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Exclusive-US plans ultimatum in Mexico energy dispute, raising threat of tariffs

By Jarrett Renshaw and David Lawder

(Reuters) - The Biden administration plans to send Mexico an "act now or else" message in coming weeks in an attempt to break a stalemate in an energy trade dispute as bipartisan calls grow for the U.S. to get tougher with its southern neighbor, according to people familiar with the discussions.

The move would represent a significant escalation in already-strained tensions between U.S. President Joe Biden and his Mexican counterpart, Andres Manuel Lopez Obrador.

Obrador's decision to roll back reforms aimed at opening Mexico's power and oil markets to outside competitors sparked the trade dispute.

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The Office of the United States Trade Representative (USTR) is expected to make what was described as a "final offer" to Mexico negotiators to open its markets and agree to some increased oversight, three people familiar with the talks told Reuters. If not, the U.S. will request an independent dispute settlement panel under the Unites States Mexico Canada Agreement, or USMCA, they said.

The United States and Canada demanded dispute settlement talks with Mexico in July, 250 days ago. Under USMCA rules, after 75 days without a resolution they were free to request a dispute settlement panel, a third party that rules on the case.

At an event on Monday, Mexico's Economy Minister Raquel Buenrostro said the United States has been entitled to call for a panel since Oct. 3.

If the panel rules against Mexico and it fails to take corrective action, Washington and Ottawa could ultimately impose billions of dollars in retaliatory tariffs on Mexican goods.

The White House has hoped to avoid escalating trade tensions with Mexico as it sought help on immigration and drug trafficking. But months of talks have yielded little progress and the administration has run out of less-combative options, the sources told Reuters.

Raising the stakes in the dispute carries significant risk for Biden, who is expected to launch a re-election bid in coming weeks and will face Republican criticism over his handling of immigration and drug trafficking. Biden needs Mexican help to control the border after COVID-era restrictions are lifted on May 11.

A U.S. official acknowledged growing frustration with the lack of progress in the discussions. "We want to see clear progress on this issue and address the concerns that have been raised by our negotiating teams," said the official, who declined to be named because the discussions were private.

A USTR spokesperson declined comment on the energy consultations with Mexico, but Trade Representative Katherine Tai hinted at possible escalation during a Senate Finance Committee hearing on Thursday when questioned about the talks.

"We are engaging with Mexico on specific and concrete steps that Mexico must take to address the concerns set out in our consultations request. This is still very much a live issue," Tai said.

She later added: "We know that all the tools in the USMCA are there for a reason."

U.S. oil companies, such as Chevron and Marathon Petroleum, along with solar and wind power companies, have struggled to get permits to operate in Mexico in recent years.

Mexico's Buenrostro said the challenges of transitioning to renewable energy and getting those projects connected to the power grid were at the bottom of the issue.

"It is not that they are being given discriminatory treatment, it is that we have difficulties of a technical nature," Buenrostro said, adding investments in power distribution were being made to address the issues.

The potential move by the Biden administration comes just weeks after USTR escalated another trade dispute with Mexico over its plans to ban genetically modified corn for human consumption, requesting formal consultations. The energy dispute is a step ahead under the USMCA's enforcement mechanism.

The Biden administration alleges Obrador is favoring state oil company Petroleos Mexicanos (Pemex) and national power utility Comision Federal de Electricidad (CFE), and discriminating against U.S. companies.

"I think you're going to increasingly see folks looking for ... the next step of establishing a panel relatively soon," a congressional aide said, noting patience on Capitol Hill over the talks was wearing thin.

Ron Wyden, a Democrat senator from Oregon and chair of the Senate Finance Committee, told Tai on Thursday that Mexico was "flouting" its USMCA obligations by shutting out U.S. renewable energy firms.

"Eight months have passed. American clean energy producers are still waiting for access. In my view, it’s long past time to say enough is enough and escalate this into a real dispute settlement case," Wyden said.

U.S. imports from Mexico totaled $455 billion in 2022 against exports of over $324 billion, for a record U.S. trade deficit of $130.5 billion, according to government data.

(Reporting By Jarrett Renshaw and David Lawder; Additional reporting by Tim Gardner and Dave Graham; Editing by Heather Timmons, Tomasz Janowski and Chris Reese)