New trade pact leaves most US industry at mercy of Mexico's courts

The new North American trade agreement
ends key legal protections for many U.S. businesses operating in Mexico,
leaving their operations exposed to a risk they had avoided under the
old trade deal: Mexico's court system.

NEW YORK/MEXICO CITY: The new North American trade agreement ends key
legal protections for many U.S. businesses operating in Mexico, leaving
their operations exposed to a risk they had avoided under the old trade
deal: Mexico's court system.

For thousands of U.S. firms, the change could add complications and
uncertainty to doing business south of the border. Mexico is the
third-largest U.S. trading partner.

The previous trade agreement, NAFTA, included provisions that gave U.S.
firms operating in Mexico and Canada the option to challenge government
decisions at an international tribunal.

A change in Mexican or Canadian regulations, for example, that had a
material impact on a U.S. firm's operations, could be challenged through
an international panel instead of local courts.

The removal of the investment protection means firms would now be at the
mercy of Mexico's courts, which are notorious for corruption, an energy
industry source said.

The provision has been part of numerous trade pacts to lessen risks for
firms operating overseas. Its removal makes the new agreement an
outlier, trade experts and industry sources in Washington said.

The administration of U.S. President Donald Trump took a negative view
on the provision. U.S. Trade Representative (USTR) Robert Lighthizer
sees it as a subsidy for U.S. companies to invest in Mexico.

A spokeswoman for USTR declined to comment for this story, referring to
Lighthizer's previous statements, which essentially said the old
provision encouraged companies to move operations overseas at the cost
of American jobs.

Trump blamed NAFTA for the loss of thousands of U.S. manufacturing jobs
to Mexico, where labor is cheaper. He threatened to end the free trade
deal until Mexico and Canada agreed to more favorable terms. A revised
pact was signed last month.


The new deal, officially called the United States-Mexico-Canada
Agreement (USMCA), will phase out much of the old investor-state dispute
settlement (ISDS) protections over coming years.

Lighthizer had initially wanted to remove all such protections, but
agreed to some carve outs after pressure from Mexico and U.S. industry
groups, Mexican sources said.

"He took a more moderate position because Mexico wanted to preserve
ISDS, because it is very important for investment," said Jesus Seade,
lead trade negotiator for Mexico President-elect Andrés Manuel Lopez

Republican lawmakers in the United States, including Senator Orrin Hatch
from Utah, also opposed Lighthizer's attempts to cut ISDS from the
deal. He led other lawmakers to press Lighthizer to keep NAFTA's "robust
investor protections" in a March letter.

A spokeswoman for Hatch said he is still reviewing the deal and working to ensure it "will build on NAFTA's proven success".

Under the new deal, the ISDS tribunal would only be an option for firms
disputing a small number of issues, such as state expropriation of
assets or discrimination against foreign entities.

A handful of industries retain broader protections under USMCA. They are
oil and gas, telecommunications, power generation and infrastructure
sectors that have contracts with the Mexican government.

But even those sectors face some uncertainty, industry sources said,
because it is unclear if contracts with state-owned enterprises, such as
oil company Petroleos Mexicanos (PEMEX) and state power utility
Comision Federal Electricidad, would be covered.

"This is a major degradation of investor protections," a business industry source in Washington said.

Large U.S. firms have typically won these kinds of disputes, sources said.

In 2009, agribusiness Cargill Inc won US$77 million from the arbitration
tribunal over trade barriers the company said Mexico erected against
high-fructose corn syrup from 2002 to 2007.

In 2015, Ottawa was forced to pay ExxonMobil Corp and Murphy Oil Corp
US$17 million in damages after the companies won a victory against a
requirement to spend money on research and development.

"The change to ISDS is certainly deliberate and signals what USTR will
pursue in the future," said Inu Manak, a trade specialist at the Cato
Institute, a conservative think tank in Washington.

USTR last week said it plans to open trade talks with the European Union, the United Kingdom and Japan.

"We'll have to see how far they push it in the coming year as more negotiations begin," Manak said.

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