Bloomberg News

Obama Heads to Mexico Amigos Meeting Strained by Keystone

February 18, 2014

Barack Obama

President Barack Obama boards Air Force One to leave Palm Springs International Airport in Palm Springs, California, on Feb. 17, 2014. Photographer: Jacquelyn Martin/AP Photo

Canadian Prime Minister Stephen Harper’s frustration with U.S. President Barack Obama’s failure to approve the Keystone XL pipeline may make this installment of the North America summit, known as the “Three Amigos,” the frostiest since the annual meetings began almost a decade ago.

At the one-day meeting tomorrow in Toluca, Mexico, with Mexican President Enrique Pena Nieto and Harper, Obama is bringing an agenda focused on trade, education, border security and stopping drug trafficking. Yet 20 years after the North American Free Trade Agreement took effect, the U.S. and Canada are at loggerheads over a $5.4 billion collaboration that would carry oil south from the thick sands of Alberta to American refineries along the Gulf Coast of Texas and Louisiana.

“People always call these things the ‘Three Amigos,’ but I would say at this point in time it’s difficult to use that term,” said Duncan Wood, director of the Mexico Institute at the Woodrow Wilson International Center for Scholars in Washington. “From the Canadian point of view, Keystone is an extremely big issue, and they’ve staked a lot of the relationship with the United States on it. From the U.S. side, you have complex internal politics that need to be resolved.”

Keystone supporters say TransCanada Corp. (TRP)’s project will create thousands of construction jobs. Environmentalists who oppose it say it will exacerbate greenhouse-gas emissions by speeding oil-sands development. Obama rejected the initial application for the pipeline in 2012, citing risks with its path through ecologically sensitive lands in Nebraska, and has yet to rule on the rerouted plan.

‘Inevitable Victory’

Harper, 54, said last month that if necessary he’ll wait out Obama’s term, which ends in 2017, to get the project built.

“It is, in my judgment, a necessary and inevitable victory,” Harper said in a Jan. 16 interview. “I absolutely believe that. I can’t see how it will be otherwise.”

He said today that he’ll bring the issue up with Obama when the pair meet in private tomorrow.

“I’ll raise the issue in private, which I’ve done every time I’ve met him over the past couple of years,” Harper told reporters today in Mexico City. “My message will obviously be be very similar to the message I deliver in public.”

In its final environmental review, the U.S. State Department on Jan. 31 found the pipeline wouldn’t greatly increase carbon emissions because the oil sands in Alberta will be developed anyway. The approval process now moves into a second stage focused on whether the project is in the U.S. national interest.

Obama’s Delay

Obama, 52, has said the Keystone project will be in U.S. interests only if it doesn’t significantly add to carbon pollution. He’s repeatedly declined to publicly take a position until final reviews are completed.

“What is happening, and what has been happening, is a process that has been conducted according to the rulebook,” White House press secretary Jay Carney said Feb. 5.

Obama plans to deliver that same message to Harper, an administration official said, asking for anonymity to brief reporters on the summit plans last week.

“It’s clearly something that is an aggravation to the Canadians and something they want to see resolved quickly,” said Eric Farnsworth, head of the Washington office of the Council of the Americas. “In their minds they’ve been looking for an answer for a long time.”

Mexico’s Economy

For his part, President Pena Nieto wants to use the summit to show off the capital of Mexico State, a powerhouse of manufacturing for foreign companies from Chrysler Group LLC to Nestle SA (NESN), Wood said.

Pena Nieto, 47, grew up in Toluca and served six years as governor of Mexico’s most populous state, and his public infrastructure accomplishments helped catapult him to the presidency.

Since Pena Nieto took office in December 2012, returning his Institutional Revolutionary Party to power after a 12-year hiatus, Mexico has undergone its own energy revolution, at least on paper. In December, the nation passed a constitutional amendment to end state-owned Petroleos Mexicanos’s oil monopoly, which had been in place since the nation seized fields from U.S. and British oil companies in 1938.

That will attract as much as $20 billion annually in additional foreign investment, according to Bank of America (BAC:US) Corp., doubling the total of recent years, and allow companies such as Exxon Mobil Corp. and Chevron Corp. to develop the largest unexplored crude area after the Arctic Circle.

More Competition

Latin America’s second-largest economy is also allowing more competition in the phone and broadcast industries, where billionaire Carlos Slim’s America Movil (AMX:US) SAB has about 70 percent of Mexico’s mobile-phone customers and Grupo Televisa SAB (TV:US) gets about 70 percent of Mexico’s broadcast-television audience.

The overhauls, aimed at spurring competition and growth in a nation where major industries are dominated by monopolies and duopolies, earned Mexico a credit upgrade this month from Moody’s Investors Service to A3, the nation’s highest rating ever.

“This is a showcase for the Mexican government to talk about what they can do,” Wood said.

The summit will also be a chance to explore ways to update Nafta and advance a wider agreement, the Trans-Pacific Partnership, being negotiated with nine other Pacific rim nations. While the official goal is a deal this year, U.S. automakers are pressing for more access to the Japanese market.

Trade Agenda

“The president’s biggest priority on his trade agenda is to bring the TPP negotiations to a close,’” said Steve Biegun, Ford Motor Co. vice president of international governmental affairs.

Nafta is cited by all three governments as a triumph of collaboration. Mexico is poised this year to surpass Japan as the biggest exporter of cars to the U.S. after Canada, with the tally likely to reach 1.69 million this year, up from fewer than a quarter of a million vehicles in 1990, according to estimates from consultant IHS Automotive.

Mexican auto exports to the U.S. more than quadrupled from 1993 to 2013 as output almost tripled, buoyed by lower tariffs under Nafta.

Car Factory

On the 40-mile (64.4 km) drive to Toluca from Mexico City, the capital built by 16th-century Spanish conquistadores from the ruins of an Aztec temple they destroyed, Chrysler’s sprawling 1.57 million-square-foot assembly plant stretches out along the highway. The factory, opened in 1968, used to make the PT Cruiser. Its 2,600 employees now assemble the Dodge Journey, Fiat 500 and Fiat Freemont, according to the company.

While Keystone is an irritant in the U.S.-Canada relationship, it won’t interrupt the flow of trade between the world’s biggest economy and its top trade partner, Wood said.

Two-way trade between the U.S. and Canada climbed 2.6 percent to $632 billion last year and trade between the U.S. and Mexico, the largest U.S. trade partner after Canada and China, rose 2.7 percent to $507 billion, according to Commerce Department data. The Nafta partners accounted for about $19.2 trillion in economic output in 2013, more than one quarter of the world’s gross domestic product.

“I think in future months there will be more complaining by the Canadians, but ultimately it’s not going to disrupt the relationship,” Wood said.

Even in the shadow of humming American factories, Ford’s Biegun says Keystone has the potential to take center stage.

“You have to believe that Keystone’s going to come up,” Biegun said. “When they talk about energy, Keystone has got to be priority number one.”

To contact the reporters on this story: Eric Martin in Mexico City at emartin21@bloomberg.net; Angela Greiling Keane in Washington at agreilingkea@bloomberg.net

To contact the editor responsible for this story: Steven Komarow at skomarow1@bloomberg.net


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