[CTC] Sources: Canada to propose eliminating ISDS at NAFTA meeting this week; USTR to agree

[Arthur Stamoulis]

INSIDE US TRADE
 
Sources: Canada to propose eliminating ISDS at NAFTA meeting this week; USTR to agree

February 21, 2018 
During a meeting with their U.S. counterparts this week, Canadian negotiators will pitch the elimination of the deal’s investor-state dispute settlement provision -- and the U.S. is expected to agree to that proposal, allowing for what private-sector and congressional sources called a “win” for U.S. Trade Representative Robert Lighthizer in one of his priority areas in the talks.

The decision to yield to Lighthizer’s demands on ISDS was described as part of a larger bargain in the negotiations, opening the door for possible U.S. concessions on Canadian and Mexican priority areas, these sources said.

Mexico -- the NAFTA country most interested in keeping ISDS intact because of foreign investments in its energy sector -- is not going to oppose Canada’s offer in the hopes of securing other concessions, the sources told Inside U.S. Trade.

“They would like to have it but they’re not going to be the one to save it,” one source said of Mexico’s stance on the issue.

Sources said it was not clear what Canada had asked for or would be able to secure in return, but some speculated the U.S. might be willing to keep Chapter 19, a main focus for Ottawa in the negotiations.

USTR has proposed eliminating the Chapter 19 review mechanism of antidumping and countervailing duties -- a demand pushed by the U.S. lumber industry and their champions on Capitol Hill. Canada, which wants to amend the provision, has made clear that maintaining the dispute settlement review mechanism is a red line for the Trudeau government and Canadian lumber producers.

White House officials over the weekend shared the prospect of an agreement on the elimination of ISDS with the business community and offices on Capitol Hill, prompting one trade association to organize what a source called an “emergency call” to inform companies of the Canadian proposal and the expected U.S. reaction.

The White House has previously provided such “heads-up” warnings on trade issues, sparking  heated debates within the administration and suggesting to some that the interagency consultation process has not functioned as intended, with key agencies bypassed in the decision-making process.

The State and Treasury departments have been “totally cut out” of the ISDS discussion, one source said, noting that USTR also had not discussed with Capitol Hill its plans to move from an opt-in mechanism -- as it has proposed in the talks -- to eliminating ISDS altogether.

USTR declined to comment on Canada’s proposal and the expected U.S. reaction to it. A spokesman for Canadian foreign affairs minister Chrystia Freeland, the country’s political NAFTA lead, did not respond to a request for comment.

The American Petroleum Institute, in a press release on Tuesday, said NAFTA negotiations “must advance our role as a global energy leader by retaining U.S. access to Mexico’s newly-opened oil and natural gas market and providing strong protections, including Investor-State Dispute Settlement (ISDS), for these U.S. energy investments.”

API president and CEO Jack Gerard published an op-ed <https://www.arcamax.com/politics/opeds/s-2051815> on the issue the same day, saying that “If ISDS is watered down or falls through the cracks, it opens the door for other nations to withdraw similar agreements safeguarding U.S. investments around the globe.”

One source said that while the timing of the API release and op-ed seemed “out of the blue,” they were intentionally released ahead of this week’s NAFTA meeting <https://insidetrade.com/node/162004> in Washington, DC, where USTR is expected to agree to eliminate the provision.

A private-sector source told Inside U.S. Trade that “job creators are concerned that USTR will jettison this long-standing enforcement tool that has been used many times against foreign governments stealing U.S. property.”

The source said it was not clear how the Trump administration “hopes to grow jobs by adopting this Elizabeth Warren anti-business proposal.”

But another source noted that many companies, including the big three U.S. auto manufacturers, made clear before the talks started that securing ISDS was not among their offensive demands in the talks.

The Mexican government has been trying to engage Lighthizer in what one source called a “signaling exercise” to indicate what the USTR cares mosts about in the talks and what proposals are lesser priorities. U.S. and Mexican private-sector sources say they suspect a proposal to change U.S. trade remedy law to favor seasonal produce growers -- a red line for Mexico -- is among those offers the USTR is willing to withdraw in return for concessions in other areas.

In October, Lighthizer explained the rationale behind his ISDS proposal as well as a five-year sunset clause pitch -- both of which, he said, were part of a push to create investment uncertainty and, in return, disincentivize outsourcing.

He argued that ISDS was leading to non-economic outcomes and allowed U.S. businesses to place a “thumb on the scale <https://insidetrade.com/node/160713>.”

“So basically the way I analyze these is business says ‘we want economic outcomes, we want to be able to have free trade and make money, or not, based on the market,’” Lighthizer told reporters on Oct. 21. “‘But we would also like the United States’ government to more or less guarantee that we don’t have to worry about political risk.’ Right? So instead of buying political risk insurance, or instead of calculating political risk into their decision about a dollar and cents decision, what they’re doing is saying ‘no, we want a thumb on the scale.’”

Lighthizer has often singled out Canada for what he sees as Ottawa’s reluctance to seriously engage in the talks, while pointing out that his negotiators are “making headway” with Mexico. The Canadian negotiating team again drew the ire of Lighthizer <https://insidetrade.com/node/161960> when it took their presentation for a new automotive rules of origin framework to Capitol Hill and U.S. stakeholders earlier this month.

Accordingly, the sudden cooperation between the U.S. and Canada seemed “a little bit out of character for where the relationship has been recently,” one source said, but another said Canada coming to the table this week was a “push to conclude” the negotiations and a sign that Ottawa was engaging on Lighthizer’s priority issues.

The progressive Canadian Centre for Policy Alternatives, in a report issued last month <https://insidetrade.com/node/161647>, argued that Canada should drop its opposition to USTR’s opt-in proposal and “rid itself of NAFTA’s ISDS mechanism,” which the think tank said has cost Canada more than $314 million.

"One can only hope that Canadian opposition to this U.S. proposal is tactical. In fact, because the U.S. is the demandeur on this issue, Canada could gain valuable negotiating coinage by withdrawing its opposition to the U.S. opt-out proposal," the report says. "This leverage could help negotiators advance key Canadian interests, such as safeguarding affordable access to medicines or securing meaningful continental labour standards. Canadian negotiators should not let this opportunity slip through their hands."

A private-sector source speculated that Canadian negotiators were willing to abandon ISDS in NAFTA because “they probably realize they will never get their investment court.” Canada initially proposed the establishment of an investment court system similar to what it secured in its trade agreement with the European Union. That proposal did not gain traction with USTR.

At the last round of talks in Montreal, Canada tabled a second ISDS offer that would exclude the United States but provide mutual investor protections between Mexico and Canada. That proposal sparked anxiety in the U.S. business community and among some lawmakers on Capitol Hill who were hoping the other countries would counter Lighthizer’s demands on investor protections.

A NAFTA official at the last round said the discussions on ISDS were “sort of odd” because “What we're talking about here is whether Mexico or Canada would be in agreement for the U.S. to shoot itself in the foot. That's the thing that's very weird.”

“They've been pushing for ISDS because their companies feel that it's important. Over the years we've said ‘You know, it provides a certain degree of credibility, a certainty, and we're willing to continue with those disciplines,’” the official said. With the business community’s support for ISDS in mind, the official said it was important to consider whether a deal without ISDS could win enough votes to pass in Congress.

One private-sector source said there was still “some speculation that Canada and Mexico will do something together” to protect investors outside of the NAFTA framework.

A source close to the talks said a “win-win discussion” on Chapter 11 would involve a discussion of how to improve ISDS, as was done in the Trans-Pacific Partnership negotiations. But, the source added, “if the win that the U.S. is looking for is to be having the benefits of ISDS for its companies but not providing so, it's a tough sell, in reality.”

Asked whether Mexico would be open to passing domestic legislation to ensure U.S. companies are protected in Mexico, an official said “even if it were, I will not be discussing the changes or the amendments of my laws” in NAFTA.

Sen. Bill Cassidy (R-LA) brought up what he views as the importance of ISDS to his state’s economy during a White House meeting with the Senate Finance Committee, President Trump and Lighthizer earlier this month.

“The thing about investor-state dispute settlement is that you have energy resources in Mexico. It’s not like you’re building a plant. The energy resources are there and if you’re going to get the energy out of the ground and refine it you’ve got to move your -- you’ve got to invest there,” Cassidy told Inside U.S. Trade after the White House meeting.

“I think Lighthizer’s point is that you should pay a risk premium if you’re going to invest overseas as opposed to the United States,” Cassidy added. “In the case of energy you cannot not invest there. You’ve got to.”

Asked about Lighthizer’s response to the points he raised during the meeting, Cassidy said “he acknowledges it but I can’t say that there was a response beyond an acknowledgment.” -- Jenny Leonard (jleonard at iwpnews.com <mailto:jleonard at iwpnews.com>)


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