US Energy and Security Hinge on NAFTA Safeguards
U.S., Canadian, and Mexican representatives are in the middle of negotiations to revise the North American Free Trade Agreement — an agreement that over the years has been very good for American energy. Yet, there’s uncertainty over whether a key NAFTA provision that safeguards U.S. investments in those countries will survive. Such an outcome would be a significant blow to U.S. energy and national security.
The uncertainty stems from the administration’s signals that NAFTA’s investor-state dispute settlement provision should not be included in a new agreement. ISDS protects American interests and property from unfair treatment by host nation governments. But in remarks last fall, U.S. Trade Representative Robert Lighthizer was dismissive of this idea:
It’s always odd to me when the business people come around and say, “Oh, we just want our investments protected.” I mean, don’t we all? I would love to have my investments guaranteed. But unfortunately, it doesn’t work that way in the market.
The USTR continued:
I’ve had people come in and say, literally, to me: “Oh, but you can’t do this: you can’t change ISDS. … You can’t do that because we wouldn’t have made the investment otherwise.” I’m thinking, “Well, then why is it a good policy of the United States government to encourage investment in Mexico?” … The bottom line is, business says: “We want to make decisions and have markets decide. But! We would like to have political risk insurance paid for by the United States’ government.” And to me that’s absurd. You either are in the market, or you’re not in the market.
There are a couple of problems with this analysis. First, the natural gas and oil industry isn’t seeking investment “guarantees,” nor is that what ISDS does. What ISDS does is ensure that if an American company has a dispute with a host government, its claim will be heard in neutral, international arbitration setting. In that way, ISDS strengthens respect for contracts, which is fundamental to markets. Second, advancing U.S. energy security through smart, strategic development of natural gas and oil around the world is very good policy for the United States. Even more than that: Secure energy is a critical U.S. national interest.
In an interview with the Wall Street Journal, Antonio Ortiz-Mena of the Albright Stonebridge Group consultancy said the administration shouldn’t look at energy as it does other sectors. “When the USTR thinks about this, it’s thinking about the auto industry, and `why should the auto industry get special protection to invest in Mexico when they should invest in the U.S.?’” Ortiz-Mena said. “But in the case of energy, you invest where the oil is. If there’s oil in the Gulf of Mexico and you want to invest in deep sea drilling, it’s not as if you could do that in Detroit.”
Writing in Forbes, Phil Levy, senior fellow at the Chicago Council on Global Affairs, sees the administration caught between two purposes. “Lighthizer seems to be saying: If you want to invest in Mexico, pay the risk insurance!” Levy continues:
Logically, he might follow up: If you want to export to Mexico, pay their tariffs! Of course, he doesn’t say the latter because the administration views investment in Mexico as bad but exports to Mexico as good and tariffs impede those exports. There is a reason that trade and investment go together.
Indeed, NAFTA’s zero tariffs on exchanged goods, market access, and trade liberalization has helped created an integrated North American energy zone, with U.S. energy trade with Canada and Mexico flourishing. Canada was the number one export market for U.S. crude oil and kerosene-type jet fuel in 2016; Mexico was our number one export market for total refined products, finished motor gasoline, and other products. According to the Wall Street Journal, foreign investment has surged since Mexico announced reforms opening new access to its energy sector. U.S. access to heavy Mexican crudes — used by a significant portion of our refinery sector — is key to growing our exports of refined products.
NAFTA has been good for U.S. energy — very good — making our nation economically stronger and more energy secure. ISDS ensures that American energy companies have recourse if and when they are subject to unfair treatment, which is critically important to investment decisions. This provision must be retained in any revision of NAFTA.
Mark Green is the Editor of Energy Tomorrow, a project of the American Petroleum Institute.