Wall Street Journal | 22 Aug 2017
U.S. bid to exit Nafta arbitration panels draws ire from businesses
Trump administration circulates plans to withdraw from pact’s investor-state dispute settlement system
By Bob Davis
WASHINGTON—U.S. trade officials are putting together a proposal to let the U.S. withdraw from a corporate arbitration system at the heart of the North American Free Trade Agreement, upsetting big American companies that say the system protects their investments overseas.
The plan, drawn up by the U.S. Trade Representative’s office, would remake what is known as the investor-state dispute settlement system. ISDS is a form of international arbitration in which corporations can sue governments for damages if they believe governmental decisions improperly diminish the value of their foreign investments. The arbitration panels, which operate as an alternative to domestic court systems, have been widely criticized by labor and environmental groups and conservative nationalists as giving corporations—and only corporations—a way to circumvent domestic laws and regulations.
Under the USTR plan, the three Nafta countries would need to “opt in” to the ISDS system in the future—essentially making participation in the system voluntary, say individuals briefed on the plan. Mexico, for instance, could decide to keep the arbitration system as a way to give investors confidence that disputes won’t drag out in the Mexican court system, which has long been criticized for delays and corruption.
But the U.S. could decide against joining the system, forcing investors to take any disputes through the U.S. court system. If the U.S. took that path, Canadian and Mexican companies wouldn’t have the right under Nafta to submit investment disputes with the U.S. to arbitration panels. It isn’t clear whether U.S. companies would continue to be able to use ISDS panels in other Nafta nations if the U.S. doesn’t join the system in the future.
The USTR is circulating its plan to other agencies and the White House, which haven’t yet given their approval. The U.S. is trying to put together concrete plans to submit to Mexico and Canada in time for the third round of Nafta negotiations next month in Canada, which will follow a second round beginning Sept. 1 in Mexico City.
A spokeswoman for the agency declined to comment on the proposal.
The plan is generating opposition among business groups and on Capitol Hill. “The business community supports no fundamental change” in the ISDS system, said Vanessa Sciarra, a trade specialist at the National Foreign Trade Council, an organization representing big U.S. exporters. Early this month, more than 100 U.S. trade associations sent a letter to the administration supporting the system as “a core element to protect the United States against the theft, discrimination and unfair treatment of U.S. property overseas.”
The U.S. stance is among several evolving positions that put the administration at odds with big business, which has the potential to unleash its lobbying power among lawmakers to put pressure on U.S. negotiators and, potentially, prompt members of Congress to vote against the final pact when it comes to Capitol Hill. Already the U.S. side has suggested it wants to require a “substantial” portion of autos and auto parts produced under the pact be made in the U.S.—an idea Detroit auto makers generally oppose.
In the case of the dispute-settlement system, business officials fear that should the U.S. scrap the system, other countries would be bound to do the same. “It’s just a transparent excuse to delete the [arbitration] procedure,” said Jeffrey Schott, a trade expert at the Peterson Institute for International Economics, a free-trade think tank.
Critics of ISDS have long said the arbitration panels infringe on U.S. sovereignty, an argument made by U.S. Trade Representative Robert Lighthizer in Senate testimony in June. “I’m always troubled by the fact that nonelected non-Americans can make the final decision that the United States law is invalid,” he said. “This is a matter of principle I find…offensive.”
USTR hasn’t briefed Mexican or Canadian negotiators on its proposal in detail, said individuals familiar with the plan.
Carlos Véjar, a trade attorney at law firm Holland & Knight in Mexico City, said the panels are of more benefit to the U.S. given that it invests more in Mexico than vice versa. The U.S. accounted for 52% of the $15.6 billion in foreign direct investment in Mexico in the first half of this year.
Mexico has recently opened its energy industry to foreign investment, for instance, a sector likely to draw substantial investment, he said. Brazil, he noted, gets plenty of foreign investment even though it isn’t party to an ISDS system.
Canada recently agreed to a different form of arbitration system in a trade pact it negotiated with the European Union. The two sides created an Investment Court System to replace ISDS. The new courts would have a roster of 15 tribunal members bound by tough conflict-of-interest rules. Grounds for suing under the arbitration system would be narrowed. The EU and Canada also created an appellate body to review decisions for legal errors and some other issues. Nafta doesn’t provide for an appeals process.
It isn’t clear whether the U.S. would consider those changes sufficient should Canada propose them as part of the current Nafta negotiations.
While the USTR plan was meant to address longstanding complaints by labor groups, among others, the AFL-CIO’s trade adviser, Celeste Drake, said she found it inadequate. By allowing Mexico and Canada to retain the arbitration system, “it still maintains for global corporations an extrajudicial system of private justice that no one can access,” she said.
Additionally, she said, if the U.S. were to withdraw from the ISDS system while Mexico and Canada stayed in the body, U.S. companies would have an incentive to move their operations out of the U.S. to take advantage of the extra legal protections afforded by the system.
“You may be including an additional incentive to move production to Mexico by leaving in this legal provision that investors could find very valuable,” Ms. Drake said.
—Anthony Harrup contributed to this article.