ISDS as a Catalyst for Growth: The U.S. Chemical Industry’s Case for Stronger Investment Protections Under the USMCA

Recognizing the importance of free trade to the highly-integrated, North American supply chain, U.S. chemicals manufacturers welcomed last Friday’s signing of the U.S.-Mexico-Canada Agreement (USMCA) in Buenos Aires.

However, legitimate concerns remain about insufficient Investor-State Dispute Settlement (ISDS) protections under the newly-inked trade pact – a subject which this post will review in greater depth.

Chemicals industry support for USMCA

As the American Chemistry Council (ACC) wrote in our statement last Friday, the USMCA is poised to support chemical manufacturing growth in many ways.

First, the USMCA is a trilateral agreement between the U.S. and two of our country’s biggest export destinations for chemicals. In 2017, U.S. chemical manufacturers exported approximately $43 billion to Canada and Mexico. That number is expected to grow to $59 billion in 2025.

Second, ACC strongly supports the inclusion of the final Sectoral Annex for Chemical Substances, which embraces the principles the North American chemical industry jointly recommended to enhance Regulatory Cooperation.

Third, USMCA streamlines the Rules of Origin for chemicals and helps facilitate and protect digital trade by making simple yet modern upgrades, such as enabling electronic filing options and digital signatures.

Stakeholders unite around need for greater ISDS protections

ISDS matters to U.S. chemicals manufacturers because it provides an arbitration process that allows a foreign investor in a country to make claims directly against the host government if it feels the government has violated the provisions of the investment chapter of the agreement.

Under the original North American Free Trade Agreement (NAFTA), U.S. chemicals manufacturers could make a full set of claims if Canada and Mexico violated the investment provisions. If the USMCA goes into effect as drafted, that would no longer be the case.

ISDS has been the subject of countless discussions over the past twelve months. Recently, the Washington International Trade Association (WITA) convened a crowd of businesses, law, academia, NGOs, and embassies to discuss the importance and relevance of ISDS, and explore potential changes to the text on ISDS prior to possible ratification of the USMCA by each party next year.

Part 1 of the WITA ISDS event is embedded below; Parts 2 and 3 are available on WITA’s event page.

ACC’s position on ISDS and its importance to our industry

There are 4 core points I think it’s important to share that can help explain why U.S. chemical manufacturers care very much about ISDS protections for their investments in Canada and Mexico.

  1. Although some have claimed that ISDS protections may incentivize companies to invest abroad rather than in the U.S., that simply is not the case for the U.S. chemicals industry.

Chemical companies do not exclusively invest in foreign markets for the purpose of exporting back to the United States. They invest to be close to their customers for a variety of reasons that are unique to our industry:

  • Proximity of feedstock: these localized investments take advantage of feedstocks available in markets like Mexico and Canada;
  • U.S. export growth: ACC companies make these investments to create markets and export innovative products from the United States;
  • Minimizing safety risks: building and investing locally helps minimize the need to transport hazardous chemicals across borders, which helps protect people and the environment; plus
  • Several other factors that influence ACC members’ decision-making: reliable and inexpensive energy sources, strong rule of law, and access to a skilled and educated workforce.

ISDS is a necessary backstop to protect these investments, but ISDS is not the reason our companies make those investments. In fact, ISDS — if drafted appropriately — will serve as an incentive for any government which commits to implement good regulatory practices, such as Mexico has in the USMCA. All of this helps our members grow business that supports further production and job creation, including in the United States.

  1. The chemicals industry in the United States has benefited from ISDS tools throughout the history of NAFTA and the US FTA program.

FTAs with ISDS have created better climates for investment as well as trade-related economic growth.

Since 1997, companies in our sector have made numerous ISDS claims against foreign government actions. According to data from the United Nations Conference on Trade and Development, both Canada and Mexico are tied for third on the most frequent respondent list (after Argentina and the Czech Republic). ISDS is especially valuable there because it gives ACC member companies recourse when local courts have not addressed the problem.

It should be noted, however, that most of the benefit of enforcement mechanisms are through the existence of ISDS, not through its use. The existence of ISDS prevents investment barriers from happening, similar to how WTO agreements play a strong role in the prevention of trade barriers.

  1. ACC shares many of our colleagues’ concerns about the USMCA outcomes on ISDS.

Although our industry has unique reasons for seeking greater ISDS protections in the USMCA, ACC’s voice is part of a chorus of business and industry associations that share many of the same concerns. For example, we are also concerned that:

  • Canada decided to opt out of ISDS, which is a NAFTA-minus outcome;
  • The USMCA hand picks the sectors that can make the full set of claims. The chemicals sector is not in this select group and can only make claims on post-establishment national treatment and most favored nation violations and direct expropriations;
  • An investor must have a contract with the Mexican government in order to make a claim, which is something our industry would normally never have to do;
  • The USMCA limits ISDS protections from the original NAFTA;
  • The USMCA extends the exhaustion period from 6 months in the original NAFTA to 30 months. This is a disincentive for an investor to make any ISDS claims.
  1. There are various ways the U.S can work to resolve concerns over insufficient ISDS protections. 

Ideally, ACC and many of our fellow business partners would like to see Canada opt back in, and allow all sectors to make claims on the full set of ISDS provisions (e.g., no selected sectors, no contract requirement).

If the above proposition is unfeasible, our second choice would be to add chemicals to the list of selected sectors. This would require the elimination of the contract requirement and the addition of more sectors to the list, including the chemicals sector.

USMCA outcome on ISDS should not set a precedent

U.S. investment in Canada and Mexico has enabled America manufacturers to thrive in foreign export markets and in the U.S. domestic market.

We recognize the political priority that the Administration is trying to address with the current USMCA provisions on ISDS. However, if the current text on ISDS under USMCA does not change in order to better protect those investments, we are concerned other countries may default to the agreement as a template for other free trade pacts.

If the goal is reinvigorating manufacturing in the United States, foreign investment can indeed help support that goal, but only if companies have confidence that the rule of law will protect their investments.

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