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Tesla Meets the Rule of AMLO – Mary Anastasia O’Grady/WSJ

But López Obrador says he’ll allow the U.S. to subsidize Mexico’s wind farms.

President Andres Manuel Lopez Obrador speaks at the Old City Hall in Mexico City, Jan. 20.
President Andres Manuel Lopez Obrador speaks at the Old City Hall in Mexico City, Jan. 20. (Henry Romero/Reuters)

By Mary Anastasia O’Grady

Mexico City –

Elon Musk is said to be looking to build a new Tesla facility in the Mexican border state of Nuevo León. But like many thinking of investing in this country nowadays, he could run into trouble because President Andrés Manuel López Obrador doesn’t approve. AMLO, as the president is known, said Friday that he would deny Mr. Musk the permits to set up shop on the outskirts of Monterrey, the state capital.

Mexico ought to be a hot destination for high-tech value-added manufacturing capital as investors turn away from China. It isn’t, and it’s worth examining the reasons.

Entrepreneurs are sniffing around the southernmost partner of the U.S.-Mexico-Canada Agreement—USMCA. But the moment is being squandered by a caudillo president who has no respect for the rule of law. Things in Mexico are now done according the rule of AMLO, signaling great uncertainty for risk capital.

In 2022 Mexico attracted $35 billion in foreign direct investment, up from $31.5 billion in 2021, according to the Ministry of the Economy. The government touts the increase as a big win. Yet in the first quarter of 2022, two extraordinary transactions, unrelated to manufacturing, distorted the picture. The media merger of Mexican Televisa with the American company Univision and the restructuring of Aeroméxico totaled nearly $6.9 billion. Without them 2022 FDI would have dropped to $28.4 billion, barely above 2020 FDI of $28.2 billion, the year Covid-19 hit the economy.

Mergers, acquisitions and bankruptcy rescues generate efficiency gains and create wealth. But in this case they also hide a sad reality: Mexico isn’t capitalizing on its unique comparative advantages—geographic, demographic and political—in nearshoring value-added manufacturing. The country’s FDI potential is significantly higher.

Antonio del Valle, president of the Mexican Business Council, said this month that Mexico could attract capital at twice the current rate if it had the right policies. To reach the $70 billion in FDI that is possible, he argued, Mexico needs fixes on the energy front and in infrastructure along with “a rule of law throughout the country, clear rules that do not change and that generate certainty for us.” The status quo is anything but certain.

In signing the USMCA, Mexico agreed to open its oil, gas and electricity markets to competition—foreign and domestic. Pemex, the state-owned oil behemoth, and the federal electric utility, known by its initials as CFE, are struggling in this new environment. But rather than let them become mere rivals to other producers, Mr. López Obrador is trying to restore their monopoly power in violation of the trade agreement.

In a July request for USMCA “dispute settlement consultations,” the U.S. trade representative cited “Mexico’s inaction, delays, denials, and revocations of private companies’ abilities to operate in Mexico’s energy sector.” Canada joined the U.S. call for consultations.

After months of standoff, the U.S. now has the right to request an arbitration panel to hear the case. But the Biden administration is dithering. Worse, it’s considering a green-energy subsidy for Mexico according to AMLO. The CFE recently tweeted: “With US financing, 4 out of 10 industrial parks on the Isthmus of Tehuantepec will be wind-generated and owned by the CFE, the president reported after announcing a visit by John Kerry to the country on March 19.” This would prop up the failing CFE even as Mexico discriminates against private power generators, including renewable investors. The State Department didn’t respond to a request for comment.

To minimize pressure from foreign governments, AMLO is negotiating with businesses on a case-by-case basis. In 2020 he told the American company Sempra that he would grant a permit to export liquefied natural gas if Sempra met his demands. That same year he forced Constellation Brands to abandon a new Mexicali brewery valued at $1.4 billion. In January, after a meeting with Canadian Prime Minister Justin Trudeau, AMLO said that he was committed to “receive companies that may have pending issues, some disagreement with the attitude of our government; we are always open to dialogue.” Translation: Kiss my ring—I’m the decider.

Arbitrary treatment of investors damages the country’s capacity to generate cheap, plentiful energy for manufacturing. It also harms Mexico’s investment profile.

Nuevo León is one of Mexico’s most modern states. Its proximity to the U.S. and access to valuable human capital and technology make it appealing to Tesla. The Mexican daily Reforma reported in December that the “investment, including initial phases and future expansions, would exceed $10 billion,” according to an unnamed source. But AMLO has turned down the project, citing concerns that it would strain water resources. The Mexican Institute for Competitiveness refutes that claim with facts. It can be no coincidence that the president favors putting the facility in the central state of Hidalgo, close to his failed airport project.

AMLO’s strong-arm tactics sometimes work. But the opportunity cost to Mexico can’t be overstated.

Write to O’Grady@wsj.com.

Appeared on The WSJ in the February 27, 2023, print edition as ‘Tesla Meets the Rule of AMLO’.

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