Updated US NAFTA Objectives Show Potential Flexibility Toward Keeping ISDS All-Inclusive

The U.S.'s proposal for an optional ISDS has been one of several sticking points during talks, as the U.S. is looking for clear signs from Canada and Mexico that they're willing to engage on some proposals to significantly change how NAFTA operates. Those contentious proposals include pitches to scrap the deal's binational antidumping and countervailing duty dispute settlement process, a proposal for a 50 percent U.S. domestic content requirement and 85 percent North American content requirement for automobiles, and a proposal to allow U.S. agriculture producers in a certain region to band together and use seasonal data as a basis for AD and CV duty case petitions on perishable imports, among others. Some major U.S. industry groups, including the U.S. Chamber of Commerce, have aggressively dissented from the U.S.’s idea for an optional ISDS (see 1710100025), put fourth during the fourth round in Washington.

The updated objectives appear to indicate U.S. flexibility toward maintaining an all-inclusive ISDS system, adding several new points on investment compared with the original objectives, and including language that suggests the U.S. is accounting for the existence of “arbitrators” in an updated NAFTA, Stimson Center distinguished fellow Bill Reinsch said in an email. “The language clearly seems to assume that an ISDS provision will continue to exist and that it will operate in ways similar to those currently -- note the reference to ‘arbitrators,’” he said. “That indicates they clearly contemplate having a process where disputes are referred to independent arbitrators and are not proposing simply to abolish the procedure, which some NAFTA critics have called for.”

Among other things, the updated document newly calls for “providing the NAFTA countries with tools to ensure the coherence and correctness of the interpretation of investment rules,” which Reinsch said he interprets as an ISDS “sovereignty override” that would allow parties to ignore ISDS arbitrator decisions under “specified circumstances.” Such an override would be consistent with the statements of Lighthizer and other administration officials on the importance of sovereignty, which could “knock a big hole in ISDS,” he said, potentially casting more uncertainty on negotiations. “Why would someone bring a dispute if they knew that if they won, the losing country would be able to negate the decision?” Reinsch asked.

While the updated investment objectives appear to indicate the U.S. is moving away from the optional ISDS pitch and acknowledging that a tripartite ISDS will remain part of NAFTA, “persistent doubt” remains about “who speaks for the U.S.,” said Eric Miller, president of Rideau Potomac Strategy Group, a trade consulting firm. Negotiating approaches sometimes clash within the executive branch and between the executive branch and congressional and industry stakeholders, he said. The ISDS objectives “can be floated, but does that have the support of the senior levels of the White House? Does that have the support of everybody?” Miller said. “We have seen cases where less-than-fully-vetted proposals have actually gone forward.” There's no indication that the U.S.'s optional ISDS proposal itself has changed since it was pitched during the fourth round, Lori Wallach, director of liberal consumer rights advocacy group Public Citizen's Global Trade Watch, said in an email.

Cato Institute trade policy analyst Simon Lester was surprised that some the new investment points seem to contradict previous reports that USTR was seeking to undermine NAFTA's ISDS mechanism, but also said that the new investment objectives don’t necessarily mean USTR plans to break from its optional-ISDS proposal. “Overall, I think these objectives are just designed to kind of mollify Congress in the short term, but leave USTR the discretion to negotiate what it wants later,” Lester said. While the new objectives are likely aimed to please the Chamber, too, that group likely won’t “fall for something so transparent,” he said. “The Chamber’s going to want to hear quiet, behind the scenes” indications that the U.S. is shifting toward its positions on ISDS. Lester noted, too, that the added objectives refer to investment disputes but don’t include the specific term “investor-state dispute settlement,” noting that this leaves room for the U.S. to issue a state-to-state dispute settlement proposal -- whereby governments, instead of firms, challenge investment policies of other governments -- to replace ISDS as it exists. USTR didn't comment.