THE TTALK QUOTES
On Global Trade & Investment
Published By:
The Global Business Dialogue, Inc.
Washington, DC   Tel: 202-559-9316
Email: Comments@gbdinc.org
No. 16 of 2018
TUESDAY, MARCH 27, 2018

Click here for last Monday's quote from the UK's Liam Fox.

KANSAS AND ISDS  

"Ambassador Lighthizer, I urge you to reconsider your position on ISDS.  Continuing to include ISDS in NAFTA makes both good policy and political sense."

Rep. Lynn Jenkins 
March 21, 2018 
CONTEXT
The U.S. Trade Representative, Ambassador Robert Lighthizer, was the sole witness at the Ways and Means Committee hearing last Wednesday, March 21.  The topic was the U.S. trade agenda, and over the space of almost four hours a lot of issues were covered.  One that surfaced in several exchanges was the investor-state dispute settlement provision, Chapter 11 of the current North American Free Trade Agreement. 

So the key acronyms are ISDS and NAFTA.  Early in the hearing, the chairman, Representative Kevin Brady (R TX) talked about the importance of having an ISDS provision in NAFTA and challenged Ambassador Lighthizer's apparent intention to abandon it.  The exchange was refreshing in that both sides were candid about their views but disconcerting in that they were so far apart.  Chairman Brady believes that ISDS is essential.  "Without ISDS," Chairman Brady said, "American property is left unprotected against discrimination, foreign seizure, regulatory abuses, and other forms of unfair action." Moving to the heart of the issue, Mr. Brady added:

"I am deeply concerned about reports [that] Mexico and Canada have begun negotiating bilateral ISDS provisions without us because USTR has said it doesn't want to participate in that." 

And clearly it does not.  As Ambassador Lighthizer put it, "We are skeptical about ISDS for a number of reasons."  With respect to disputes over foreign investments in the United States, Ambassador Lighthizer believes the system undermines U.S. sovereignty.  That is because it gives foreign parties more legal options than it gives to U.S. citizens. A foreigner can appeal the decision of U.S. courts to ISDS arbitration.  A U.S. citizen cannot. 

As for disputes over the treatment of U.S. investments abroad, Ambassador Lighthizer opposes ISDS because he believes it puts the U.S. government in the position of  encouraging plant locations abroad by underwriting the political risk insurance of investors. 

Rep. Jenkins on ISDS. That exchange ended with Chairman Brady reminding Ambassador Lighthizer, "Your client is Congress."  We shall say more about that exchange in the Comment Section.  First, however, here is what Congresswoman Lynn Jenkins, a Republican from Kansas, had to say on the issue when it was her turn to speak:

I want to reiterate my support for the continuation of strong investor protections like investor-state dispute settlement in NAFTA.  And I have grown concerned about reports to weaken, remove or make protections optional.  ISDS ensures that U.S. investors in foreign countries benefit from the same process and due compensation rights that foreign investors enjoy in the U.S. under our Constitution.  That sounds a lot like the reciprocity in trade deals that this administration wants.  Foreign investment by U.S. companies also creates and supports U.S. jobs. 

For example, the family farm and ranch operations in my district, who depend on exporting their products to Mexico, utilize Kansas City Southern's railroad to provide that vital link to reach these crucial markets.  This cross-border infrastructure would not be possible without $4.5 billion dollars [that] Kansas City Southern invested in Mexico over the past 20 years. 

Additionally, when the House and the Senate last passed Trade Promotion Authority, it established ISDS as a negotiating objective.  So, not including ISDS in NAFTA would be a direct rebuke to Congress's explicit direction and could undermine critical support for a renegotiated NAFTA lacking such protections. 

Ambassador Lighthizer, I urge you to reconsider your position on ISDS. 
Continuing to include ISDS in NAFTA makes both good policy and political sense.
COMMENT
TPA and NAFTA. It may be just your editor's peculiar pattern of thought, but for us the hardest issue for the Administration is or should be the fact of ISDS as a negotiating objective in the Bipartisan Congressional Trade Priorities and Accountability Act of 2015, the current version of TPA.  That said, and assuming the negotiators from the three countries are successful in concluding a new, updated NAFTA, Congress will either approve it or not.  At that point, the language of TPA will either be reaffirmed or overtaken.  We shall see.

Out Sourcing. As for Ambassador Lighthizer's concern that ISDS can have the effect of encouraging plant relocations from the U.S. to Mexico or other countries, here is how he put it:

On the outgoing side, there are many people who believe that it, in some circumstances ... it's more of an outsourcing issue.  So what is it?  It's a situation where somebody says, "I want to move a plant from Texas, and I want to put it in Mexico.  And, when I go down there, I don't want to take the political risk that AMLO is going to win in Mexico and change my bargain.  So I want the U.S. Government, essentially, to buy political risk insurance for me." 

Our view tends to be that, if you [as an investor] want to move a plant from the United States to Mexico and the economics suggest that, then you should go with the economics.  And it's too bad.

(And your responsibility, as the U.S. Congress, is to make the U.S. more competitive so that that isn't a problem.) 

But, if you [the plant owner] are going there because we are underwriting the investment, we are putting our finger on the scale. We're encouraging you to move your plant down there.  That's not the job, in my opinion at least, of the United States Government. 

Kansas City Southern.  Representative Jenkins, of course, talked about a very different kind of investment, namely Kansas City Southern's $4.5 billion investment in Mexico, which this 2009 map illustrates:



The ISDS Challenge.  Our knowledge of the history of ISDS is not as rich as we would like it to be.  The idea, however, that investors should have a recourse - a recourse beyond a state-to-state dispute mechanism - seems intuitively right.  Sometimes companies invest to develop resources specific to a particular location, sometimes to access markets. And sometimes, as in the case of the Kansas City Southern Railway, to provide a physical connection between U.S. producers and foreign buyers.  Surely it is in America's interest to provide  a system for defending such U.S. investments against discrimination or expropriation.

But that is only part of the story. Any policy analysis of investment needs to take into account the fact that in today's world - and it's a world we have been living in for some time - comparative advantage is not the passive result of the sun on Portuguese grapes - it is a dynamic competition among nations.  It's about who gets to make things: cars, airplanes, and medicines, and yes aluminum. 
 
Certainly, that is what India's "Make in India" is about.  It's what China's "Made in China 2025" is about.  And it is what a good deal of every country's trade and investment policies are about. 

It seems clear to us that, at some point, U.S. trade policy needs to recognize the reality of that competition.  What is not clear, however, is the idea that gutting or dropping ISDS is the best way to do that. 

***

Ms. Jenkins on NAFTA. Because this entry is as much about NAFTA as it is about ISDS, we'll end it as Congresswoman Jenkins ended her statement last Wednesday, with a comment on NAFTA.  She said:

To speak just a little more broadly, Ambassador Lighthizer, I can't overstate the importance of NAFTA for the farmers, ranchers, and manufacturers in my district.  In fact, about two dozen county farm bureau members from eastern Kansas were just in my office yesterday to hammer this point home.  They depend and rely on being able to sell to Mexico and Canada as though their livelihoods depend upon it because they do. 

The message I received is the need for certainty that NAFTA benefits, which have allowed Kansas exports to surge, remain in place.  This certainty is paramount to providing desperately needed assurance to all aspects of the Kansas economy.  The small towns across my district that make up America's agriculture heartland are depending on the Administration getting this modernization right, and moving on to expanding into new markets and joining new trade deals. 

That's why I strongly support NAFTA and why I encourage this Administration to follow through on its promise of doing no harm.  With that Mr. Chairman, I yield back.
SOURCES & LINKS
At Ways and Means is a link to the YouTube recording of the full hearing on the U.S. Trade Agenda, which the House Committee on Ways and Means held last Wednesday morning, March 21. All of the above quotes were taken from that hearing.  The transcriptions, however, are the responsibility of the Global Business Dialogue.

Chairman Brady's initial exchange with Ambassador Lighthizer on ISDS begins at minute 32:00.

Congresswoman Jenkins' statement, the source for today's featured quote, begins at the 1 hour-50-minute mark.  

Kansas City Southern Railway is the Wikipedia entry on this company, where you will find the above map, among other things.  

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