Keeping NAFTA’s dispute settlement system is vital to American business

Since its implementation, the North American Free Trade Agreement (NAFTA) has played a major role in growing the American economy by creating well over ten million new jobs in the energy sector alone.

In 2015, for example, American companies’ Foreign Direct Investment in Mexico totaled $420M for oil and gas extraction, $1.96B for support activities for oil and gas extraction. NAFTA has helped American energy security by lowering prices for crude oil, gasoline, kerosene-type jet fuel and other refined products. U.S. manufacturers with investments in Canada and Mexico employed 2.8 million workers in the US in 2014 a 46 percent increase since 1997.

In fact, NAFTA is now the world’s largest free trade agreement and the gross domestic product of its three members is more than $20 trillion.

{mosads}The original NAFTA deal also included basic access, protection and regulations that have helped grow manufacturing, services and agricultural industries by allowing companies to reach new consumers and to contribute in foreign infrastructure, energy and resource development plans.

American individual, non-profit and business investors benefit from NAFTA provisions that cover several of the private property protections already found in the U.S. Constitution and U.S. law, including due process, non-discrimination, fair treatment by the government and payment for the seizure of property. 

The current discussions on updating the agreement provide an important chance to improve defense and enforcement tools against the theft, discrimination and unfair treatment of U.S. property overseas. But those who are keeping a watchful eye on the negotiations are worried that some of these protections are being weakened, which will hurt American economic growth and business interests. 

Enforcement options can be sought by the investor through a neutral settlement system, known as investor-state dispute settlement (ISDS), a staple of free trade agreements that many countries, including the U.S., have agreed to for over 50 years.

ISDS is a neutral arbitration procedure. The process helps to ensure that private sector investments are protected, especially if those entities do not have access to developed and independent court systems. ISDS enforcement mechanisms are a safeguard for substantial investments that might not otherwise come to fruition.

These requirements are highly valuable and have already helped many U.S. businesses that have faced the seizure, theft and abuse of investments in both Canada and Mexico. ISDS in NAFTA has been highly helpful to the United States.

The United States has won all 18 cases that have been that have been concluded. In addition, American investors have also used ISDS procedures in forty cases with Canada and Mexico, winning several to guarantee payment when those governments have taken unfair actions against American investment. In other cases, the presence of strong, neutral and fair guidelines has helped U.S. investors avoid and resolve problems with foreign governments.

At the same time, the United States has been completely successful in defending its own policy priorities and promising that foreign investors cannot contest the United States’ ability to change rules as it sees fit. In short, ISDS has been a boon to American industry, jobs and strength.

An effective ISDS system is important for the continued growth of the American economy, especially in a sector like energy. Unlike other decisions that companies must face — deciding where to locate a manufacturing facility, for example — oil and gas companies must go to where oil and gas reserves exist. Overseas markets can often offer tough challenges, including legal systems where judgment favors local stakeholders, lack of a transparent or steady regulatory government, and, at times, complete nationalization of investments worth billions of dollars.

It also helps that ISDS maintains important elements of sovereignty, like regulations made in the public interest. This crucial balance is a principal reason why they have been uncontroversial. ISDS does not provide an unprecedented right to challenge governments. ISDS panels have never overturned — and do not have any authority to change — any country’s laws or regulations.

The impact on energy investment cannot be understated. Natural resources, especially oil and natural gas are often highly politicized, especially where local lawmakers face nationalistic political sentiments that put pressures on them to resist foreign investment, even if it is counterproductive to their own economy.

A healthy and real ISDS system has been proven to be essential for U.S. businesses and as they locate and develop important energy resources and other valuable supplies around the world. American investment in oil and natural gas in Mexico is still in the early stages after being mostly closed for over 70 years. ISDS offers strong defense for American business investors (frequently stronger than those afforded in US or foreign courts) and gives power to investment protections that industry can then apply.

These facts all should point U.S. negotiators towards a position that keeps or strengthens ISDS positions. But closed-door negations, and less than explicit comments about the need to keep strong ISDS positions, are worrying to those who want to see American business continue to invest, which will help job creation and economic opportunity here at home. For the sake of the American economy, let’s hope those fears are overblown.

Mario H. Lopez is president of the Hispanic Leadership Fund, an advocacy organization that works for public policy that strengthens liberty, opportunity, and prosperity for all Americans.