The People of America's Oil and Natural Gas Indusry

Ending NAFTA Investor Protections Will Harm U.S. Energy Security

Mark Green

Mark Green
Posted May 8, 2018

There’s no denying that North American Free Trade Agreement (NAFTA) has been very good for U.S. energy over the years. Yet, whether we will be able to say the same about NAFTA 2.0 years down the road is an open question.

That’s because the Trump administration has signaled a key NAFTA provision safeguarding U.S. energy investments in Canada and Mexico shouldn’t be included in a revised agreement. It’s an outcome that would be a significant setback for our energy and security interests.

At issue is NAFTA’s investor-state dispute settlement provision (ISDS), which protects American interests and property from unfair treatment by host nation governments. But in remarks last fall, U.S. Trade Representative Robert Lighthizer dismissed ISDS:

“It’s always odd to me when the business people come around and say, ‘Oh, we just want our investments protected. I mean, don’t we all? I would love to have my investments guaranteed. But unfortunately, it doesn’t work that way in the market.”

More from the USTR:

“I’ve had people come in and say, literally, to me: ‘Oh, but you can’t do this: you can’t change ISDS. … You can’t do that because we wouldn’t have made the investment otherwise.’ I’m thinking, ‘Well, then why is it a good policy of the United States government to encourage investment in Mexico?’ … The bottom line is, business says: ‘We want to make decisions and have markets decide. But! We would like to have political risk insurance paid for by the United States’ government.’ And to me that’s absurd. You either are in the market, or you’re not in the market.”

A couple of responses. First, the natural gas and oil industry isn’t seeking investment “guarantees,” nor is that what ISDS does. What ISDS does guarantee is that if a U.S. company has a dispute with a host government, its claim will be heard in neutral, international arbitration setting. In that way, ISDS strengthens respect for contracts, which is fundamental to markets.

Now, zeroing in on Lighthizer’s rhetorical question about good policy for the United States, advancing U.S. energy security through smart, strategic development of natural gas and oil around the world is very good policy for the U.S. Even more than that: Secure energy is a critical U.S. national interest.

In an interview with the Wall Street Journal, Antonio Ortiz-Mena of the Albright Stonebridge Group consultancy said the administration shouldn’t look at energy as it does other sectors:

“When the USTR thinks about this, it’s thinking about the auto industry, and `why should the auto industry get special protection to invest in Mexico when they should invest in the U.S.?’ But in the case of energy, you invest where the oil is. If there’s oil in the Gulf of Mexico and you want to invest in deep sea drilling, it’s not as if you could do that in Detroit.”

Phil Levy, senior fellow at the Chicago Council on Global Affairs, sees the administration caught between two purposes in a piece in Forbes:

Lighthizer seems to be saying: If you want to invest in Mexico, pay the risk insurance! Logically, he might follow up: If you want to export to Mexico, pay their tariffs! Of course, he doesn’t say the latter because the administration views investment in Mexico as bad but exports to Mexico as good and tariffs impede those exports. There is a reason that trade and investment go together.”

Indeed, thanks in large part to NAFTA’s zero tariffs on exchanged goods, market access and trade liberalization, an integrated North American energy zone has been born, with U.S. energy trade with Canada and Mexico flourishing. Canada was the No. 1 export market for U.S. crude oil and kerosene-type jet fuel in 2016, while Mexico was our No. 1 export market for total refined products, finished motor gasoline and other products.

namerican_energy_flows

The Wall Street Journal reports that since Mexico announced reforms opening new access to its energy sector, foreign investment has surged. U.S. access to heavy Mexican crudes – which a significant portion of our refinery sector is configured to process – is key to growing our exports of refined products.

NAFTA has been good for U.S. energy, very good. ISDS ensures that American energy companies have recourse if they believe they’ve been subject to unfair treatment, which is critically important to investment decisions – decisions that ultimately make our nation stronger economically and more energy secure. The ISDS provision should be retained in any revision of NAFTA.


ABOUT THE AUTHOR

Mark Green joined API after a career in newspaper journalism, including 16 years as national editorial writer for The Oklahoman in the paper’s Washington bureau. Mark also was a reporter, copy editor and sports editor. He earned his journalism degree from the University of Oklahoma and master’s in journalism and public affairs from American University. He and his wife Pamela live in Occoquan, Va., where they enjoy their four grandchildren.