Senior Vice President for International Policy
August 07, 2017
As the U.S., Canada, and Mexico prepare to launch negotiations on August 16 to modernize the North American Free Trade Agreement (NAFTA), the oath attributed to the ancient Greek healer Hippocrates — “Do No Harm” — has become a mantra for U.S. negotiators.
As noted widely in the press, U.S. Trade Representative Robert Lighthizer has in recent weeks consistently insisted
This approach has been broadly welcomed by the U.S. business and agriculture communities. It’s easy to see why. Canada and Mexico purchase more “made-in-the-USA” manufactured goods than our next ten largest export markets combined.
Similarly, U.S. agricultural exports to Canada and Mexico have quadrupled under the NAFTA, and U.S. services exports to the two countries have tripled. In fact, the U.S. last year recorded a trade surplus with its NAFTA partners of $11.9 billion when manufactured goods and services are combined.
While the debate over the NAFTA has brought many of these facts to light, what’s less well understood is the essential role the pact plays in fostering investments that support American jobs. Here, too, and particularly with regard to retaining the NAFTA’s investor-state dispute settlement (ISDS) provisions, it is essential that the negotiators “do no harm.”
Why international investment is essential
Why do U.S. companies invest in Canada or Mexico instead of simply exporting? Most such investments go to sectors that cannot be served by means of exports from the U.S. This includes many services—from insurance and banking to retail and logistics, all of which require an “on the ground” presence—as well as manufacturing operations for goods, such as detergent or potato chips, which generally cannot be exported due to high transportation costs.
In other words, these investments are not about substituting foreign production for domestic production — or replacing U.S. workers with low-wage foreign labor. Globally, less than 10% of the production of foreign affiliates of U.S. multinationals is sold in the U.S. market, according to the U.S. Department of Commerce. In other words, U.S. companies invest in foreign markets to serve those markets — not as a substitute for domestic production.
U.S. firms’ investments abroad bring real benefits to Americans, including on the jobs front. A study found that U.S. companies that invest abroad tend to create more jobs in the U.S. and pay higher wages than companies focused solely on the domestic market. They are also more resilient, more stable as employers, and less likely to go bankrupt.
U.S. multinationals have continued to concentrate their high-wage, high-skill jobs in the U.S., according to a Commerce Department. The trillions of dollars in revenue U.S. multinationals earn through their foreign operations help fund their research and development activities, 84% of which continue to be performed in the U.S.
Why investor-state dispute settlement is needed
For two decades the NAFTA has fostered international investment and the American jobs it supports. The accord provides legal guarantees to allow U.S. firms to invest in most sectors in Canada and Mexico, and its Chapter 11 allows investors to seek international arbitration—the aforementioned ISDS—to ensure that other countries treat U.S. investors fairly, do not seize their property without compensation, and do not impose “forced localization” requirements that compel jobs to be shipped overseas.
The facts of ISDS are simple:
- ISDS does not infringe U.S. sovereignty. On the contrary, it upholds the same fundamental due process guarantees protected by our Constitution. For example, the Constitution enshrines safeguards against government expropriation without compensation (the takings clause) and arbitrary and capricious actions taken by foreign governments against U.S. investors. ISDS obligates other countries to uphold these precepts as well.
- ISDS cannot overturn U.S. laws or regulations.It simply requires fair treatment and due process. All arbiters can do is award compensation when a government expropriates property or otherwise tramples on the rule of law.
- The U.S. government has never lost an ISDS dispute. Under trade or investment agreements the U.S. has entered into with 54 countries, just 18 disputes have been brought against the U.S. over the past half century, and the U.S. hasn’t lost a single one. By contrast, U.S. companies — including more than a few small businesses — have won or favorably settled many of the approximately 40 cases they have brought against Canada and Mexico.
- Congress insists on ISDS remaining in the NAFTA.An amendment that would have barred the inclusion of ISDS in future trade agreements negotiated under the Bipartisan Congressional Trade Priorities and Accountability Act of 2015 (known as Trade Promotion Authority, or TPA) was soundly defeated when 60 senators opposed it. TPA instructs U.S. trade negotiators to include ISDS in trade and investment agreements.
- Business strongly supports ISDS in the NAFTA.Eliminating ISDS and its investment protections would deny an essential mechanism for settling investment disputes and benefit no one but foreign governments engaging in discriminatory practices against U.S. companies.
Indeed, eliminating or weakening ISDS in the forthcoming NAFTA negotiations risks undermining the business community’s support for the undertaking. It must play a role in fostering international investment.
As in many other areas, negotiators looking at the NAFTA’s investment provisions must take care to “do no harm” and retain the agreement’s indispensable dispute settlement provisions.