Senior Vice President for International Policy
February 24, 2017
In soccer, an “own goal” is one scored inadvertently when the ball is struck into the goal by a player on the defensive team.
This can happen in trade, too.
Some trade proposals now being shouted from the sidelines—including some from progressives already in staunch opposition to the administration’s positions on a host of issues—certainly fit this description.
The Trump Administration should recognize these recommendations for the self-destructive proposals they are as officials consider negotiating new bilateral trade agreements and updating older agreements such as the North American Free Trade Agreement (NAFTA).
Consider procurement and “Buy American.” Senator Tammy Baldwin (D-WI) pressed Wilbur Ross, President Trump’s nominee for Secretary of Commerce, on the topic in his January 18 confirmation hearing before the Senate Commerce Committee. According to Politico, she “pressed Ross to commit to drop the government procurement chapter” from NAFTA.
In response, Ross wisely said: “‘I think that there should be reciprocity.’ For example, if China bars U.S. companies from bidding on government procurement projects, ‘it doesn’t strike me as very logical that their companies should be able to bid on projects here,’ he said.”
Indeed, reciprocity is a fundamental principle of trade agreements, including their procurement chapters. The United States must insist on reciprocal access for procurement markets in our trade agreements, as it has done in the past.
But real world data show that Senator Baldwin’s concern is fundamentally misplaced. Information from the Federal Procurement Data System confirms that just one of the 50 largest contractors to the U.S. government in FY 2016 was a foreign-headquartered firm (BAE Systems, a U.K.-headquartered defense contractor whose U.S. affiliate employs nearly 30,000 American workers)1. Just one Canadian company showed up in the top 100 contractors; no Mexican companies appeared in the list.
In fact, across the entire federal government, just 2% of all contracts were secured by foreign-headquartered companies in FY 2016. Of this sliver, about 80% were Department of Defense contracts, nearly all of which went to the U.S. affiliates of British or other European firms. (By the way, federal agencies are generally prohibited by law from procuring goods or services from China.)2
Meanwhile, U.S. companies do good business in government contracts in Canada and Mexico, thanks in large part to the access provided by NAFTA.
Opening procurement to a wider universe of bidders should enhance competition and help taxpayers get better value for their dollars. But it would be dead wrong to say that NAFTA’s procurement rules have stopped the U.S. government from “Buying American.”
Even from the most mercantilist perspective, Senator Baldwin’s call to void the procurement chapter in NAFTA would harm U.S. workers whose employers win foreign procurements while offering them no discernable benefit.
Meanwhile, Senator Elizabeth Warren (D-MA) has continued her push to end the use of international arbitration—known as investor-state dispute settlement (ISDS)—to resolve disputes under U.S. trade and investment agreements. NAFTA’s Chapter 11 includes such a mechanism.
This effort isn’t new. Senator Warren championed an amendment just a year and a half ago that would have barred the inclusion of ISDS in future trade agreements negotiated under the Bipartisan Congressional Trade Priorities and Accountability Act. Her amendment was soundly defeated on a bipartisan vote of 39-60.
Under NAFTA, the governments of Canada and Mexico agreed to investment rules requiring fair treatment of U.S. investors. These rules guarantee U.S. investments won’t be subject to discriminatory treatment and will be compensated in the unlikely event of expropriation. The United States made similar commitments in return.
Inevitably, investment disputes arise from time to time. That’s why NAFTA’s Chapter 11 provides for neutral arbiters to enforce the basic rights of American investors.
ISDS is based on the due process protections in our Constitution, but it can’t overturn the policy decisions, laws, or regulations of any country. All it can do is award compensation when a government expropriates property or otherwise tramples on the rule of law.
In fact, the U.S. government has never lost a case. Under trade or investment agreements the United States has entered into with 54 countries, just 13 disputes have been brought against the United States and decided over the past half century. And our record is 13-0.
However, ISDS has been invaluable to U.S. companies and their millions of shareholders who otherwise have been subjected to expropriation or discriminatory treatment simply on the basis of their nationality. U.S. firms have won compensation under ISDS in disputes from Venezuela to Canada.
So, as with procurement, what would you call a move to void international trade and investment rules that bring nothing but benefits to American workers and companies? You got it—an own goal.
1. Nearly all U.S. defense contracts secured by foreign-headquartered firms such as BAE Systems are actually won and fulfilled by their U.S. affiliates, which are incorporated in the United States and are thus legally U.S. companies. Procurement rules in trade agreements are generally irrelevant to their ability to bid for such contracts.
2. While China has nothing to do with NAFTA, the Congressional Research Service explains that the Trade Agreements Act of 1979 “requires the President, with regard to procurement covered by the Agreement, to prohibit procurement of products of a foreign country or instrumentality that has not been designated by the President,” which can only be done with regard to countries that have joined the United States in a reciprocal trade agreement with procurement provisions such as the WTO Government Procurement Agreement—which China has resisted joining—or the NAFTA. In other words, federal agencies are prohibited by law from procuring goods or services from China unless “there are no offers of U.S. products or services or of eligible products, or such offers are insufficient to fulfill U.S. Government requirements,” and Chamber researchers could not readily find any evidence that this has ever happened.