How Trump Can Protect Property Rights When He Renegotiates NAFTA


How Trump Can Protect Property Rights When He Renegotiates NAFTA

Aug 28, 2017 2 min read

Former Research Fellow For Economic Freedom and Growth

James M. Roberts' primary responsibility was to edit the Rule of Law and Monetary Freedom sections of Index of Economic Freedom.
American business — big and small — is solidly in favor of ISDS. Cheriss May/Sipa USA/Newscom

NAFTA negotiations are now underway. Officials for the U.S., Canada and Mexico are reassessing the 1994 North American Free Trade Agreement's treatment of everything from tariffs, to intellectual property, to multilateral regulatory compliance.

The Trump Administration has yet to reveal just what its "must haves" are. But one goal should be to retain and upgrade NAFTA's Investor-State Dispute Settlement (ISDS) system. It's an essential mechanism to assure that those making investments and business deals in partner countries will have the full protection of the rule of law.

ISDS systems enshrine the essential private property protections of U.S. law — due process, compensation for foreign government seizure of property, and nondiscrimination — and provide a neutral, independent arbitration process that enables investors and businesses to settle disputes without triggering state-to-state conflict.

For Americans, these systems guarantee fair treatment, consistent with the U.S. Constitution, even in foreign jurisdictions that might otherwise give preferential treatment to domestic parties. For all parties to the agreement, ISDS panels act to prevent expropriation, direct discrimination or other nefarious regulatory actions against foreign investors.

NAFTA's ISDS system has compiled a very good record of protecting American companies and workers from unfair treatment by the Mexican or Canadian officials. In the past dozen or so years, the U.S. government has won every ISDS case filed against it by foreign investors.

Meanwhile, ISDS lawsuits filed in Canada and Mexico have resulted in settlements for American companies of over $100 million — compensation that would not be available if ISDS were eliminated from NAFTA. If American companies had to rely upon traditional state-to-state dispute settlement mechanisms and weaker legal protections for private property in Canada and Mexico, things might not have gone so well for American investors.

The Heritage Foundation's Index of Economic Freedom has demonstrated that the protection of property rights — especially the enforcement of contracts — is essential to the success of a market system. ISDS mechanisms help ensure the evenhanded government enforcement of private contracts — giving investors and businesses the confidence to go forward with mutually beneficial deals.

That's why more than 3,000 international agreements include ISDS provisions requiring all signatory nations to treat all investors equally under the law.

ISDS provisions can also open up foreign markets for exports of U.S. products made by American workers. Tougher ISDS rules can block foreign governments from trying to implement protectionist restrictions on commerce such as local-content mandates, local employment quotas and export percentages.

This is not to say that ISDS is without critics. Sen. Elizabeth Warren, D-Mass., for example, stridently opposed an ISDS provision in the Trans-Pacific Partnership, charging that it would somehow "tilt the playing field in the United States further in favor of big multinational corporations" and undermine U.S. sovereignty.

Fortunately, ISDS enjoys strong bipartisan support. Sen. Ron Wyden, D-Ore., for example, firmly rejected Warren's claims. Instead, he warned that, without ISDS protections, "our small businesses with investments abroad will have nowhere to turn if a corrupt government steals a factory or a crooked judge targets them unfairly."

American business — big and small — is solidly in favor of ISDS, too. The National Association of Manufacturers and more than 100 other U.S. business groups have urged the Trump administration to ensure fair treatment by foreign governments by maintaining and improving ISDS enforcement and the protection of U.S. property overseas.

This should be a no-brainer for the administration. After all, undermining the ISDS protections already included in NAFTA during the renegotiation process would stand in direct conflict with the White House goal of pursing trade policy that puts American workers first.

Without ISDS in place, foreign competitors would be tempted to discriminate against American products and services — and they'd have an easier time getting away with it.

Americans' trust in government has reached all-time lows in recent years. Keeping transparent, independent, and neutral arbitration mechanisms in trade agreements to resolve foreign investment disputes — and protect American sovereignty — is one way to restore it.

This piece originally appeared in Investors Business Daily