The Case for a ‘Fully Enforceable’ NAFTA

When it comes to trade agreements, most Americans like them “strong and enforceable.” As the U.S. Chamber of Commerce has often said, the commitments in a trade pact aren’t worth the paper they’re written on if they can’t be enforced.

Support for vigorous enforcement of our trade agreements is strong across the breadth of the U.S. business and agriculture community and the Congress. As House Ways and Means Trade Subcommittee Committee Chairman Dave Reichert stated on February 7:

I’ve made clear that the best way to improve our trade agreements is to require ambitious and fully enforceable commitments from our trading partners.

Which makes it unfortunate that the U.S. administration has proposed to gut the full array of enforcement tools in the North American Free Trade Agreement (NAFTA). While there’s broad support for measures to modernize the 25-year-old agreement, scrapping its enforcement provisions would be a mistake, and it could easily end in lost U.S. exports and lost American jobs.

The NAFTA’s enforcement or “dispute settlement” provisions include state-to-state dispute settlement (in Chapter 20), investor-to-state dispute settlement (in Chapter 11), and an appeal process that allows companies to challenge anti-dumping (AD) and countervailing duty (CVD) decisions made by other NAFTA-member countries (Chapter 19).

Both chapters 20 and 11 establish independent panels whose decisions the parties to the agreement have committed to respect. They allow governments to impose retaliatory duties (under Chapter 20) or compensation (under Chapter 11) to harmed investors as a means to ensure another government respects the panel decision.

However, the Office of the U.S. Trade Representative (USTR) is proposing to replace the NAFTA’s state-to-state dispute settlement provisions with a softer advisory system. By making compliance with these decisions purely voluntary, the proposed changes would weaken the entire agreement and could very well lead to a situation where governments are free to ignore their commitments with impunity.

Similarly, by “opting out” of investor-to-state dispute settlement, the United States is proposing to render the agreement’s investment protections unenforceable. Given that the United States has never lost one of these disputes—while U.S. companies have clearly benefitted from such investment protections in other countries—it’s an approach that offers real costs but no benefits.

In addition, USTR is seeking to eliminate Chapter 19, leaving U.S. exporters without an effective tool to hold Canadian and Mexican AD and CVD administrators accountable through an appeals process that can overturn egregious determinations and retain access to those countries’ markets. Chapter 19 has proven extremely valuable for U.S. agricultural exporters selling their products in Mexico.

Without these enforcement provisions, the U.S. government’s ability to advance these goals would be severely compromised.

What would these changes mean in practice? Enforcement actions under U.S. trade agreements have focused on such priorities as protecting the intellectual property of U.S. innovators and creators, seeking compensation in the event an American firm’s investment is expropriated by a foreign government, or supporting the labor rights to which governments have committed in the agreements themselves. Without these enforcement provisions, the U.S. government’s ability to advance these goals would be severely compromised.

In public remarks in September, U.S. Trade Representative Robert Lighthizer sounded nostalgic about dispute settlement before the advent of NAFTA or the World Trade Organization (WTO), which was established in 1995. “There was a system where you would bring panels and then you would have a negotiation,” Lighthizer told an audience at CSIS as he recalled his time as a Deputy U.S. Trade Representative in the 1980s. “And, you know, trade grew and we resolved issues eventually… It’s a system that, you know, was successful for a long period of time.”

However, this system of non-binding dispute settlement procedures was widely criticized as toothless and ineffective at the time, and this frustration led to the approach in the NAFTA. One obvious consequence of such a system is that commercial disputes would fester without resolution. Practice has shown that government officials will invariably subordinate these commercial concerns to other “matters of state”—say, building an international consensus for sanctions against a rogue state or in support of a peace plan.

In short, it means that commercial disputes wouldn’t be resolved at all. Without investor-to-state dispute settlement, discrimination against U.S. companies could simply continue. For an individual company, an action impacting assets worth a few million dollars could be devastating, but it probably still would not get the attention of a cabinet officer on a level sufficient to raise it in a meeting—let alone see it addressed successfully in negotiations, as was the practice in the 1980s.

The NAFTA’s labor provisions are also involved. Since 2007, there’s been bipartisan agreement to subject the labor chapter of any trade agreement to the same binding dispute settlement rules as other commitments. Ambassador Lighthizer has said he agrees with lawmakers who insist that the new NAFTA labor chapter should be strong. “We have to have strong labor provisions. They have to be enforced in the same way that everything else is enforced,” he told Politico.

But if those rules are enforced the same way as everything else—and nothing else is enforceable—that doesn’t seem like a satisfactory outcome.

Happily for the U.S. business community, congressional trade leaders get it. As Ways and Means Committee Chairman Kevin Brady (R-TX) said on February 7:

I want to make sure we hold our trading partners accountable through strong, enforceable commitments with effective dispute settlement, including ISDS, because it creates U.S. jobs. People in my district and across the country are counting on us to get this right.

Indeed we are.

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