The New NAFTA Puts the "United States" First but U.S. Investors Last

Updated: Dec 12, 2018

On November 30, leaders of the United States, Mexico, and Canada signed the new U.S.-Mexico-Canada Agreement (USMCA). It is tempting to say that the USMCA is different from NAFTA in name only, but that would gloss over some of the improvements and ignore a serious flaw in the pact.

The change in name, however, is worthy of a comment. It is evidence of Donald Trump’s strength – not as a deal maker, but as a marketer. Much of his fortune was made by licensing his name for various products and tagging it to his properties. The revised pact can be branded as “America First” by listing the agreement as the U.S.-Mexico-Canada Agreement.

The USMCA keeps most essential elements in the original North American Free Trade Agreement and imports other provisions from the Trans-Pacific Partnership (TPP) deal that Trump called the “worst trade agreement ever.” These provisions include electronic commerce and cross-sectoral commitments on technical barriers to trade. Other provisions that mirror TPP include language to protect U.S. service exports.

Canada’s entry into the Agreement hinged on an expansion of duty-free treatment for U.S. dairy exports from 3.0 to just over 3.5 percent of the Canadian dairy market. This is well below the U.S. demand but, by accepting it, President Trump can tell U.S. farmers that he opened that market for them (however slightly).

What President Trump cannot do, however, is tell American investors that he protected their interests. Investors need stability, but this agreement includes a 16-year “Sunset Clause” and review procedures every six years. Reviewing the agreement is certainly reasonable, but language suggesting that it will terminate undermines investor confidence.

Moreover, this Agreement fails to protect U.S. citizens and companies that invest abroad. It totally ignores the fact that American firms are regularly challenged by foreign governments that seek to give advantages to domestic and politically favored companies.

NAFTA included an early form of investment protection that helped to ensure that U.S. property was not expropriated and that U.S. companies were not treated differently than domestic companies, which is to say that they were guaranteed “national treatment.” The protections were similar to provisions in core U.S. laws and regulations. In NAFTA these protections are known as investor-state dispute settlement (ISDS).

Administration officials say that President Trump’s opposition to investment protections is consistent with his promise to keep jobs at home and that investment protections facilitate “off-shoring and outsourcing of jobs.” That thinking is flawed and ignores the benefits of these investments. U.S. companies invest abroad to enhance their overall operations. Foreign investments help to improve the local market, making better customers for U.S. exports. In fact, these investments almost always contribute directly to jobs in the United States.

The Administration did include a limited version of ISDS for those companies that have contracts with the Mexican government, primarily energy companies and telephone service suppliers. The failure to extend this protection to other investors poses a serious problem, particularly for those who invest in land. Indigenous groups in Mexico often use a provision in the Mexican Constitution, Recourso de Amparo, to challenge property holdings that they contend are protected as ancestral lands.

The Administration argues that Canada has a fully developed legal system and that ISDS would not be needed in Canada. This argument fails to address the many cases where U.S. investors were forced to use ISDS in Canada. Using ISDS, U.S. investors successfully rolled back actions by different Canadian Provinces that denied them national treatment.

It is also important to remember that the United States has never lost an ISDS claim brought by a foreign investor here. Investor protection is embedded in the “takings clause” of the Fifth Amendment of the U.S. Constitution. Simply put, we have no reason to fear granting ISDS to foreign investors. They already receive even stronger protections from the U.S. Constitution than they would from a pledge to arbitrate an expropriation claim.

While we have no reason to fear granting ISDS to others, we have a lot to lose by not insisting on investment protections for U.S. investors. Without ISDS, U.S. investors must rely on the U.S. government to protect their investments. There is no guarantee that the government will take the case, and no guarantee itwill demand that the investor be made whole.

This month’s signing of the agreement is essentially a formality. Each country’s legislature must approve the pact before it can take effect. While Congress cannot change the terms of the Agreement, it can bind this Administration and all future administrations on key points. Congress should demand that USMCA not allow the agreement to expire without a vote by the U.S. Congress to implement the Sunset Clause. Congress should also require the Executive Branch to protect U.S. investors through the State-to-State dispute resolution provisions in USMCA and to make investors whole if their property is expropriated.

The USMCA is an improvement on NAFTA. It is not perfect but, if the U.S. Congress will set the terms under which this agreement will be implemented, it should be approved.