwide, the opportunities presented by Mexico’s liberalized energy sector, and the Trump administration’s noted interest in energy. The existing North American energy dialogue has become a critical resource in preparing for the future of global and regional energy markets, and it is worth a full examination.

Energy is a major component of both the U.S. and the Mexican economies, responsible for wealth creation, innovation, and employment. Across both countries, 

millions of people work in the traditional energy sector

, and millions more are finding work in the areas of renewable energy and energy efficiency. But secure access to comparatively low-priced energy is also crucial for economic competitiveness. Prior to Mexico’s energy reform, high prices for industrial consumers of electricity compromised its manufacturing competitiveness, and natural gas shortages meant repeated stoppages at factories in the north of the country. Since the reform was passed, 

prices have been reduced dramatically in Mexico

, falling by between 21 percent and 30 percent for industrial consumers between September 2014 and September 2015. This has significantly improved the economic competitiveness of Mexican manufacturers.

After 75 years of running a closed and monopolistic energy sector, in December 2013 the Mexican government won congressional approval for a far-reaching reform package that liberalized both the hydrocarbon and electricity sectors. This paradigm shift happened in the face of considerable opposition from left-wing parties and nationalists, but the Peña Nieto government was still able to win a two-thirds majority in both chambers of Congress and approval from a majority of the state legislatures. Over the next two years, implementing legislation was passed by Congress, and regulatory frameworks and organisms have been constructed.

In December 2014, Energy Secretary Pedro Joaquin Coldwell announced the nation’s first oil bidding round (Ronda 1) since 1938, and over the following two years successful auctions were held for shallow- and deepwater fields and for onshore blocks. Although the first of these auctions (Ronda 1.1), in July 2015, was a disappointment with only 2 out of 14 blocks awarded, the National Hydrocarbons Commission (CNH) and Energy Ministry (SENER) listened to investor feedback and changed the process for subsequent auctions, to impressive effect. In Ronda 1.2, 3 out of 5 blocks were allocated, with impressive winning bids ensuring higher than expected revenue for the government, and Ronda 1.3 saw all 25 available blocks awarded. The “jewel in the crown” of Ronda 1, however, came in December 2016, one year after the completion of Ronda 1.3, and three years after the signing of the constitutional reform. In this auction, the CNH successfully allocated 8 out of 10 available fields, with the winning bids coming in with royalty commitments far above the levels expected by the government (figure 1). On the same day as Ronda 1.4, the CNH also oversaw the bidding process for the historic Trion Deepwater field farm-out, in which firms competed to partner with Mexico’s state-owned Pemex petroleum company in an existing field in the Perdido Fold Belt, in the Gulf of Mexico near the U.S.-Mexico border. In total, the first bidding round of the new hydrocarbons model saw the signing of 39 contracts and is expected to generate $49 billion.

The success of this extraordinary change in Mexico’s hydrocarbons industry was brought about in large part by the willingness of the Mexican government to engage in dialogue with the investor community. When Energy Secretary Pedro Joaquin Coldwell announced the Ronda 1 terms in December 2014, he declared that the government was open to feedback from the private sector and foreign investors to be able to improve on the investment climate. Although this may be seen as standard practice in other jurisdictions, in Mexico this marked a dramatic departure from the traditional, state-imposed reality in the hydrocarbons sector. Not only did Mexico welcome foreign investment, it invited the investors to help shape the rules of the new system.

Mexico’s petroleum markets are also being revolutionized downstream. Beginning in January 2016, private companies are now allowed to compete with Pemex in the retail market and, in April 2016, private companies were allowed to import refined products without having to go through Pemex. This liberalization of the refined products market has seen enormous interest from foreign oil companies, with Gulf already opening its first gasoline stations in the country in mid-2016. Lastly, 2017 will see the partial liberalization of gasoline prices in Mexico, which has brought a consumer backlash as prices have risen dramatically.

However, significant challenges still remain for Mexico’s hydrocarbons sector. Pemex continues to face enormous financial pressure due to an overwhelming government tax burden, crippling labor liabilities and dramatically reduced revenues due to falling production and low international oil prices. Pemex’s production decline has been profound and dramatic, falling from 3.4 million barrels per day in 2004 to less than 2 million per day in 2017. Pemex has also been hemorrhaging money on its downstream operations: its six refineries have been operating at only 66 percent capacity over the past few years, and it is estimated that they result in a US$9 billion loss every year for the company. This also means that 

Mexico has been importing record supplies of gasoline

, reaching 867,000 barrels per day in July 2016.

Nonetheless, Pemex is finally beginning to adapt to the new environment. In February 2016, the company brought in a new CEO, Jose Antonio Gonzalez Anaya, who has committed to partnering with the private sector. The proof of this commitment came in December 2016, when Pemex not only participated in a winning consortium in December 2016 for a deep-water block in the Perdido Belt in Round 1.4, but also entered an association within the Trion field through a farm-out. The winning bidder in the farm-out process, Australia’s BHP Billiton, not only ushered in a new era of collaboration for Pemex but also brought a $624 million cash payment for the company, a welcome injection at the end of what had been a very difficult year. These events suggest that change is coming fast for Pemex, and that there is significant reason to be optimistic about the future.

At the same time as this extraordinary process was unfolding, Mexico was continuing to transform its natural gas sector. During 2011 and 2012, the country had experienced severe natural gas shortages, with industrial consumers being cut off from supplies at critical moments, compromising their ability to meet orders. Building on existing commitments, the Peña Nieto administration has continued to expand Mexico’s natural gas pipeline network, and even more important, has overseen new cross-border pipeline projects that have brought much needed low-cost gas in from the United States.

The influx of natural gas into Mexico is also helping to transform the electricity system (figures 2 amd 3). As with the hydrocarbons industry, Mexico’s power sector has been completely opened up to competition thanks to the 2013 constitutional reform. Before the reform, the power sector was dominated by the state-owned utility, the Comision Federal de Electricidad (CFE), a monopolistic system that only allowed private power generation under certain conditions. The electricity reform helped decentralized the previously state-owned and vertically integrated industry, permitted private investment, made power generation more competitive, created an independent body (the CENACE) to run the wholesale electricity market, and guaranteed open power grid access for all participants. The transformation also affected the CFE. It was unbundled, split into several companies that will compete with each other and with private firms.

Access to stable supplies of natural gas in Mexico is transforming generating capacity. It is estimated that 44 percent of generation capacity additions up to 2029 will be natural gas–based, and a number of existing fuel oil–powered plants will be converted to gas.

Figure 2. Mexico’s Industrial Power Prices

The importance of the power sector reforms was made clear by Mexico’s energy minister, Pedro Joaquin Coldwell, when he called it “the economic competitiveness reform.” As 

, “access to reliable and affordable power can give businesses a competitive edge over their rivals, stimulate job creation and spur economic growth. . . . Studies suggest that cheaper electricity can substantially boost Mexico’s manufacturing base.”

Figure 3. Mexico’s New Power Sector Structure

But Mexico’s power sector transformation has also already brought significant investment in new renewable energy capacity. In March 2016, the first electricity generation auction was held, with 18 renewable power contracts awarded, attracting record-low prices per megawatt (MW) of power generated (figure 4). A second auction in September saw even lower prices guaranteed.

Figure 4. Mexico’s First Renewable Energy Auction, 2016

Further changes will follow in Mexico’s power markets, with an opening of the capacity market in February 2017 and the launch of a market for clean energy certificates in 2018. This latter initiative will cement the government’s already impressive commitment to reducing carbon emissions and boosting renewable energy production in Mexico.

The Liberation of the U.S.-Mexico Energy Dialogue

For decades, Mexican sensitivities regarding the connection between energy and national sovereignty prevented the development of a modern and multifaceted dialogue over energy cooperation between the two countries. The 2013 reform, however, opened the way for comprehensive interaction on energy policy. In February 2014, only two months after the reform was approved, the three North American heads of government met in Toluca, in the State of Mexico, to discuss the future of regional integration. Energy featured high on the agenda, and it was agreed that the energy ministers of the three countries would begin a regular dialogue. The first meeting took place in Washington, D.C., in December 2014, and agreeed on an agenda for cooperation on three specific points:

Publicly available collaboration on North American energy data, statistics, and mapping; Responsible and sustainable best practices for unconventional oil and gas developments; and a modern, resilient energy infrastructure for North America, including policies, regulations, workforce, innovation, energy efficiency practices, and sustainable technologies.

The breadth of this agenda helps to emphasize the potential for collaboration now that the Mexican energy system has been transformed. The memorandum of understanding signed by the energy minsters institutionalized an information-sharing framework for participants to promote dialogue and cooperation. Under the North American Cooperation on Energy Information initiative (NACEI), the three ministers agreed to set up a working group that would facilitate this coordination, combining the efforts of the three countries’ energy departments and information agencies, statistics and census bureaus, and national energy control and regulatory boards. The group was specifically tasked with comparing, validating, and improving respective energy import and export information; sharing publicly available geospatial information on energy infrastructure; exchanging views and information on cross-border energy flows; and harmonizing terminology, concepts, and definitions of energy products.

Figure 5. Border Crossings of Natural Gas Pipelines

The leadership role played by the United States in this regional approach was underlined by the 2015 Quadrennial Energy Review (QER), which focused extensively on the opportunities for energy cooperation in North America. The QER chapter on North America concluded that the United States has significant energy trade with Canada ($140 billion per year) and Mexico ($65 billion), yet greater coordination is needed to improve energy system efficiency and build resiliency against disruptions of the North American energy market, data exchanges, and regulatory harmonization.

In 2015, the U.S. Energy Information Administration (EIA), Canada’s National Energy Board, and Mexico’s Secretaría de Energía (SENER) produced a 

. This report established projections for crude oil, refined products, and natural gas and electricity markets across the region to 2029. Although the report’s authors emphasize that “it does not reflect results of an integrated North American energy model” nor should it “be construed as an official outlook for any of the Trilateral members,” there is, for the first time, the possibility of a more holistic approach to planning the future of North America’s energy sector.

The December 2014 meeting of the energy ministers was followed in May 2015 by a meeting on the margins of the Energy and Climate Partnership of the Americas and the Clean Energy ministerial meetings in Mérida, Mexico. The three ministers agreed to form a new Working Group on Climate Change and Energy, involving regular interactions between teams from all three countries. The agenda that was laid out in Mérida included reliable, resilient, and low-carbon electricity grids; more focus on clean energy and energy efficiency, including energy management systems; carbon capture, use, and storage; climate change adaptation and resilience; and oil and gas sector emissions, including methane and black carbon.

The energy ministers praised the new initiative. Mexico’s Pedro Joaquin Coldwell emphasized that its agenda demonstrated a commitment to “a path to achieve deep de-carbonization.” The United States’ Ernest Moniz emphasized the initiative’s potential for “facilitating cooperation to deploy innovative renewable energy technologies, modernize the grid, and increase energy efficiency to combat climate change and reach greenhouse gas targets while growing low-carbon economies in North America.”

This institutionalization of a regional energy and climate agenda is 

a prerequisite for meaningful and sustained cooperation

. Building on the experience of the North American Energy Working Group (NAEWG) in the early 2000s, the new working group will coordinate its efforts through socialization and harmonization. The first process has already shown its value: the meetings of the three energy policy representatives have encouraged mutual understanding and increased interaction between their ministries. The second process will take longer, and we should not expect it to be a linear or an even process. It makes more sense to harmonize regulations and standards in some areas than in others, and sometimes the harmonization should be bilateral rather than trilateral. In most areas, the goal should be compatibility and coordination rather than full homogenization.

Another area that has progressed impressively since 2013 has been regulatory cooperation. As Mexico has opened its sector to private participation, its regulatory agencies have been strengthened and their power expanded. The CNH has been charged with running the bidding process for oil blocks in Rounds 1 and 2, and the Comision Reguladora de Energia (CRE) has overseen both the opening of the electricity market alongside SENER and the CENACE, and the regulation of transportation, storage, and distribution of hydrocarbons, including natural gas. Furthermore, the reforms created a new environmental regulatory agency, the Agencia de Seguridad, Energia y Ambiente (ASEA), to oversee the industrial safety and environmental protection aspects of the hydrocarbons sector. Operating under the control of the environmental ministry (SEMARNAT), the ASEA has had to progress rapidly since its inception in 2015. In fact, all three regulatory agencies have had to adapt to dramatically altered circumstances during the first three years of Mexico’s new energy model. To do so, they have made a concerted effort to acquaint themselves with international best practices, and Mexican contact with U.S. and Canadian regulators has been an integral part of that process. Regulatory exchanges with California and Texas (and Alberta) have been particularly significant, as have exchanges with U.S. federal organizations such as the Bureau of Safety and Environmental Enforcement, the Bureau of Ocean Energy Management, the Bureau of Land Management, the Environmental Protection Agency, the Federal Energy Regulatory Commission, and the Pipeline and Hazardous Materials Safety Administration.

Mexico has long been recognized as an emerging market leader in international climate change negotiations. Beginning with the presidency of Felipe Calderón, Mexico has attempted to develop an aggressive approach to global climate talks that is backed up by progress on climate mitigation and renewable energy policy at home. President Peña Nieto’s continuation of this policy surprised some who had predicted a hydrocarbons-friendly approach, and has even strengthened Mexico’s global climate position by securing legislation in Mexico’s Congress for a 50 percent reduction in carbon emissions by 2050, alongside ambitious targets for electricity generation from renewable sources. Mexico was also the first developing country to declare its Intended Nationally Determined Contribution for greenhouse gas reductions under the Paris Accord process in April 2015, and has undertaken a commitment to reduce its black carbon emissions by 51 percent by 2030. Largely thanks to this commitment, Mexico and the United States became partners in pushing the Paris Accord in December 2015, setting the stage for further regional cooperation.

The North American energy dialogue has been an important force driving cooperation on climate issues. In July 2016, at the Ottawa North American Leaders’ Summit, Mexico agreed to join the existing U.S.-Canada agreement on methane emissions reductions. The trilateral accord commits the countries to reducing methane emissions from the hydrocarbons industry by up to 45 percent by 2025. Mexico had previously resisted a commitment to reduce its emissions, partly because of opposition from Pemex and partly because of the energy reform’s already overwhelming agenda. Alongside pressure from the Canadian and U.S. governments, extensive efforts by civil society groups, including the Environmental Defense Fund (EDF) to promote the emissions reductions were successful in convincing the Peña Nieto administration of the importance of a trilateral accord. The EDF, quoting Mexican government figures, estimate that methane emissions from the hydrocarbon industry make up 19 percent of total methane emissions in the country. Trilateral cooperation can also be credited with 2016’s most important global climate accord, the Kigali Agreement on phasing out hydroflourocarbons (HFCs) in October. In 2009, during a meeting of the Montreal Protocol, the United States, Canada, and Mexico (plus the Maldives) pushed for international cooperation to reduce HFC emissions as a crucial component of fighting climate change.

Building a New Agenda: Regulation and Infrastructure Lead the Way

The beginning of the administration of President Donald Trump in January 2017 presents an opportunity to move the energy relationship between Mexico and the United States in exciting new directions, in addition to consolidating existing areas of agreement. Although the specifics of the new administration’s energy policy are far from clearly defined at present, four clear priorities emerged during the presidential election campaign that are likely to persist and have implications for the energy relationship with Mexico. First, the Trump campaign emphasized the need to eliminate U.S. dependence and focus on importing oil from friendly nations. The second goal is a concern with reducing the regulatory burden faced by private energy firms. Though much of this regulation takes place at the level of state agencies, it is likely that the Environmental Protection Agency will see its mandate to regulate carbon gas emissions greatly reduced. Furthermore, the appointment of former Texas governor Rick Perry as energy secretary signals a move to cut back on red tape and promote the exploitation of America’s shale, oil and natural gas reserves. Third, throughout the campaign, Trump emphasized the need to invest in U.S. infrastructure to generate jobs and improve competitiveness. This is likely to have ramifications for the energy sector. Lastly, the new administration has signaled its intent to boost the use of natural gas, both as a way of reducing emissions and lowering energy costs for the consumer.

Each of these priorities has important implications for the bilateral relationship. The first element of the Trump energy platform that has direct relevance for Mexico is the goal of becoming “totally independent of any need to import energy from the OPEC cartel or any nations hostile to our interests.” Ensuring “friendly suppliers,” such as Canada and Mexico, has long been a goal of U.S. energy policy, and Mexico stands to benefit from this. Although the new administration will seek to boost national production to ensure independence, most experts recognize that North American, rather than U.S., oil independence is a much more reasonable target at which to aim. This means that the Trump administration should recognize the importance of ensuring the long-term success of Mexico’s energy reforms.

Two factors make this point particularly relevant. First, Mexico has seen a prodigious decline in oil production in recent years and the reforms are the best hope of reversing that decline (see figure 6). Secondly, the reform under attack from opposition parties in Mexico and, with the possibility of a shift to the left in the 2018 presidential election, there is a risk that the reform will stall or be rolled back. This would be an alarming prospect for both the United States and for a number of its companies that have been successful in first-round oil contract bidding.

Figure 6. Mexican vs. U.S. Oil Production, 2001–16 (thousands of barrels per day)

The second element, regulatory simplification, provides a compelling opportunity for Mexico to work with the United States to reduce the burden of its own regulatory system for energy firms. Although its regulations and regulatory bodies have seen substantial progress since the 2013 reforms, Mexico still has a regulatory system in place that seeks to prohibit, rather than facilitate, activity by the energy industry. The change of tone in Washington provides an opportunity for Mexico’s regulatory agencies to develop a dialogue with their U.S. counterparts that focuses on efficient regulation, something that the emerging private oil and gas industry is crying out for in Mexico. Critical issues concern repetitive paperwork, interagency coordination, permitting, and the use of online compliance mechanisms. If the United States is about to see a concerted push toward more efficient regulation, then it behooves Mexico to follow suit, to maintain competitiveness and to facilitate the integration of energy markets. Existing dialogue with state regulators in Texas have already emphasized the importance of a paradigm shift in Mexican regulation; the approach of the new U.S. government offers a chance to take that conversation further, in forums such as the existing North American dialogue.

On the third energy priority, infrastructure spending, there are ample opportunities for ongoing energy infrastructure projects that take into account the increasingly integrated nature of energy markets, from oil and gas pipelines to cross-border transmission lines and a coordinated approach to refining capacity. A crucial element of the success of the Mexican energy reform has been the arrival of natural gas from the United States through cross-border pipeline projects (see figure 7). These pipelines took years to plan and build, and it is vital that future Mexican demand is considered with enough anticipation to ensure that pipeline capacity exists to carry gas to market. Mexico’s refineries are likely to see an overhaul in the next few years as Pemex seeks partners for its refining division that consistently loses around US$9 billion a year. If Mexico plans to invest in building new refining capacity, it would be wise to consider the current and future state of the U.S. refining sector, which is aging and has limited capacity.

Figure 7. U.S.-Mexico Cross-border Natural Gas Pipelines

Electricity is also ripe for cross-border cooperation. Little has been done over the past four years to increase U.S.-Mexican interconnections, with only 10 connections linking the markets of the two countries (four connections to the Western Electricity Coordinating Council and six to the Electricity Reliability Council of Texas). However, given the increase in capacity in Mexico and the rapid growth of the renewable energy industry on both sides of the border, there now exists an opportunity to plan cross-border transmission in order to benefit both producers and consumers with lower-cost and shorter-distance options for transmission. A prime example of this potential is the concept of an electricity transmission line in Mexico’s northern border states that would allow electricity to travel not only between Mexican states and across the border to U.S. consumers, but also permit electrons generated from wind energy projects in Texas to travel across the border to Mexico, move along the border, and then cross back over into California, where demand for renewable energy is growing rapidly (figure 8). In January 2017, 

the United States and Mexico signed a new cooperation agreement on grid reliability

, setting the stage for increased connectivity between the two countries’ electricity systems.

Figure 8. Mexico’s Planned Electricity Transmission Projects

Finally, it is worth focusing on the Trump administration’s goal of boosting natural gas production and use. If gas production is to grow in the United States, new consumers will be needed to sustain a price that allows for investment in the sector. Fortunately for gas producers, it is expected that Mexico will see its demand for natural gas grow rapidly, and it is estimated that exports to Mexico will soon reach between 8 and 10 percent of U.S. production (figure 9). Mexico plans to dramatically boost its internal natural gas pipeline network over the next few years, and it is expected to grow more than 90 percent before the end of the decade. In addition to satisfying demand in Mexico, in the long term there is the opportunity to export U.S. natural gas via pipeline to Central America and through liquid natural gas facilities built along the Mexican coast. Although this could also, of course, be achieved in the United States, zoning restrictions and social license problems often make these projects costly and difficult to complete on time. In Mexico, there would likely be an easier path to construction, though social opposition to energy projects has been a growing problem in recent years.

Figure 9. U.S. Natural Gas Production and Exports to Mexico

U.S. Natural Gas Production and Exports to Mexico

It is less obvious where a meaningful agenda can emerge between Mexico and the United States on the issue of climate change. Much will depend on the incoming administration’s attitude toward the Paris Accord and to reducing carbon emissions. However, 

collaboration between Mexico and the United States on renewable energy goes back a long way

 and we should expect that meaningful cooperation would continue on this issue. The question of transmission for renewables has already been mentioned, but it would also make sense to consider the creation of agreements between regional system operators in the U.S. Southwest with the CENACE and CFE to overcome intermittency problems and help optimize existing and future renewable resources. The 

experience of the Midcontinent Independent Systems Operator (MISO)

 in combining hydroelectric resources from Manitoba with wind power produced in Minnesota highlights the potential for linking Mexican and U.S. resources. Furthermore, the government of California has indicated its desire to continue working on climate and energy issues with Mexico, bringing attention to the potential for ongoing collaboration at the level of U.S. states.

As the Trump administration takes office, the energy relationship between Mexico and the United States is at a historic high point. Mexico’s new energy model, based on market dynamics and attracting private and foreign investment, has opened the way for a highly constructive and productive dialogue between national authorities and their U.S. and Canadian counterparts. Regular meetings of the energy minsters of the three NAFTA countries have helped deepen mutual understanding and further energy cooperation at both the regional and global levels.

Four areas can be added to the existing agenda of energy and climate cooperation. Ensuring Mexico’s continuing status as a “friendly” oil supplier means that the United States has an interest in assisting its southern neighbor to maximize the potential of its oil fields. Second, sharing the successful U.S. experience in energy regulation, and in particular in reducing regulatory burden, will help Mexico succeed and integrate its energy markets. Third, energy infrastructure planning presents an opportunity to coordinate investments across the border to ensure that benefits are optimized for both countries. Lastly, a focus on increasing natural gas production and use in the United States is entirely compatible with the change underway in Mexico. Continued Mexican consumption of cheap gas from the United States will ensure both stable prices and improve Mexican economic competitiveness.

Mexico has an unprecedented opportunity at the beginning of the new administration to build an even stronger energy relationship with the United States. Existing North American cooperation, the progress seen under the energy reform and the interest of the Trump administration in helping the U.S. energy sector to grow provide the ideal platform for a vibrant dialogue on these issues, one that can drive prosperity and employment creation in both nations.

 is the director of the Mexico Institute at the Wilson Center. Prior to this, he was a professor and the director of the International Relations Program at the Instituto Tecnologico Autonomo de Mexico (ITAM) in Mexico City for 17 years.

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What is the outlook for cross-border collaboration on key energy issues?

U.S.-Mexico Energy and Climate Collaboration

As the votes from Sunday’s midterm elections were counted in Mexico, it was clear to everyone what the story of the campaigns would be. Jaime Rodríguez Calderón, better known as 

projected to be the clear winner in the Nuevo León gubernatorial election

, more than doubling the vote received by each of his nearest rivals from the ruling 

The truly remarkable thing about Calderón’s candidacy is not his margin of victory, but that he ran and won as an independent — this was the first time in Mexican history that such candidacies were possible. His victory marks a potential sea change in Mexican politics, with voters increasingly tired of the established parties and disillusioned with the traditional political elites.

The midterms were expected to change little at the national level, and at first glance that is what appears to have happened: the ruling PRI held on to its dominance of the federal congress, and there was only sporadic electoral violence in the states of Oaxaca and Guerrero. Yet, 

a number of key stories emerged on Election Day

 that hint at significant trends in Mexican democracy.

First, the PRI only managed to hold onto its leading position by working closely with two other parties, the 

 (Green) and PANAL (a teachers’ union party). The PRI’s vote fell to around 29 percent, down from almost 32 percent support in the 2012 congressional elections. With the support of its allies, and the even more disappointing performance of the opposition PAN (21 percent) and PRD (10.6 percent), it will be able to maintain its majority in congress.

Second, there was a high turnout, indicating that the Mexican public was indeed motivated to participate and that the parties were anxious to get as many supporters as possible to the polls.

Third, the left is more divided than ever — the well-established PRD was almost matched in the polls by the breakaway 

 party, run by former PRD leader Andrés Manuel López Obrador. When the votes for the leftwing parties (PRD, 

, PT) are added together, their total comes to almost the exact same number as the PRI’s.

Fourth, there appears to have been a very high number of spoiled ballots (

) — almost five percent of the total number of votes cast. This points to a worrying trend towards electoral disenchantment, a tendency borne out by polling data on Mexican skepticism about democracy in recent years.

But the story of the election is clearly 

. The independent candidate for the governorship of Nuevo León, a wealthy northern border state and one of the country’s industrial engines. In his victory, Rodríguez broke the mold of Mexican elections by proving that success can come from outside of the established party system. As an independent, Rodríguez was one of fifty candidates nationwide running without party affiliation — in this, the first election in Mexican history where independents were allowed to run for office.

The national and international media attention 

 attracted virtually guaranteed that even if he did not win the governorship, many more independent candidates would come forward in forthcoming elections, including the 2018 presidential contest. Mexicans’ growing disillusionment with traditional party politics and the established modes of democracy in their country may just see an outlet in the prospect of candidates who have broken free from the dominant party paradigm.

“I’m not saying I am Superman, but I could be the Lone Ranger.” 

 used this phrase repeatedly during the race, and it served him well. Voters clearly identified with his outsider status, and he appears to have won 49 percent of the vote in Nuevo León, compared with 23 percent each for the PRI and PAN candidates.

Of the 50 independents running in this election, only one other candidate won election, and this is no accident. Current electoral rules make it difficult for independents to compete with candidates from Mexico’s well-established political parties. Though independent candidates are allowed to have access to promotion on radio and television, candidates from political parties receive much more airtime. Campaign funding — which in Mexico has traditionally been entirely public — is more uneven still: independents receive less than one percent the amount the public funding received by their competitors from established political parties.

Though independent candidates can receive private funding, the rules governing this have not been clearly delimited by the authorities. Nor is there clarity on the rules governing independents’ campaign spending. In 

’s race, local authorities declared that the amount of private funds that a candidate can use cannot exceed 10 percent of total campaign expenses. In theory, these rules apply to candidates who receive public money through political parties. If they were applied to 

 it would jeopardize his position because he received the equivalent of $23,000 in public financing — compared to the nearly $3 million that his competitors received just through their political parties. This legal uncertainty raises the prospect of postelectoral instability, challenges, and conflict.

 led the polls in Nuevo León for the past three months, jumping nearly 16 points since March. He received a further boost when, a few weeks ago, Fernando Elizondo, a former interim governor and senator, dropped out of the race and threw his support behind Rodríguez.

Rodríguez’s performance is partly a testament to his considerable political savvy and experience, and partly a reflection of his roots in local and sectoral politics. He is originally from Pablillo, a small town in central Nuevo León with fewer than one thousand inhabitants. As a young agricultural engineering student, Rodríguez fought against increases in public transportation fares and later became the leader of the National Agricultural Confederation in Nuevo León. For that post, he responded to an opponent’s complaints that he wore “exotic leather boots and jeans purchased in the United States” with a speech that rallied farmers to “stop thinking squat, and instead think big,” inviting them to dream of better boots, better tractors, and better incomes. These battles honed his campaign skills and furthered his image as a charismatic, nontraditional politico.

In 2009, after climbing the political ladder to become a federal and local deputy, Rodríguez won election as mayor of García, a municipality with a population of around 145,000 that is part of the metropolitan area of Monterrey, Nuevo León’s capital. Here, he earned a reputation as a strong and determined character.

His government philosophy is called the “García model,” and focuses on three policy areas: security, education, and labor. He considers the participation of government, citizens, and businesses to be fundamental to good governance. To facilitate this as mayor, he used unconventional methods — publishing his private telephone number so he could receive requests directly from the citizenry, or registering complaints and requests through his 

At that time, he realized that security was the number one concern of the electorate, so as a first step, he launched a strategy to take back some public spaces that had been claimed by criminals. More dramatically, he dismissed all of the municipal police in García. Those actions won him public trust, but also made him a target of organized crime groups, who kidnapped his two-year-old daughter, murdered one of his older sons, killed his city’s public security minister in the municipality, and tried twice to assassinate him.

As insecurity and violence decreased in Nuevo León, his popularity transcended his term in office and the figure of 

 became known in the state and nationwide, with 

 (A fearless Bronco), inspired by his story.

In September 2014, Rodríguez decided to give up his membership to the PRI because he foresaw difficulties in obtaining the nomination to run for governor. In his resignation letter, he expressed the ideas that became the banners of his campaign for governor: political parties are no longer responsive to citizens’ demands, and the community is angry and tired of corrupt politicians.

 as means to promote himself, he obtained registration as gubernatorial candidate. 

 ran his campaign based on the strength of his personality and charisma. Through informal and often obscenity-laced speeches, he increased his popular support, promising to always speak the truth to citizens, and insisting that with courage and strategy, an effective and lasting security strategy can be built.

Doubts remain as to the nature of the governor-elect. Is he truly independent, breaking away from the established model, or should we instead see him as a former party man who is first and foremost an opportunist and professional politician, someone who has seen the writing on the wall and is willing to do what it takes to win office?

 turns out to be, the rise of independent candidates should be read as a call for political parties to increase internal competition and improve the quality of their candidates. Parties clearly need to recapture the allegiance of the growing number of Mexicans who have lost faith in the established model. At the same time, civil society movements such as the 

 (which calls on candidates to make a full disclosure of their business and financial interests) are raising public awareness about the issues of corruption and conflict of interest. 

 polls consistently place Mexico at or near the bottom of the Latin American region in terms of citizen satisfaction with democracy.

Whatever the more generalized implications of this for elections, 

’s particular style of governing will be difficult to repeat at the gubernatorial level, and he will have to find new ways to face the challenges to come. Nonetheless, Jaime Rodríguez Calderón has bucked the status quo and emerged as the most compelling character of Mexico’s 2015 midterms.

More intriguingly, as Luis Carlos Ugalde, former president of the electoral body in Mexico, recently said in an 

, we cannot rule out the possibility that an independent candidate could run for president in 2018; while he or she will not likely have the strength to emerge victorious, they might win enough votes to tip the balance.

 is emblematic of the rising disenchantment on the part of the Mexican electorate with the country’s political parties, and will likely prove to be a disruptive factor in national politics for years to come.

 is the director of the Mexico Institute at the Wilson Center. Follow him 

is a consultant with the Mexico Institute.



Photo courtesy of Reuters/Stringer Shanghai

addresses an arena filled with supporters in May 2015. 
Photo courtesy of Reuters/Stringer Shanghai

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In Mexico, an independent's election as governor marks a potential sea change in Mexican politics, as voters grow increasingly disillusioned with traditional political elites.

As Mexicans buck political status quo, Independent “El Bronco” wins election

Seventy-five years ago, ecstatic Mexicans thronged the Zócalo, their capital city’s immense central square, to celebrate President Lázaro Cárdenas’s decision to nationalize the assets of the foreign companies that controlled Mexico’s oil. By the tens of thousands they donated jewelry, cash, and even chickens to help provide the compensation Cárdenas had promised the companies. The day the decision was announced, March 18, became a national holiday marking what many Mexicans still consider a signature moment in their country’s struggle for dignity and freedom from American imperialism. Oil was the 

 (national treasure), and Petróleos Mexicanos (Pemex), the national oil company Cárdenas created, became a monument to Mexican pride.

Today, however, Mexico’s streets ring with speeches and chants by demonstrators opposing an array of ambitious reforms proposed by President Enrique Peña Nieto during his first months in office, none more significant than his call in August to shake up Pemex and reopen the country’s economy to foreign oil companies and private domestic firms.

The government’s proposal came hard on the heels of several other sweeping pieces of legislation. A labor law reform, passed with Peña Nieto’s support just before he took office, promises to bring Mexican labor markets some much-needed flexibility. A controversial school reform bill would subject teachers to formal evaluations and generally make them more accountable. In telecommunications, the government challenged virtual monopolies in the telephone and television markets with new antitrust measures, and a financial reform will encourage banks to increase lending to consumers and businesses. In September, Peña Nieto capped a busy year by introducing a package of revenue-raising tax reforms, including the promise of an old-age insurance program. But because of its great potential to generate jobs and economic growth, the energy package is seen as the “mother of all reforms.”

Since Peña Nieto took office last December, under the banner of the Institutional Revolutionary Party (PRI), he has achieved more than his two National Action Party (PAN) predecessors, Vicente Fox and Felipe Calderón, were able to pull off in 12 years. Each of Peña Nieto’s reforms has required taking on powerful vested interests — the labor unions, teachers, telecommunications billionaire Carlos Slim, and the banks, respectively — and coordinating closely with the main opposition parties, the conservative PAN and the leftist Party of the Democratic Revolution (PRD). Both opposition parties have been weakened by internal divisions, and the dominant faction in each believes that working with the government may persuade frustrated voters that it can get things done. The result has been a period of extraordinary cooperation. It is not for nothing that the international press is calling this “Mexico’s Moment.”

One of the great ironies of the current situation is that Peña Nieto’s PRI is the same party that ruled without interruption for 71 years until 2000, creating and defending many of the institutions he now seeks to overhaul. It was the PRI, emerging from the Mexican Revolution of 1910–20, that created Pemex and shaped modern Mexico, controlling the national political scene by co-opting the opposition and fixing elections. But by the turn of the century Mexicans had had enough of a system once described as “a perfect dictatorship” by Peruvian novelist and political leader Mario Vargas Llosa, who said it exceeded even Soviet communism in its malign subtlety. They had tired of its recurring financial crises (known as the 

 crises because they often coincided with the end of a president’s six-year term) caused by financial mismanagement, corruption, and surges of pre-election spending. By choosing the PAN’s Fox as their president in 2000, the voters opted for a fundamental shift toward a more democratic system and the promise of faster economic growth and greater accountability from government.

Then came a dozen years of frustration. That is not to say that nothing changed. The country’s political system evolved, and Mexico consolidated its democratic institutions, establishing competitive elections as the norm. Although the process of building a democratic culture is far from complete, the shift to free and fair elections is particularly impressive given the country’s recent history. Thanks in part to the North American Free Trade Agreement, Mexico has become one of the world’s leading exporters, shipping more manufactured goods abroad every year than the rest of Latin America combined. Increasingly those goods go not just to the United States, but to many other customers around the world — everything from textiles to high-value-added goods such as automobiles, aircraft parts, and metalworking machines. Mexico’s middle class has grown, too, and the rate of homeownership is on the rise. Gross domestic product per capita rose from about $5,600 in 2000 to some $9,700 in 2012.

Despite the growth of the economy and the consolidation of democracy, however, nearly half the population remained in poverty. Fox and Calderón were widely criticized for failing to create a more equitable society. Along with this harsh assessment came accusations of corruption and general ineffectiveness. In the six years before Peña Nieto took office, for example, Calderón saw his reform proposals rejected at every turn by an opposition PRI party that was simply unwilling to negotiate. All of these failures were magnified by the upsurge of drug-related violence and insecurity that began after 2006 with the Calderón administration’s war against major drug traffickers.

Pemex was another rock Fox and Calderón failed to move. The national oil company remained an almost sacred symbol of Mexican sovereignty and national pride. Yet the company’s performance left much to be desired. Mexicans have long celebrated the nationalization of 1938, yet it marked the beginning of a long period of virtually stagnant output. By the 1960s, Mexico had been reduced to importing foreign oil.

Only the chance discovery of a huge oil field in the Gulf of Mexico reversed the decline. The find came after a fisherman named Rudesindo Cantarell repeatedly accused Pemex of oil spills, complaining for several years that oil floating on the surface of the ocean had been ruining his nets. When Pemex geologists finally went to investigate in 1976, they stumbled upon the field. Estimated to be the third-largest oil deposit in the world at the time, the Cantarell field catapulted Mexico into the big leagues of the global oil industry. By 2004 the country was producing more than 3.4 million barrels per day (bpd) and was exporting more than half of it, primarily to the United States.

Pemex was not just pumping oil; it was also pumping money into the government’s coffers. Dependence on tax revenues from Pemex, which provide about a third of its income, contributed for many years to the government’s reluctance to free up the company financially or operationally. And the abundance of the Cantarell field made it easy not to think much about the future. While better-governed national oil companies such as Ecopetrol in Colombia and Petrobras in Brazil have advanced, Pemex has skimped on investments in technology and operations. This has left it unable to keep producing at the high levels seen a decade ago. Inadequate spending on exploration and production — a serious problem since the mid-1980s — has hurt Pemex’s ability to tap new resources. As a result, oil production has declined dramatically over the past nine years.

Mexico’s national oil production currently stands at 2.55 million bpd, down slightly from 2.6 million in 2010. While, thanks to high oil prices, production has been sufficient to maintain a steady flow of money to Pemex and the government, the decline has caused consternation in policy ranks. The reduction of output by more than 800,000 bpd since 2004 translates into a loss of some $80 million each day in revenue (assuming a price of $100 per barrel). Given the fact that national hydrocarbon consumption is rising, Mexico will have to boost both its reserves and its production significantly in coming years if it is not again to become a net importer of oil.

Beyond the overwhelming focus on oil, a second vitally important energy issue has gone largely unnoticed: Mexico’s failure to develop its natural gas resources, including massive shale gas reserves that rank as the world’s sixth largest, according to the U.S. Energy Information Agency. Because of its preoccupation with efforts to stem the rapid decline of oil production in the Gulf of Mexico, Pemex has made only minimal investment in shale gas. That has led to the unhappy spectacle of gas-rich Mexico struggling desperately to increase gas imports from the United States.

The shale gas revolution to the north has created thousands of new jobs in the United States and greatly enhanced its global competitiveness. But a perverse effect has occurred in Mexico. The surge of cheap gas coming onto the market drove prices down, increasing demand. Because its conventionally sourced gas costs more to produce, however, Pemex cut gas production. On a number of occasions during the past two years, gas shortages have forced companies in Mexico to shut down manufacturing processes. Pemex has increased natural gas imports from the United States, but the cross-border natural gas pipeline network is already operating at full capacity, and it will take several years before it can be expanded. Mexicans must now watch in dismay as their energy-rich country loses out to the United States in the competition for new industry. General Electric, for example, recently shifted some of its refrigerator production from China and Mexico to Kentucky in part to take advantage of low fuel costs.

Peña Nieto’s Pemex proposals will not provide a quick fix for the natural gas imbroglio, but they nevertheless promise profound changes in Mexico’s energy sector. The president laid out five main areas of reform, including a corporate reorganization and a reduction of the government’s take of Pemex’s revenues. By far the most important change involves an amendment to the constitution.

Invoking the spirit of Lázaro Cárdenas, Peña Nieto tiptoed through a political minefield by proposing to restore a clause that was written into the Constitution in 1940 but later removed. It prohibited land concessions to foreign oil companies but did give the government much greater flexibility in determining how to exploit Mexico’s oil and gas reserves. Specifically, it allows both production- and profit-sharing contracts with foreign firms and private Mexican companies. But, in deference to the delicacy of the subject, Peña Nieto cautiously specified that he would only seek legislative approval for profit-sharing deals. That means that foreign firms will not physically possess any of the precious tesoro nacional. But it also means that companies will have significantly less incentive to invest in the Mexican energy sector. (A profit-sharing scheme makes it much more difficult for companies to book any gain in their own oil reserves, and thus harder for them to raise capital for ventures in Mexico.)

There are various ways to navigate these and other challenges. Although the government has speculated that the reforms will bring much-needed private capital, it is unlikely that we will see a flood of major investments in the short term. The finer details of the legislation and contracts still need to be defined, and many companies will want to wait and see how the first few contracts work out before diving into the deep waters of the Gulf of Mexico. However, in the long run this promises to be a transformational shift in the Mexican oil and gas sector.

The PRD, led by its éminence grise on energy issues,Cuauhtémoc Cárdenas, the son of Lázaro, immediately denounced what he saw as the hijacking of his father’s name and called on opponents to protest against the “privatization” of Pemex. They have been joined by followers of Andrés Manuel López Obrador, a firebrand leftist and two-time PRD presidential candidate. But in Mexico City, where antigovernment protesters regularly take to the streets, their protests have been overshadowed by those of the national teachers’ union, which is opposing the government’s education reform. And because Peña Nieto’s constitutional proposal on energy also has the support of the PAN, however, there is little doubt that it will pass.

Although the Pemex reform is far from being the “whole enchilada” sought by many on the right in Mexico and by the global oil and gas industry, it will move Mexico another step forward in the consolidation of the liberal economic development path that began with the debt crisis of the 1980s and the North American Free Trade Agreement in 1992.

Mexico still faces large problems. Poverty and inequality are rife, violent crime is pervasive, and the rule of law remains a distant goal. Democratic progress has brought elections that are largely free and fair, but individual rights and those of minorities are far from secure. And Pemex itself must still deal with many challenges, including crushing debt and a tenacious labor union. Yet this is a great moment.

Change in Mexico can be glacial, but Peña Nieto has managed to set in motion reforms that could markedly improve the lives of all Mexicans. We can hope that Mexico today is enjoying more than a moment of change.

is the director of the Mexico Institute at the Wilson Center.

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In a year that brought an eruption of ambitious reform measures, the biggest of them all is the proposed overhaul of Mexico’s iconic national oil company.

Raising Lázaro: Is Mexico’s oil industry coming back?

The consumer societies constructed over the past 75 years in North America, Europe, and Asia are largely founded on the principle of making higher-quality goods more affordable for the average consumer. The endless drive to reduce costs by relocating production facilities has resulted in a globalized, vertically integrated, and highly specialized manufacturing model that benefits specific countries and regions. Willingly and consciously, we have created unbridled globalized supply chains that focus on maximizing value.

But this approach to global capitalism and highly mobile capital has increasingly come into question for several reasons: increased and changing security threats; geopolitical instability; and rising voter, consumer, and investor awareness of environmental, social, and governance (ESG) concerns. These and other considerations are forcing companies around the world to expand their strategic thinking, and to reorient their supply chains away from a straightforward concern over costs to one that satisfies a more complex business environment.

Governments, too, have become much more concerned about building supply chain resilience as they have confronted shortages of medical supplies, pharmaceutical products, critical minerals, and other elements that contribute to security. Companies now face a wider set of challenges when designing their supply chains, beset not only with reputational, political, economic, and commercial risks but also with a redefinition of their purpose.

 is now accompanied by a need to focus on 

The postwar model of international trade, focused on the reduction or elimination of both tariff and nontariff barriers, established the potential for an economic model in which comparative advantage and investment patterns were based not only on considerations of the finished product but also on the parts and processes along the value chain. The successes of first the General Agreement on Tariffs and Trade (GATT) and then the World Trade Organization (WTO), allowed for a vastly expanded global movement of finished goods and for a huge expansion of trade between firms and industries.

Production became increasingly fragmented, with most of the innovation happening at the operations level, and supply chains were therefore defined mainly around manufacturing efficiency. Beyond export facilitation, governments also focused on improving industrial and technological capacity, increasing efficiency and outsourcing processes.

A gradual awakening of concern over the environmental and social consequences of business activity has taken place over decades. In fact, the 1960s saw the first real awareness of corporate social responsibility, or CSR, with a focus on the impact of companies on the 3Ps—profit, people, and the planet.

From the creation of the GATT in 1947 to the terrorist attacks on the United States in September 2001, policymakers and business strategists in the US and Europe paid little attention to issues of national security and geopolitics. In part, this was because, in a bipolar world, the GATT aimed to foster trade between allied and friendly nations. Additionally, one of the liberal institutionalist assumptions underlying the GATT’s creation was that increased trade would lead to more peaceful international relations.

The success of the GATT and then the WTO as the world’s trade system created a policy and business environment in which questions of geopolitics and security faded into the background, particularly after the end of the Cold War. Fukuyama’s “End of History” was, of course, somewhat of a red herring, but the triumph of market-oriented democracies helped foster the belief that the profit motive would thrive regardless of political challenges. Other main factors driving the globalization of supply chains were China’s accession to the global trade system in 2000, the signing of NAFTA in 1994, the expansion of the European Union to include Central and Eastern European economies, and China’s overseas investments and growing imports of commodities from emerging markets.

In the 2000s, production became highly globalized and consumers benefited from uninterrupted and affordable access to goods and services. This trend was further aided by the liberalization of international capital flows and the ongoing significant differences in wage levels between developed and developing economies. As investors looked for the highest return on investment, cost reduction by any means possible–with an emphasis on cutting labor costs–became a priority in business strategies, and consequently in the design of supply chains.

Duncan Wood