President Donald Trump’s trade representative, Ambassador Robert Lighthizer, stirred up some controversy last week when he called for a five-year “sunset” provision to be included in the North American Free Trade Agreement.
He asserted that investor-state dispute settlement features in U.S. free trade agreements amount to government-backed political risk insurance for big American companies.
Some of those huge firms do benefit from taxpayer subsidies to cover their potentially risky investments in countries where the rule of law is not as highly developed as it is at home.
But, for the most part, they are beneficiaries not of investor-state dispute settlement, but of a U.S. government program that actually does provide political risk insurance—the Overseas Private Investment Corp.
The big difference is that investor-state dispute settlement is practically cost-free to American taxpayers, while the Overseas Private Investment Corp. is not.
The Heritage Foundation has called for the shutdown of this corporation, noting that political risk insurance is available for purchase by U.S. firms from private insurers in countries all over the world that have developed capital markets far superior to what they were when the corporation was set up in 1970.
Investor-state dispute settlement provisions, on the other hand, actually do American taxpayers a favor by taking the government out of the political risk equation. That’s because countries that are parties to these provisions offer protection against political risk—through private, third-party international arbitration—at very little expense to taxpayers.
What’s more, the U.S. only enters into investor-state dispute settlement agreements with willing parties—countries that are U.S. trading partners.
Trade and investment with those countries is good for American workers, and the companies that employ them. Those partner nations want to do business with the U.S. and help American companies to create jobs in both countries.
Provisions such as investor-state dispute settlement help to make the Overseas Private Investment Corp. unnecessary.
Politico reports that Canada and Mexico have pushed back against a U.S. proposal to “sunset” NAFTA after five years, quoting the Canadian trade minister saying that such a provision would be detrimental to “an environment within which business can make investments, and in many of those investments people look for 20, 25 years for payback.”
As for investor-state dispute settlement, it protects Americans by enshrining the principles of rule of law in each investor dispute, and extending to those investors essential private property protections under U.S. law that include fairness and due process, compensation for foreign government seizure of property, and nondiscrimination.
Let’s hope that NAFTA will be upgraded and improved, and that the investor-state dispute settlement provisions will remain in it.
