The new trade pact leaves little protection for US industry in Mexico
Last updated on December 3rd, 2018
There are new North American trade agreements in place and they are adding a few problems to existing American businesses that operate in Mexico. The American operations are exposed to the risk that had been avoided under the older deal, and there are literally thousands of these firms.
Mexico, despite Donald Trump’s threat of a wall, is the third largest trading partner of the United States. The old trade agreement, NAFTA, ensured that US firms operating in Mexico could challenge government decisions at a specially set up international tribunal. The same applied for Canada. But recent changes to this agreement, including the removal of investment protection, has a severe impact on the US firms.
American firms are now at the mercy of Mexico’s courts rather than international tribunals. Mexican courts are renowned for corruption and lengthy processes.
The investment protection provision had been part of trade pacts that were in place to lessen risks for firms operating out of the United States. Removing this provision makes business risky.
President Trump’s administration took a negative view on the investment provision, and U.S. Trade Representative Robert Lighthizer saw it as a subsidy for Americans investing in Mexico. They saw it as a way for Americans to move operations to Mexico, using cheaper labor and meaning that Americans lost their jobs.
A revised pact was put into place and signed last month. This new deal is known as The United States-Mexico-Canada Agreement – USMCA – and it will phase out much of the old investor-state dispute settlement (ISDS) protections over coming years.
Initially, it is thought that USTR wanted to remove all protection, but caved in to pressure from both Mexican and American industry groups. Lighthizer was thought to behave more moderately, as he wanted to preserve the trade relationships between Mexico and the U.S.
We are not sure where the wall fits into all of this.
There have been disputes between American firms working in Mexico, settled by the international tribune. Many of these are state-owned enterprises, such as oil company Petroleos Mexicanos (PEMEX) and state power utility Commission Federal Electricidad.
These companies need some protection. And the new laws are a major degradation of investor protections, according to Washington business industry sources.
“This is a major degradation of investor protections,” a business industry source in Washington said. Usually, the large American companies have won the disputes that have come up, in a fair manner and in an internationally agreed upon manner.
Now, Trump and his administration want more jobs for more Americans and they want the industry to return to America. But time will tell if it is going to return to America, simply because it is more expensive to run in America.
The newly revised pact has not been accepted willingly by big business and there is sure to be a lengthy process ahead to see what can be changed, if it can be changed, and how it can be changed.
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