New NAFTA must value the rule of law in trade disputes

You might have noticed an uptick in media coverage about the North American Free Trade Agreement (NAFTA) in recent months. Don’t worry, you haven’t been transported back to the 1990s.

Rather, trade negotiators and representatives from the U.S., Canada and Mexico are gathering in Washington Wednesday for the opening of renegotiations of the 24-year-old treaty. Over those two-plus decades, NAFTA has matured and improved, with less bureaucratic burden per unit of trade and investment than any other trade bloc in the world. 

{mosads}Those trade experts and economists like me, who closely followed NAFTA’s birth, believed it held promise, although many remained doubtful that it could ultimately succeed. They were proven wrong. The U.S. and Canada prospered under the pact and integrated smoothly. Mexico entered into a period of macroeconomic stability that it had not seen for decades, which has continued through today, even after major financial crises in 1994 and 2009.

Looking closer at the numbers — 2016 data from the U.S. Census Bureau — the U.S. exported about $593 billion of goods and services (26 percent of total exports) to its two trading partners. Canada exported $290 billion (63 percent of its total exports) and Mexico exported about $330 billion (82 percent of total exports).

The U.S. had a net deficit of $43 billion — a surplus of about $13 billion with Canada and a deficit of $56 billion with Mexico. This deficit represented only 2 percent of total U.S. exports, 1.6 percent of imports and less than 0.3 percent of GDP. Contrary to common criticisms, NAFTA has generated about as much in U.S. exports as imports.

In addition, Foreign Direct Investment (FDI) of the U.S. in Canada and Mexico amounted to $450 billion as of 2015, with almost $290 billion invested in the U.S. These numbers indicate the close interrelationship within NAFTA and suggest that any attempt to weaken the agreement would have devastating consequences, particularly for the U.S. economy.

Businesses have already weighed in with their concerns. The National Association of Manufacturers — along with 112 other American business groups — recently urged the Trump administration to affirm certain protections for American businesses as part of the NAFTA renegotiations. These businesses suggested that there are a number of issues that should be reviewed in terms of trade relations, but that it is essential to maintain a clear set of procedures to resolve conflicts, more specifically, between governments and investors.

At present, disputes between private investors and governments of the countries where they invest are covered in Chapter 11 of NAFTA. It seeks to guarantee the rights of investors, specifically basic private property protection, due process and appropriate compensation if governments were to seize assets arbitrarily. Chapter 11 envisaged the establishment a neutral arbitration mechanism, namely an Investor-State Dispute Settlement (ISDS).

The ISDS mechanism exists in a large number of trade agreements worldwide, 50 of which the U.S. is involved in. The U.S. Trade Representative’s office has noted that ISDS mechanisms help resolve investment conflicts without creating state-to-state conflict, allow for uniformity of treatment and preservation of the rule of law. 

The effectiveness of the United States’ experience with this system should pave the way for a non-controversial case for renewal. The U.S. government has faced 18 ISDS cases by foreign investors since the early 2000s, and the U.S. has won every case. At the same time, a number of cases were presented against the Mexican and Canadian governments, and many have been won by U.S. investors. These results demonstrate that the rule of law has stronger roots in the U.S. and can be extended within a transparent and fair settlement mechanism.

Recent experience suggests that Chapter 11 provides the right safeguard to protect individuals and corporations from inordinate government action, a case that could arise in Mexico if a populist candidate wins the presidency. The current system has worked effectively since NAFTA’s inception, and any significant change would be detrimental to the welfare of all members.

The three economies are inextricably interconnected, and NAFTA has helped promote prosperity within an increasingly common framework about open trade and the rule of law. Preserving ISDS in NAFTA will be critical to ensuring that American businesses are treated fairly in accordance with U.S. laws. This item should be paramount for trade negotiators as they commence the first round of negotiations Wednesday in Washington.

Claudio M. Loser is president of the Centennial Group Latin America, which provides guidance on strategies, policies and approaches to realize opportunities enabled by increasing flows of private capital, technology and management know-how in the region. He’s a  senior fellow at the Inter-American Dialogue, a U.S.-based center for policy analysis, exchange and communication on issues in Western Hemisphere. He also served as IMF Western Hemisphere director from 1994 to 2002. 

The views expressed by contributors are their own and not the views of The Hill.