Protecting American Interests Means Keeping ISDS in NAFTA

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Tim Worstall Senior Fellow, Adam Smith Institute
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America’s commercial relations with Canada, Mexico and the European Union entered a fever pitch when President Trump decided to impose steel and aluminum tariffs on foreign imports of these products.

Contrary to the objective of protecting American businesses, the tariffs will likely contribute to job losses, lower workers’ wages and a rise in consumer goods prices, as history has shown with tariffs.

If President Trump truly wants to protect American business through better trade relations, one little-known provision called the Investor-State Dispute Settlement (ISDS) mechanism must be strengthened in NAFTA.

There are few provisions that serve more purpose and provide greater peace of mind for business certainty than the ISDS mechanism. From the American point of view, ISDS protects U.S.-based business from political decisions by governments, especially decisions made by rogue governments.

Foreign investors deserve to know that governments will keep their word, and ISDS helps provide a fair legal venue in cases where they don’t.

Discussions about ISDS have come to the fore recently because of currently stalled NAFTA negotiations. By almost any measure, NAFTA has been a tremendous success for all parties involved, especially the U.S.

The four years following the agreement’s signing in 1994 saw the creation of 800,000 American jobs. Today, after more than twenty years of NAFTA, Canada and Mexico stand alone as by far the largest export markets for U.S. goods, accepting shipments of nearly $500 billion in American goods annually and supporting 14 million jobs in the U.S.

A major part of NAFTA’s success has been the inclusion of ISDS provisions that protect investments in Canada and Mexico and provide a means for justice for companies wronged in some way by these governments.

While all eighteen cases brought against the U.S. under this provision of NAFTA have failed, American companies on numerous occasions have won settlements using the ISDS provision. Without the ISDS, there would have been little to no recourse for holding the feet of the Mexican and Canadian governments to the proverbial fire.

Never was the need for ISDS provisions more clear than in the case of Venezuela’s about-face on American oil holdings, a change of official government policy precipitated by the election of radical populist Hugo Chavez in 1998. After a decade of investment by Mobil Corporation in Venezuelan oil projects, with established taxes and agreements, Mobil suddenly found itself in a political environment in which further privatization of the oil industry was banned and royalties levied against foreign operators like Mobil were doubled.

After a series of restrictions on foreign oil firms, Chavez in 2007 decreed that no investor could own more than 40 percent of interest in an oil operation, demanding by fiat that companies had four months to transfer interests or his government would seize assets. For Mobil, an agreement was not reached, and Venezuela seized the investment assets.

Using the ISDS mechanism, Mobil and others were awarded $1.6 billion due to Venezuela’s breaches of direct expropriation and fair and equitable treatment.

Similarly, Azurix, an American water services company, was awarded $165.2 million after an international tribunal found that Argentina unfairly discriminated against the company. In April 2016, Tampa Bay-based TECO Energy was awarded $21.1 million because of breaches of fair and equitable treatment perpetrated by the Guatemalan government. These cases are compelling evidence that ISDS works.

In the U.S., litigants can reasonably count on cases to be decided on evidence and merits, with multiple opportunities for appeals. This is not necessarily true of the rest of the world. And while many nations would prefer not to be bound to ISDS provisions in international treaties, they are absolutely critical in trade agreements such as NAFTA. Without them, American businesses could see their legal rights and contracts jeopardized in foreign countries.

One need only follow Mexican elections to realize why ISDS could soon be vital for U.S. investments in that nation.

Leading presidential candidate Andrés Manuel López Obrador has indicated his support for reversing course as it pertains to U.S. oil exports to Mexico. With Mexico only beginning to allow foreign nations to invest in its energy sector in 2014, many fear that López Obrador could pull the rug from under American investments, reminiscent of Hugo Chavez’s approach in Venezuela twenty years prior.

If past is not to be prologue in markets like Mexico, where U.S. firms have invested significant amounts of capital, President Trump and U.S. Trade Representative Robert Lighthizer should affirm their support of the inclusion of ISDS provisions in a renegotiated NAFTA, rather than suggesting that such provisions might be weakened or removed altogether in NAFTA 2.0. Doing so will go a long way to assuaging investor concerns and setting the stage for a renegotiated agreement that advantages U.S. businesses and makes good on the president’s promise to put America first.

Tim Worstall is a senior fellow at the Adam Smith Institute.

The views and opinions expressed in this commentary are those of the author and do not reflect the official position of The Daily Caller.