Baker Institute paper: NAFTA’s dispute-resolution institutions should continue

The dispute-resolution institutions created under the North American Free Trade Agreement are, in most respects, worth carrying over and improving in a revised NAFTA, according to a paper from Rice University’s Baker Institute for Public Policy.

Credit: 123RF.com/Rice University

“Addressing Dispute Resolution Institutions in a NAFTA Renegotiation” was authored by David Gantz, a nonresident fellow for the institute’s Mexico Center with a focus on international trade and economics. Gantz is the Samuel M. Fegtly Professor of Law at the University of Arizona’s James E. Rogers College of Law and director emeritus of the college’s international trade and business law program.

The paper examines the impact of NAFTA renegotiations on established processes for trade disputes between investors and states, between states and states and addressing unfair trade practices.

Gantz said there are, essentially, five distinct dispute-resolution procedures within the larger NAFTA framework for issues relating to: foreign investment and investor-state disputes (Chapter 11); appeals of anti-dumping and countervailing duty (unfair trade) actions by administrative agencies (Chapter 19); the interpretation and application of the agreement generally (Chapter 20), with a variation for financial services disputes (Chapter 14); the failure to enforce environmental laws (North American Agreement on Environmental Cooperation, or NAAEC); and the failure to enforce labor laws (North American Agreement on Labor Cooperation, or NAALC).

“Some sort of investor-state dispute-settlement mechanism (a system through which investors can sue countries for alleged discriminatory practices) may be included, considering the strong business stakeholder support in the United States, but … (U.S. Trade Representative Robert) Lighthizer and others in the Trump administration (along with many Democrats in Congress) believe that investor-state dispute settlement encourages American businesses to shift manufacturing abroad,” Gantz wrote.

“After nearly 25 years of NAFTA, the level of confidence of foreign investors in Mexico remains high, and it is difficult to assert with any degree of certainty that the demise of investor-state dispute settlement would have a significant negative effect on investment (even in the newly opened petroleum sector) in the absence of a shift in Mexican policy toward its encouragement, an unlikely development,” Gantz added.

“For U.S. investors, in the border region and elsewhere, it may be necessary to balance the risks of a renegotiated NAFTA with no investor-state dispute settlement against the termination of the agreement and future trading under World Trade Organization rules,” Gantz wrote. “In my view, elimination of investor-state dispute settlement is on balance likely to be accepted, albeit grudgingly, by foreign investors, if it assists the parties in preserving duty-free trade, existing rules of origin and other key benefits of NAFTA and avoids the termination of the agreement.” However, acceptance by some members of the U.S. Senate is more problematic, Gantz said.

The survival of Chapter 19 will depend on who prevails between the administration of President Donald Trump — which wants to eliminate it — and Canada and Mexico, which strongly support it, Gantz said.

“Chapter 19 could conceivably be modified to make it more acceptable to the United States,” Gantz wrote. “Similarly, a more discretionary Chapter 20 could be traded for other perceived benefits, if any, for Canada and Mexico from the negotiation. Chapter 19, nevertheless, remains one of the possible red lines for the NAFTA parties and is one of a handful of factors (including the sunset clause and U.S. demands for more U.S.-origin auto parts) that could lead to a breakdown in the negotiations. I recommend that Chapter 19 be preserved in some form, perhaps with an appellate mechanism to review binational panel decisions, or modification of the extraordinary challenge process in order to make it easier to challenge errant decisions.”

Given the strong possibility that an ambitious NAFTA renegotiation will fail because the parties cannot agree on changes or because different stakeholders in the United States are unwilling to support such an agreement in Congress, the options are relatively narrow, Gantz said.

He said the parties could agree on a limited modernization of NAFTA without addressing the trade deficit or restricting U.S. investment in Mexico; revert to the U.S.-Canada Free Trade Agreement, which happens automatically for the United States if NAFTA is terminated (unless and until the U.S. were to terminate the U.S.-Canada Free Trade Agreement as well), and revert to World Trade Organization tariffs and dispute settlement as between the United States and Mexico; or continue the existing NAFTA for some specific or unspecified period of time, or at least until the Mexican presidential and U.S. Congressional elections in 2018 have taken place.

About Jeff Falk

Jeff Falk is associate director of national media relations in Rice University's Office of Public Affairs.