NAFTA Works – For the U.S. and U.S. Energy

Mark Green
Posted March 2, 2018

In recent weeks we’ve encouraged U.S. negotiators in ongoing talks to modernize the North American Free Trade Agreement to ensure that energy-supporting provisions remain in NAFTA. For a simple reason: NAFTA works for U.S. energy.

NAFTA’s zero tariffs on exchanged goods, market access and trade liberalization have helped foster economic growth, generate consumer benefits and increase U.S. energy security within a more  integrated and interdependent North American energy zone. U.S. energy trade with Canada and Mexico has flourished under NAFTA. Canada was the No. 1 export market for U.S. crude oil and kerosene-type jet fuel in 2016, while Mexico is now our No. 1 export market for pipeline natural gas, total refined products, finished motor gasoline and other products.

NAFTA also works in this way: It protects the direct foreign investments of U.S. businesses, including energy companies. NAFTA’s Investor State Dispute Settlement provision (ISDS) is critical in protecting against unfair treatment or expropriation by host countries. Weakening or eliminating ISDS will take the United States in the wrong direction and risk damaging U.S. global energy leadership. A couple of specific cases:

• In Mobil Investments Inc. and Murphy Oil Corporation vs. Canada, the U.S. companies won a claim under NAFTA that the Newfoundland Offshore Petroleum Board had imposed a fee in exchange for the authorization for a pair of offshore oil projects – prohibited under NAFTA. Canada was ordered to pay the claimants about $17 million.
• A U.S. investor’s mining project was denied by the Canadian government under an undefined standard that only U.S. investors, not Canadian, were held to. A tribunal ruled that Canada had breached NAFTA obligations and the U.S. investor was entitled to financial compensation.

It’s difficult to overstate how important it is for U.S. companies to be able to seek relief in cases like these and others. Without protection for direct foreign investment, that investment might not be made and associated US jobs compromised.

The U.S. has done well under NAFTA’s ISDS provision. To date, U.S. investors have won or favorably settled many of the 40 claims against Canada and Mexico, while the U.S. has a perfect ISDS record in cases brought against it under NAFTA by Canadian and Mexican interests.

In particular, protection against expropriation without compensation is key to U.S. accessing the energy markets of other nations, especially Mexico’s. If the U.S. withdraws from NAFTA or weakens it with a sunset clause or by excluding investment protections and ISDS, Mexico may come to view the U.S. as an unreliable trading partner and ally. Mexico could reverse the recent decision to open its energy market, and we could see a repeat of what happened in Venezuela.

Before Hugo Chavez came to power in Venezuela in 1999 and nationalized oil and natural gas assets beginning in 2005, U.S. companies were the largest foreign investors in 53 percent of the 19 major oil and natural gas projects in Venezuela. Chavez ordered the nationalization and expropriation of assets of a number of U.S. companies. By 2018, companies from China or Russia were the largest foreign investors in 30 percent of the 40 major oil and natural gas projects in Venezuela, compared to U.S. companies holding the largest foreign stake in 13 percent of those projects. Meanwhile, Venezuela has fallen into financial decline, and its indebtedness to Russia and China has grown.

Again, a risk in the U.S. walking away from NAFTA or weakening it is that Mexico could follow a similar path and the United States could see China and Russia increasing their presence in Mexico’s energy market, right on our southern border.

That’s not the right path for U.S. energy and national security. NAFTA should be modernized in the right way. NAFTA should be made permanent, without a sunset clause, so that the agreement isn’t weakened by periodic renegotiations. NAFTA’s investor protections should be strengthened and its ISDS provision retained to avoid chilling direct foreign investment by U.S. companies. Mexico and its energy market should be drawn closer to the U.S. with binding commitments for a U.S. energy presence there.

NAFTA has been good for U.S. energy, which in turn has helped our economy and strengthened our security. North American is on the cusp of achieving energy self-sufficiency with respect to liquid fuels, which NAFTA has helped bring about. NAFTA works for the U.S. A modernized treaty should continue to do this. Jack Gerard, API president and CEO:  

“NAFTA has created a North American energy market that benefits American consumers, creates American jobs and promotes U.S. national security interests. Ongoing negotiations to modernize NAFTA 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.”