The latest strife between Mexico and the US comes from a 1944 water-sharing agreement. And the hype around Argentina’s return to bond markets under Javier Milei.
MEXICO
Trump threatens new tariffs over ‘water debt’ dispute
After months of friction over trade, drug trafficking and migration, another, older source of tension is tightening the relationship between the United States and Mexico: water.
The dispute centers on a treaty signed in 1944, when the rivers that connect the two countries were far fuller than they are today. For decades, the agreement quietly governed the division of shared water, surviving droughts, population booms and political swings. Now, amid intensifying climate stress and a deterioration in bilateral relations since President Donald Trump’s return to power, it has become a flashpoint.
👉 Why it matters. The conflict will undoubtedly overlap with other issues in the US-Mexico bilateral agenda, and could be used as a bargaining chip by either country. But environmental realities should be taken into account, as increasing droughts on both sides of the border have made the terms of the agreement much harder to uphold.
This week, Trump threatened to impose an additional 5% tariff on Mexican exports if its southern neighbor did not “immediately” deliver water owed to US farmers along the border. In a post on Truth Social, he accused Mexico of violating the treaty and said the shortfall was “seriously hurting our beautiful Texas crops and livestock.”
“Mexico still owes the US over 800,000 acre-feet [almost 1 billion cubic meters] of water for failing to comply with our Treaty over the past five years. The US needs Mexico to release 200,000 acre-feet of water before December 31st, and the rest must come soon after,” Trump posted.
Under the 1944 agreement, Mexico is required to send the US 1.7 million acre-feet of water every five years from the Rio Grande system delivered through a network of dams and reservoirs fed by tributaries such as the Río Conchos. In exchange, the US must provide Mexico with 1.5 million acre-feet of water each year from the Colorado River.
The treaty, administered by the International Boundary and Water Commission, kept water relations largely conflict-free for decades. But that stability masked growing pressures. When the agreement was drafted, the US-Mexico border region was sparsely populated, the climate was more forgiving and the water infrastructure was new. None of the engineers involved could anticipate a decades-long megadrought or the explosive growth of border cities.
Since 1940, the combined population of the 10 largest pairs of US-Mexico border cities has surged nearly twentyfold, to about 10 million people. That growth has been fueled by water-intensive manufacturing in northern Mexico — much of it geared toward US markets — alongside expanding irrigated agriculture, ranching and mining. Today, demand far exceeds supply.
The border region is mostly semiarid. Since the mid-1990s, sustained drought in the middle and lower Rio Grande has sharply reduced the amount of water flowing north. The Colorado River Basin, which supplies seven states in the US and two in Mexico, is also at historic lows, with reservoirs like Lake Mead losing nearly 70% of their volume over the past two decades.
Mexico has fallen short of its Rio Grande obligations three times since 1992. The most dramatic episode came in 2020, after years of mounting stress. Texas Governor Greg Abbott declared that Mexico owed the state “a year’s worth of Rio Grande water.” Mexican authorities responded by releasing water from dams in the state of Chihuahua, prompting protests by farmers who feared for their own survival.
The current shortfall is again substantial. Mexico’s water debt is now close to 1 billion cubic meters, roughly half its quota for the most recent five-year cycle, which officially ended in October. Mexican meteorological data show worsening scarcity nationwide, with about 150 municipalities (out of 2,478) experiencing drought.
Fulfilling the treaty obligations in full, Mexican officials say, would require cutting off water to cities and farms in already parched regions.
President Claudia Sheinbaum, an environmental engineer by training, has urged restraint. “An agreement for the benefit of the US and for the benefit of Mexico will be reached, as on other occasions,” she said recently. She has resisted calls to renegotiate the treaty itself, describing it as fair — a stance that reflects concern that reopening the agreement under Trump could lead to tougher terms.
As part of Mexico’s effort to curry favor with Trump, the country has moved to sharply raise tariffs on goods from several countries — most notably China — in some cases to as much as 50%.
MARKETS
Argentina’s return to bond markets still has a long way to go
Much fanfare was made about Argentina’s return to bond markets this week, as the country issued its first dollar-denominated bonds since the 2018 debt and currency crisis, which took place under former President Mauricio Macri’s watch.
Javier Milei, Argentina’s current libertarian president, celebrated the issuance of USD 1 billion of Bonar 2029 bonds, which will pay investors a 6.5% coupon. But the bonds were auctioned at just 91% of their face value, and will yield 9.26% per year in real terms.
That yield is still among the highest on the continent, paying more than 600 basis points above what a standard US Treasury bond offers — a figure topped only by crisis-laden nations like Venezuela. Argentina is the only large country in Latin America where risk premia have not improved this year, despite the substantial progress made in 2024, Milei’s first year in office.
The USD 910 million collected by Finance Minister Luis Caputo will be used to pay part of a USD 4.5 billion debt due next month, but the government had expected a stronger bid and will likely need to tap other financing sources.
👉 Why it matters. Argentina has no risk of default in the short term thanks to a US bailout announced earlier this year, which opened a USD 20 billion swap line for Argentina. But roughly USD 2.5 billion of that credit line has already been used, and the country has USD 35 billion in debt maturities over the coming two years.
Caputo’s bond auction was announced shortly after bank analysts, local investors and the International Monetary Fund (IMF) issued warnings about Argentina’s dire need to accumulate foreign currency reserves, which are seen as the most credible guarantee for future debt payments.
Instead of buying US dollars in the open market as most experts recommend, Milei’s economic team wants to rely solely on new bond issuances to roll over these billionaire debts.
A more genuine accumulation of US dollars, achieved through purchases rather than loans, would likely entail a currency devaluation, which would increase exports and reduce imports. But this would run counter to a central tenet of the government’s political identity: currency stability.
Instead of allowing the peso to float, Milei has promised to increase Argentine competitiveness through a series of structural reforms. After a solid win in this year’s midterm elections, the government wants to use its increased congressional power to pass new labor and tax regulations in a bid to attract new investment.
Market analysts believe that some version of these reforms is likely to pass. However, the high interest rates demanded by creditors indicate that they remain skeptical about Argentina’s economic roadmap, even if those reforms come to fruition.
QUESTION OF THE WEEK
Nearly one century before the Water Treaty of 1944, Mexico and the US signed a famous agreement to end the US-Mexican War. What was it called?
- Chamizal Treaty
- Gadsden Purchase
- Tijuana Agreement
- Treaty of Guadalupe-Hidalgo
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