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What is the Trans-Pacific Partnership (TPP) all about? With debate over this 12-nation trade agreement now underway, the U.S. Chamber is publishing this series making the case for the TPP’s approval. This installment looks at the agreement’s rules on investment.
Like trade, international investment is critical to American jobs and competitiveness. The investment ties between the United States and the other TPP countries are strong, but the TPP could multiply their benefits.
The benefits of investments in the United States from the other TPP countries start with jobs and paychecks. More than 17,000 companies from these 11 countries have invested $720 billion in the United States and employ nearly 1.6 million Americans directly.
These so-called “U.S. subsidiaries of foreign multinationals” purchase billions of dollars of goods and services from American companies, including U.S. small businesses, and pay salaries and wages that top $100 billion annually. In short, attracting foreign investment is good for the American economy.
Likewise, U.S. companies have made investments in the 11 other TPP nations, with Canada ($353 billion), Singapore ($229 billion), Australia ($167 billion), and Japan ($109 billion) receiving 85% of the total, according to U.S. Department of Commerce data. U.S. companies’ sales through their affiliates in the other TPP countries top $1.8 trillion annually, and these revenues underwrite R&D and other capital expenditures by U.S. companies here at home.
Why do companies invest in other countries instead of simply exporting? Most of these U.S. investments are in sectors that cannot be served by means of exports from the United States. This includes many services as well as manufacturing operations for goods, such as detergent or potato chips, which generally cannot be exported due to high transportation costs or barriers to trade.
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 United States and pay higher wages than companies focused solely on the domestic market. They are also more stable as employers and less likely to go bankrupt. Indeed, the U.S. Department of Commerce reports that U.S. multinational corporations added 289,000 U.S. jobs in 2007-2009 even as the sharpest recession in a generation caused the U.S. economy to shed more than 8 million jobs overall.
Still, myths about international investment abound. Many Americans believe “offshoring” is a major driver of job loss, but the facts show otherwise. While it discontinued compilation of these data in 2004, the Bureau of Labor Statistics previously reported the movement of work to overseas locations was a minor contributor to job losses, representing between 0.5% and 1.3% of all U.S. jobs lost in “mass layoffs” in the 1997-2003 period, according to a report by the American Action Forum.
Some charge that international investment is really about substituting foreign production for domestic production and thus replacing U.S. workers with low-wage foreign labor. But just 8.9% of the production of foreign affiliates of U.S. multinationals was sold in the U.S. market in 2009, according to data compiled by the U.S. Department of Commerce (most recent available). In other words, 90% of these firms’ overseas production is sold overseas.
The TPP will strengthen the investment ties between the United States and the other 11 participating countries, fostering economic growth and job creation. The agreement includes strong rules to protect international investments—both U.S. investments in other TPP nations and investments by firms from those countries in the United States.
First, the TPP’s investment chapter includes market access provisions to allow companies from one country to invest in the other’s territory. Such provisions can unlock foreign markets by eliminating outright prohibitions on ownership in particular sectors as well as limitations on ownership of a controlling interest in a firm.
Second, the TPP’s investment chapter includes four core obligations that reflect America’s rule of law traditions, including promises that governments.
- will not discriminate against an investment on the basis of its national origin, i.e., they will provide national treatment, except as specifically provided in the treaty;
- will at a minimum provide investments of the other parties fair and equitable treatment and full protection and security;
- will refrain from expropriation except for a public purpose, in accordance with due process, and upon payment of prompt, adequate and effective compensation; and
- will permit free transfers of funds relating to investments.
Third, while the TPP incentivizes governments to resolve disputes amicably through consultations, it provides two forms of dispute settlement when these attempts fail: state-state dispute settlement and investor-state dispute settlement (ISDS). ISDS is included in most of the world’s 3,000 BITs, the earliest of which were concluded more than four decades ago. The United States today has BITs or trade agreements that include investment protections and ISDS in force with more than 50 countries.
In practice, governments find it convenient to grant recourse to investors via ISDS. One reason they do so is because a dispute involving a single company may be viewed as less important than bilateral issues involving national security or other priorities. From the perspective of governments, ISDS depoliticizes investment disputes and leaves them in the hands of neutral arbiters. It is important to note that ISDS only applies to a limited number of obligations in the TPP’s investment chapter, not to the whole agreement.
Particularly in some developing countries where local judiciaries may be slow, ineffective, or corrupt, U.S. companies have benefited significantly from recourse to ISDS. Even though these provisions are invoked infrequently, they serve as a positive admonition to governments to avoid arbitrary actions with regard to foreign investment. These protections are especially important for smaller investors, who generally lack the financial resources needed to wage long legal battles over property in countries where the legal systems do not move swiftly or fairly.
In keeping with the Golden Rule, American officials have long recognized that the United States must accept the same obligations in investment agreements, including ISDS, that they ask of other governments. However, only 17 disputes have been brought against the United States over the past 50 years, the United States has won every time. One reason the United States has never lost a case is because it affords greater protection to foreign investors under U.S. law than it does in trade and investment agreements. (In fact, the TPP text explicitly states that the investment chapter does not create greater rights than those afforded under U.S. law.) As a result, aggrieved investors in the United States tend to take their disputes to U.S. domestic courts.
Some critics have charged that the TPP will prevent the U.S. government or other TPP governments from putting in place regulations that protect the environment, food safety or the health of American citizens or others around the world. This just isn’t true. On the contrary, the TPP text explicitly protects and supports “regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety and the environment.” It further states that such actions shall not be viewed as “indirect expropriations” that may be taken to ISDS. Indeed, all ISDS panels can do is award compensation when a government expropriates property, discriminates against investors on the basis of their nationality, or otherwise tramples on the rule of law.
In sum, the TPP’s investment provisions are a valuable contribution to legal protections that give investors the confidence to build, hire, and innovate. They offer sound protections for two-way investment that benefit the United States and uphold the U.S. government’s ability to issue regulations to protect health, safety, and the environment.
That’s good news for American workers.