By Guy Caruso
August 24, 2018 at 5:00 am ET
A “handshake deal” is expected to be announced imminently on the North American Free Trade Agreement between the United States and Mexico, paving the way for Canada to come back to the table. But as negotiations continue, often overlooked in discussions about NAFTA’s future is the critical role the agreement has played in shaping energy trade between the three nations.
Before NAFTA’s signing into law, energy trade between North American nations was minuscule. Today, trilateral energy trade in North America is occurring at record rates, facilitating the U.S. shale revolution and helping position the United States as the world’s leader in shale oil and gas production.
Consider that the United States has gone from exporting very little natural gas 10 years ago to exporting about 10 billion cubic feet per day, including 5 billion to Mexico alone. The United States became a net exporter of natural gas in 2017. U.S. refinery exports of refined petroleum products to Mexico have surged, helped by reforms to the Mexican economy that opened up new investment opportunities for energy products. U.S. refineries are now operating at historically high utilization rates and strong profitability as a result of open mark policies encouraged by NAFTA.
But this incredible momentum could be rolled back should a new NAFTA deal omit or weaken a key provision: the investor-state dispute settlement mechanism.
Included in every major U.S. trade agreement, the ISDS provides important protections for U.S. firms investing abroad. Without the ISDS mechanism, American investment and business operations could be subject to illegal seizure by xenophobic governments. For example, ISDS was key in allowing Mobil and other energy firms to recover $1.6 billion after Venezuelan dictator Hugo Chavez turned his populist radicalism against energy companies by seizing their private assets. But U.S. Trade Rep. Robert Lighthizer has suggested removing ISDS from a new NAFTA, a move opposed by Mexico and Canada and widely panned by the American business community.
Not only would the removal of ISDS be counterproductive to President Donald Trump’s desire for an “America First” trade policy, it would also threaten U.S. energy companies with investments in Mexico. That’s because Mexico’s president-elect, Andrés Manuel López Obrador, has vocally criticized private foreign investment in Mexican oil and gas assets. During his campaign, López Obrador suggested that Mexico might become more self-dependent, including a “go-it-alone” approach to energy. This may have been campaign rhetoric, but a modernized NAFTA could facilitate fair trade practices. Without the ISDS in place, American firms could find themselves with no recourse for justice should their assets be seized and government policy disadvantage them, as was the case in Venezuela.
Many believe that López Obrador will pragmatically support a modernized NAFTA, cementing trade relationships with the United States that are crucial to Mexico. But the question mark remains, as does the specter that a collapsed NAFTA could destabilize markets, disrupt a burgeoning North American energy trade, and dislodge the United States from its role as the key international economic actor in Mexico’s economy.
These concerns were the subject of a recent Heritage Foundation paper, which argues for a modernized NAFTA that preserves ISDS in light of Mexico’s recent election. Will López Obrador be the pragmatist that his recent public comments suggest, or will he lean on his revolutionary impulse to “clean up corruption” by placing large international companies, including energy firms, in the crosshairs of Mexican economic policy? The global market remains uneasy about which López Obrador will take the helm of the Mexican government or in which direction he will steer Mexican economic policy.
The reality is that during López Obrador’s tenure as president, whether it is just six years or longer, the Mexican economy will need U.S. capacity and investment in natural gas. If Mexico’s new president really wants to serve the people he claims to represent, his nation will need American energy.
He will also need to seriously consider extending opportunities to lease Mexican federal lands and offshore waters for oil and gas production, part of President Peña Nieto’s plan for partial energy sector privatization. These will be difficult goals without the peace of mind that comes with a renewed NAFTA and a preserved ISDS provision.
Trump faces a similar reality. With unemployment down and the United States poised to see a 3 percent or more increase in economic growth, Trump has a golden opportunity to continue this momentum by being a hero on trade. He can accomplish this by following the course suggested recently by Stephen Moore, Steve Forbes and Art Laffer, who argue for “total trade disarmament” by abolishing all tariffs, subsidies and other trade restraints on American imports if others do the same for American exports.
By applying this strategy to continuing NAFTA negotiations and preserving the ISDS, Trump can solidify a true “America First” trade policy. The result will be a stronger American economy.
Guy F. Caruso is a senior adviser in the Energy and National Security Program at the Center for Strategic and International Studies and is a former head of the Energy Information Administration.
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