Mexico rules out uneven investment protection in new Nafta

The Mexican government is sticking to a principle of reciprocity as talks with the US and Canada for the renewal of the North American Free Trade Agreement (Nafta) have yet to reach a consensus on the investment protection regime of the new Nafta and other major issues, such as rules of origin.  

“If Mexico gives protection to US investors, the US should give protection to Mexican investors,” Ildefonso Guajardo, Mexico’s finance minister, said at an event in Miami on April 17, a few days before a key in-person high-profile meeting in Washington with US trade representative Robert Lighthizer and Canadian foreign minister Chrystia Freeland.

Chapter 11 hangs in the balance

The three countries have held seven rounds of official talks on the renewal of Nafta since Mr Lighthizer notified Congress about the government’s intention to renegotiate the agreement, which US president Donald Trump called “the worst trade deal ever made” in May 2017. About 70% of the issues on the table have been solved, although the most complex are still pending, including dispute settlement mechanisms, Mr Guajardo said at the World Strategic Forum.

Nafta grants investors typical investment protection provisions under its Chapter 11, which creates the case for an arbitration claim before recognised tribunals such as the World Bank’s International Centre for Settlement of Investment Disputes if an investor believes its rights to, among others, a fair and equitable treatment, lawful expropriation and national treatment have been violated.

Such guarantees have been a key factor in facilitating foreign investment within the bloc, giving investors a mechanism to resolve any dispute that may occur with the host state. Between 2005 and 2016, the US has been sued 11 times under the provisions of Chapter 11, and never lost a case, Mexico 17 times and lost eight, whereas Canada lost or settled in eight cases out of 34 claims, according to figures from the Canadian Centre for Policy Alternatives.

Chapter 11’s provisions are now at odds with the White House’s America First policy, and have been openly criticised by Mr Lighthizer, who called it “absurd” for investors to expect to have a political risk insurance paid by the government, hinting at the US’s will to abandon Chapter 11 – something Mexico does not agree on.  

“Our position is that we would like to have a Chapter 11,” Mr Guajardo said in Miami. “If the US insists in not having one, that is their responsibility vis-à-vis their investors, not our responsibility. One option [under discussion] is to have a possibility of an opt-in/opt-out solution. The problem is that if Mexico opts in [of Chapter 11], and the US opts out, that would be asymmetrical, and our Congress will never approve something that is not symmetrical.”

A back door for Chinese imports?

Another major point of contention between the parties concerns Nafta’s rules of origin, which define the minimum amount of local content required for a product to gain Nafta status and thus be traded across the bloc free of tariffs. Under the current rules, at least 62.5% of the material in key goods such as car or light trucks must come from North America to qualify for Nafta status. That did not prevent Mexico and its booming car industry from relying heavily on imports of production inputs from Asia, mostly China, to add competitiveness to its productions.

“Under the current rules, you can bring in components from other countries, then add value through a process in Mexico, and thus comply with the rule of origin. This is what the Americans have realised now,” Manuel Montoya, managing director of automotive cluster association Claut in northern state Nuevo León, one of the country’s hubs for the automotive industry, told fDi Magazine in April 2017.

Accordingly, the Mexican government has left little door open for a tighter rule of origin, although it has not closed it altogether. “We are approaching the issue with an open mind, we have to understand what are the details of the US proposal, figure out its consequences on the industry, and try to strike an agreement,” Mr Guajardo said, speaking to fDi Magazine on the sidelines of the event in Miami.

The issue has become even more sensitive now that the White House has slapped tariffs on Chinese imports worth $150bn, and Beijing may thus seek to use Latin American countries and their free trade agreements with the US to get around the tariffs.

Where Mexico stands

“For Mexico, it is extremely clear where our main dimension is – that is North America, where we belong,” Mr Guajardo said. “We have been developing a strong strategy in the past two years, and started 45 anti-dumping procedures, two thirds of which have been against steel imports from Asia, and we will remain on the watch not to compromise our steel industry and keep strengthening the integration of North America. [As testament to this] we imposed tariffs on Chinese steel two years earlier than the US, because we were aware of the overcapacity of its steel industry and the stress it was imposing on the steel industry.”

Mr Guajardo even hinted at a chance to go further and mirror the trade barriers erected by the US against certain Chinese imports. “Waiting to see the detailed position of the US on this, we can manage a mirror strategy to avoid Mexico becoming a backdoor for Chinese imports to the US markets,” he said.

On the other hand, he ruled out any US tariff against Mexican steel and other imports, something that Mr Trump threatened to do to gain leverage over the Nafta negotiations. “Mexico has got a trade deficit in steel, it wouldn’t make any sense to put quotas or tariffs [on its steel].”

All the parties seem to be aiming at mid-May to close the whole negotiations. As that deadline approaches, they will have to iron out differences and find common ground on dispute settlement mechanisms and rules of origin to save Nafta, once and for all.