Worldwide support for investor-state dispute settlement (ISDS) — a legal mechanism that permits foreign investors to pursue binding, third-party arbitration against a country over actions that harm their investments — has been under attack from Western democracies since at least 1998, when opposition by the U.S., Canada, and France led to the termination of negotiations toward a Multilateral Agreement on Investment (MAI). However, for more than two decades following this step, the EU and U.S. continued to negotiate bilateral investment treaties (BITs) and free trade agreements (FTAs) with ISDS provisions, including the 2015 Trans-Pacific Partnership (TPP) between the U.S. and 11 other nations and the 2016 Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada. 

More recently, indications that new ISDS agreements may be coming to an end have proliferated, at least with the EU and U.S., as discussed in this report. But the most recent and, perhaps, clearest sign of ISDS losing its appeal for the largest capital exporting jurisdictions is the EU’s unanimous decision in April 2024, effective in May 2024, to withdraw from the 1994 50-plus member European Union Energy Charter Treaty (ECT). The fact that the ECT had been renegotiated in 2022 because of concerns about its inconsistency with government responses to climate change were apparently not decisive. For the EU, the ECT is essentially abandoned. The future of ISDS, even with substantial reforms, such as those being discussed by the seemingly endless United Nations Conference on Trade and Development’s (UNCTAD) Working Group III, remains uncertain, although many developing countries, such as Mexico, still see it as a valuable stimulus for foreign investment despite reservations.

The U.S. had concluded multiple FTAs and a few BITs as late as 2007. More recent agreements were the TPP and the United States-Mexico-Canada Agreement (USMCA). The U.S., under former President Obama, was among the principal supporters of the TPP in 2015 — an agreement that incorporated then-traditional ISDS provisions. However, the U.S. withdrew under the Trump administration in January 2017, and the TPP became the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The 2018 USMCA saw a radical reduction in the scope of investor protection, with ISDS eliminated between the U.S. and Canada entirely and circumscribed between the U.S. and Mexico, with the full range of enforceable protections limited to a handful of government concession agreements. Since 2018, the large majorities of the Democratic Party as well as many Republicans are opposed to new — and in some cases, existing — investor protection provisions, with the opposition led by former U.S. Trade Representative Robert Lighthizer and Democratic Sen. Elizabeth Warren of Massachusetts. While business groups continue to strongly defend ISDS provisions in U.S. FTAs, they have not prevailed over U.S. anti-ISDS policies.

That being said, the investment law bar and young lawyers who wish to join should take note: ISDS will be a feature of the international legal and investment world for decades to come. ISDS will still be of importance even if the U.S. avoids new agreements and withdraws from existing ones — the latter being difficult and, in my view, very unlikely, as discussed below — and if the EU and its members avoid new commitments. Why? Because worldwide, there are a total of about 2,222 BITs in force and 388 investment provisions in FTAs. Although a few International Centre for Settlement of Investment Disputes (ICSID) member countries, such as Bolivia, Ecuador, and Venezuela, have withdrawn from the ICSID Convention and terminated some of their BITs, the vast majority of ICSID members remain party. Several dozen new cases of BITs are still being registered each year.

To sort all this out, this report is structured as follows: 

• Section II summarizes the content of typical BITs and their evolution in recent years.
• Section III analyzes the driving forces that led to the ICSID Convention’s establishment in 1964.
• Section IV traces the proliferation of BITs and FTA investment provisions after the ICSID went into force, to the golden age of awards, effectively spawned by the 1994 North American Free Trade Agreement (NAFTA).
• Section V addresses forces leading to the demise of ISDS, clearly in the U.S. and EU but not necessarily in other major capital exporting countries, such as Japan and Canada, and emphatically not with China.
• Section VI offers brief conclusions.

The reader should keep two major caveats in mind. First, the U.S. and EU, while leaders in foreign direct investment (FDI), are not the only sources, and EU and U.S. dominance in the investment field likely will decrease in the future with the expanding participation of South Korea, Singapore, China, and other major economies in Asia. Second, ISDS has been the subject of thousands of articles and hundreds of books. Any attempt, such as this one, to address these issues in a single piece, will reflect some critical omissions, for which I apologize in advance.

II. Content of Typical Investment Treaties and the EU Energy Charter Treaty

NAFTA and Its Successors

In this discussion, it may be useful to set out what we are discussing when we use the term “ISDS.” For this purpose, we will begin with NAFTA’s Chapter 11, as the standard example, in large part because it has been widely copied elsewhere, not only in subsequent agreements concluded by the three NAFTA parties. In the interest of brevity, procedural provisions and scope issues will be set aside as they are available by reviewing the text and voluminous academic and other commentary.

Key protections of NAFTA’s Chapter 11 include the following:

• Guarantees of national treatment.
• Most-favored-nation treatment.
• Minimum standard of treatment.
• Ban on performance requirements.
• Flexibility in the appointment of senior management.
• Financial transfer rights.
• Protection against direct and indirection expropriation.
• Exceptions for certain industries or sectors, depending on the agreement.

For purposes of this discussion, Section B: “Settlement of Disputes between a Party and an Investor of Another Party” of NAFTA’s Chapter 11 is also relevant, because it provides detailed rules for mandatory third-party arbitration of disputes between a NAFTA investor and another NAFTA government (ISDS).

While there have been many changes over the more than 20 years between NAFTA and TPP negotiations, the most significant updates relate to environmental concerns. For example, the TPP and many other investment chapters incorporate the following language: “Non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety and the environment, do not constitute indirect expropriations, except in rare circumstances.”

The Energy Charter Treaty

The original ECT as amended is more limited in scope, perhaps reflecting an early objective to encourage multilateral cooperation among many countries in the energy sector as the Cold War appeared to have disappeared. Key provisions include:

• Freedom to select key personnel for positions in an investment project.
• Compensation for losses related to war or other armed conflict.
• Protection against direct and indirect expropriations.
• Freedom to transfer funds.
• Subrogation of government investment guarantors when the host country has taken action covered by an investment guarantee.

However, the ECT does not provide national treatment, most favored nation treatment, or a guarantee of fair and equitable treatment like many more traditional ISDS agreements. It also contains specific recognition of “state sovereignty and sovereign rights over energy resources” and rather weak language on “sustainable development” and avoidance of environmental degradation. After briefly addressing transparency, taxation, state enterprises, and coverage of subnational authorities, along with certain exceptions and provision for economic integration agreements — e.g., FTAs and customs unions — the treaty also incorporates a broad investor right to international arbitration. In a major departure from BITs and FTA investment chapters, which usually provide only for actions by foreign investors against host government, the treaty provides for settlement of disputes between the state parties also via third-party arbitration.

III. The International Centre for the Settlement of Investment Disputes 

The ICSID Convention, according to one of its principal negotiators and advocates, the late Andreas F. Lowenfeld, Herbert and Rose Rubin Professor of International Law Emeritus at New York University, reflected a lengthy debate in the U.N. between two main entities:

• Developing countries, most of which advocated “Permanent Sovereignty over Natural Resources” and rejected the application of international law to investment disputes.
• Capital-exporting countries, which sought mechanisms that would provide third-party arbitration for investment disputes and accept the international requirements inter alia of prompt, adequate, and effective compensation.

Industrial states, which were the principal donors at the World Bank, were no longer providing sufficient capital for development; rather, such funding depended increasingly on private investors. The result was a mechanism for addressing investment disputes, but no agreement on the principal obligations of host states to investors. After several years of debate on the idea of a convention, the World Bank’s executive directors approved a draft of what would become the ICSID in 1962. As Aron Broches, then the World Bank’s general counsel, noted, “If the parties had agreed to use the services of the Center for arbitration as the sole means of settling their dispute, the government party should not be permitted to refer the private party to the government’s national courts, and the private party should not be permitted to seek the protection of its own government and that government would not be entitled to give such protection … Finally, … the Convention would provide that such awards would be enforceable in the territories of the countries adhering to the Convention.”

Significantly, as the italicized phrase demonstrates, the parties to ICSID are not, by becoming parties, obligated to accept third-party arbitration under the ICSID Convention. Rather, consent must be registered separately, typically under a BIT, under a dispute settlement chapter of a trade agreement — such as NAFTA’s Chapter 11 discussed above — in an investment contract, or in an agreement between an investor and ICSID party for resolving a particular dispute.

The requirements and procedures for ICSID arbitration have been widely discussed elsewhere, including but not limited to ICSID’s own website. The treaty entered into force in 1966, and as of 2024, it includes 158 contracting states.

IV. The Golden Age of ISDS 

While NAFTA itself resulted in more than 60 notices of arbitration and some 30 final arbitral decisions from 1994 through June 30, 2023, the total number of known treaty-based ISDS claims as of July 31, 2022, is reported to be 1,229. NAFTA was unusual for its time in that it provided for ISDS between two developed nations, Canada and the U.S. Over the period of NAFTA’s reach — January 1994 to June 2020 — there were more claims between Canada and the U.S. than between any other two parties. In the past, as noted earlier, the general assumption had been that ISDS would typically take place between developed country investors and developing country host governments. While this has certainly been the predominant pattern worldwide, several other major international agreements with ISDS provisions were concluded after NAFTA, including the ECT, which included most European and many developing nations, and the TPP, which is also a mix of developed and developing countries.

As an academic observer during most of this period and an arbitrator in two ISDS proceedings, my sense is that the explosion of ISDS cases under NAFTA and elsewhere was driven by a variety of factors, including increasing volumes of private FDI across borders. These included, in many cases, decisions by host governments to change the conditions under which the investments were originally made unilaterally and to increase environmental protection after mining concessions had been negotiated and granted, particularly with the installation of new, more environmentally conscious governments. In my view, the creativity of many U.S. and international investment lawyers was probably a factor as well, particularly under NAFTA. It is also significant that many developing countries have been persuaded that the existence of a BIT or FTA investment chapter with a capital-exporting country can be a major factor in attracting FDI in an increasingly competitive world.

This latter conclusion is sometimes reached despite the lack of any clear data, suggesting that the treaties were a controlling factor in attracting FDI, rather than simply one aspect of creating a favorable investment climate. As an UNCTAD summary noted, “Overall, developing countries stand to benefit from engaging in IIAs in terms of increasing their attractiveness for FDI, and therefore the likelihood that they receive more FDI. … Furthermore, — and this point cannot be emphasized enough — the conclusion of IIAs needs to be embedded in broader FDI policies covering all host country determinants of foreign investment. IIAs alone cannot do the job.”

This view seems supported by anecdotal evidence. For example, there is no investment treaty between the U.S. and China, Brazil, or India, yet U.S. investors over the past several decades have flocked to all three countries, at least as long as other aspects of the host country’s investment climate were generally positive — true in some periods but not in others — and the potential for financial gains was robust. That being said, it seems self-evident that an investment protection agreement can in some instances be decisive in encouraging an investor to pursue a project in a given country, with Mexico’s experience in NAFTA being a good example, as discussed below.

As of June 2024, the total number of cases submitted to ICSID arbitration was 1,020. However, while the first case was registered in 1972, no more than four cases were registered annually until 1997. From 1997 to 1999, 9 or 10 cases were registered each year, for a total of 29 cases. ICSID usage bodog online casino continued to expand in the 21st century, with 12 in 2000, 14 in 2001, 18 in 2002, and 57 in 2023. Twenty-one cases were registered in the first five and a half months of 2024. The expansion probably reflected several factors, including the pressures of multinational enterprises on their lawyers, and the replacement of public foreign investment with private FDI. Still, the most important reason for the increase may have been the proliferation of BITs and investment chapters of FTAs. According to the UNCTAD Investment Policy Hub, by 2024, 2,835 BITs had been negotiated, and 2,222 were in force, while another 462 investment provisions in trade agreements have been agreed upon, of which 388 are in force.

V. Summary of Forces Behind the Demise of ISDS

EU

EU members’ opposition to the ECT and other investment protection agreements with ISDS chapters seems to have been fueled significantly by a broadening populist trend that favors “sovereignty.” In this respect, a major critique of ISDS is that it authorizes private arbitrators rather than democratically chosen national or EU judges to make binding decisions. A widespread belief exists that ISDS is unfair because of the following:

• Is nontransparent.
• Is overly expensive leading to the exclusion of all but the largest enterprises.
• Allows investors to ignore or downplay environmental concerns.
• Does not offer workers and environmentalists a similar opportunity to seek arbitration against host governments.

However, in my opinion, a series of highly publicized arbitrations between developed European countries along with several decisions of the Court of Justice of the European Union (CJEU) seeking to prevent intra-EU arbitration are also responsible. While the European Commission (Commission) abandoned traditional ISDS in the CETA negotiations in 2015 in favor of its investment court mechanism, as discussed below, and has continued to advocate for a multilateral investment court, no EU member or other country has endorsed the project, as far as I am aware.

Opposition to ISDS is shared by the CJEU because the justices appear to view it as a usurpation of CJEU authority, although currently their case law applies only to intra-EU member arbitrations. As one international law firm explained in 2023, 

“The European Union’s (‘EU’) policy against arbitration of intra-EU investor-State disputes remains largely cabined to its borders. Arbitral tribunals continue to reject objections to their jurisdiction on the basis of the CJEU’s Achmea, Komstroy and PL Holdings judgments, the sole exception being the Green Power decision, in which the tribunal was seated within the EU. The EU’s attempt to renegotiate the Energy Charter Treaty by, among other things, carving out intra-EU arbitration did not succeed, and the EU is now advocating for a coordinated withdrawal instead. And while EU Member States courts have set aside intra-EU awards issued by tribunals seated in their jurisdictions, U.S. courts have allowed requests for enforcement of intra-EU awards to proceed, showing that investors can still obtain relief outside the EU.”

This policy seems to have expanded despite the fact that some arbitral tribunals have refused to recognize the applicability of Achmea and related cases, although such rejection may not be absolute. For example, in Green Power v. Spain, the arbitral tribunal decided it had no jurisdiction over the claimant’s claims and dismissed the case, essentially on grounds that an arbitral tribunal operating under the ECT cannot override EU law, as reflected in the CJEU decisions, because EU law is lex superior.

To the best of my knowledge, no similar ISDS tribunal has taken this approach. However, in June 2024, the Commission and EU members formally declared that the ECT “cannot and never could serve as a legal basis for intra-EU arbitration proceedings,” further limiting the scope of ISDS as it affects EU member states. As no EU members remain party to the ECT and increasingly respect the CJEU rulings, there will be fewer opportunities for intra-EU arbitrations, although arbitrations under existing BITs with non-European countries remain available.

Significantly, under the Treaty of Lisbon enacted in 2009, EU member states were no longer authorized to negotiate their own BITs, FTAs, or many other international agreements. As a result, not only was intra-EU arbitration precluded by Achmea, but the change led the Commission to promote and seek to implement a new approach to ISDS, consisting of a permanent investment court and appellate mechanism. The investment court mechanism was initially included in the CETA and the FTA with Vietnam. However, a decade after entering into force provisionally, this CETA remains under provisional application, with the application of the investment provisions excluded. Ten of the 27 EU members have refused to approve it in part because it includes the EU’s novel investment court and appellate mechanism for resolving investor-state disputes, believed by many to be a challenge to national sovereignty like a traditional ISDS.

EU FTAs with Vietnam and Singapore that originally were to include ISDS mechanisms were restructured to isolate the ISDS provisions, which remain in limbo with Vietnam’s agreement, or shelved indefinitely for later negotiations with Singapore’s. While the Commission does not seem to have abandoned its investment court mechanism, no significant progress toward bringing the mechanism into force appears to have been made beyond agreeing with Canada on rules that would govern the investment tribunal, mediation, and binding interpretations, along with a code of conduct for the judges.

As far as the ECT is concerned, as of January 2024, Denmark, France, Italy, the Netherlands, Poland, Slovenia, and Spain had or were in the process of withdrawing from the ECT, with the Commission endorsing the withdrawals of all EU members. Regarding actual disputes, the ECT secretariat reported that as of May 2023, 158 known cases had been instituted under the treaty. Of these, as of June 2022, Russia, the Ukraine, or Moldova were respondents in only eight cases; more significantly, among the largest EU members, Spain was the respondent in 51 cases, Italy in 13, Poland in 5, and Germany in 4, while France and the U.K. were the respondent in no cases.

The ECT is one of a relatively few ISDS agreements, along with NAFTA, where one developed country’s investors can bring a claim against another developed country. Before NAFTA and the ECT, such claims were rare at best, mostly under BITs and FTAs, where despite reciprocal provisions, the principal purpose was to protect capital exporting country investors from arbitrary actions in developing countries with weak legal systems.

U.S.

Similar anti-ISDS views are prevalent in the U.S. Notably, U.S. Trade Representative Katherine Tai recently commented: “President Biden does not believe corporations should receive special tribunals in trade agreements that are not available to other organizations, and he opposes the ability of private corporations to attack labor, health, and environmental policies through ISDS. I share these views, and the United States is not currently pursuing any trade or investment agreements that would establish ISDS.”

Although such opposition did not represent a significant majority position in the U.S. Congress and with U.S. presidents until relatively recently, its origins go back at least as far as the negotiation of NAFTA in 1991–92. In a more recent statement at the time of the USMCA negotiations, such organizations as Public Citizen attacked the ISDS provisions of NAFTA as a “stunning corporate power grab: NAFTA grants rights to thousands of multinational corporations to bypass domestic courts and directly ‘sue’ the U.S., Canadian and Mexican governments before a panel of three corporate lawyers.” Sen. Warren has opposed ISDS in trade agreements at least since the TPP negotiations in 2015, while Lighthizer’s public opposition is somewhat more recent — albeit for different reasons — with the USMCA negotiations. As he observed in 2017, “The bottom line is business says ‘We want to make decisions and have markets decide. But! We would like to have political risk insurance paid for by the United States’ government.’ And to me that’s absurd. You either are in the market, or you’re not in the market. They’ll come in and say ‘Ambassador, the market’s dictating we go to Mexico to invest in certain things.’ And my reaction is, ‘Then go to Mexico and invest. That’s what the market’s for.’” What is most significant is that — for sharply differing reasons as noted in the introduction — the U.S. left and right has strongly opposed ISDS in both current and future trade agreements; many also are eschewing all significant trade agreements entirely, as has been the Biden administration policy.

However, strong opposition to the elimination of ISDS in existing and future agreements is widespread among business groups. As a letter from the Business Roundtable, National Association of Manufacturers, and the U.S. Chamber of Commerce at the time of the USMCA asserted: “ISDS does not infringe U.S. sovereignty. Rather, it upholds the same fundamental due process and private property guarantees protected by our Constitution, and it obligates other countries to uphold these precepts as well. ISDS 2 cannot overturn U.S. laws or regulations: All arbiters can do is award compensation when a government expropriates property or otherwise tramples on the rule of law.”

Such opposition has not been limited to business groups. A commentary published by the independent, nonpartisan Center for Strategic and International Studies (CSIS) has also advanced strong reservations, suggesting that administration and congressional opposition to ISDS is based on “shaky and short-sighted premises”; it argues that “the legal certainty and stability provided by ISDS mechanisms will prove critical in facilitating cross-border investment,” particularly with privately financed wind, solar, hydro, and nuclear power projects.

Still, under the circumstances, and despite the potential adverse impact on green power projects worldwide, in my view, it will be very surprising if the U.S. under either a Harris or a Trump administration negotiates any new ISDS provisions or other trade agreements in the foreseeable future.

Mexico

Although Mexico remains very much a developing country with a commitment to ISDS — weakened considerably in the case of the ISDS under the USMCA — Mexico merits discussion of its historical relationship to ISDS in NAFTA, the USMCA. and other agreements. Prior to the NAFTA negotiations, Mexico had long been legally and constitutionally committed to the Calvo Clause, which stipulates that disputes with foreign investors must be resolved by national courts and tribunals. It also bars recourse by foreign investors to the diplomatic protection of their home countries.

In the course of the 1991–92 NAFTA negotiations, Mexico’s adherence to the Calvo Clause was largely abandoned, with Mexico accepting ISDS in NAFTA’s Chapter 11, even though it did not become party to the ICSID Convention until 2018. This sea change in Mexico’s investment policies occurred apparently because officials were convinced that Mexico would not benefit fully from NAFTA’s duty-free, quota-free access to the U.S. and Canadian markets unless foreign investors had greater confidence in Mexico’s investment climate and the rule of law. Chapter 11 addressed, inter alia, the weakness of Mexico’s domestic foreign investment legislation, the mandatory requirements for majority Mexican ownership, and the uncertainty the existing system offered to foreign investors. Foreign investors won other major incentives in NAFTA, including commitments to national treatment of foreign investors and improved protection for intellectual property, which Mexico fulfilled.

Mexico has concluded 36 BITs, all post-NAFTA, as of 2021, including 15 with the U.K., Switzerland, and other European countries. In addition to Canada and the U.S., Mexico has trade agreements with nearly 50 countries, most of which include investment protection provisions. Two of the most important are trade agreements with the EU concluded in 2000 and Japan in 2004. The agreement with Japan incorporates an investment protection and ISDS chapter. The EU-Mexico Economic Partnership Agreement does not include this chapter, presumably because, as noted above, many of the then-existing EU members had separate BITs with Mexico.

Mexico is currently in FTA negotiations both with the EU and the U.K. A public draft of the EU-Mexico Global Agreement from 2018 indicates that the FTA, which was approved by the EU Council in September of 2020, incorporates the usual protections for foreign investors, but no ISDS. A separate statement on the agreement from the EU indicates that the Commission intends to include the investment court system in in its agreements with Mexico. However, efforts by the EU to amend the agreement in 2022 were apparently opposed by Mexico, which among other things wanted modernized investment protection to be included sooner rather than later, suggesting continued support for ISDS. Presumably, any ISDS provisions will be in a separate agreement when and if the trade agreement is concluded to avoid the delays experienced among EU member states in ratifying CETA.

The U.K. and Mexico signed a “continuity agreement” in 2021 which essentially replicates the 2000 agreement with the EU; negotiations of a broader FTA with or without ISDS provisions were initiated in July 2022 but apparently have not progressed.

Despite these last activities, for Mexico the most important consideration for foreign investors is not the availability of ISDS, but the fact that the López Obrador government has been highly critical and dismissive of foreign investment, even though the continuing viability of Mexico’s economy depends on it. President-elect Claudia Sheinbaum may be able to moderate the anti-capitalist rhetoric but could be unwilling or unable to change significantly Mexico’s dismal investment climate. She is promoting a new doctrine known as “Shared Prosperity Plan,” and no one knows what impact, if any, it would have on investors and their capital. Add to this the possibility of another Trump presidency, with its strong opposition not only to ISDS but to U.S. investment outside the U.S., and one wonders whether even significant actions by Sheinbaum to improve the investment would have the desired effect, at least for U.S. and other enterprises seeking to sell their products in the U.S.

Canada

Canada’s approach is more difficult to fathom. Canada has not concluded a new BIT since 2018, a few weeks after the USMCA was signed. In the USMCA negotiations, it agreed to eliminate ISDS between Canada and the U.S. entirely, although ISDS with Mexico is available under the revised CPTPP, as both countries are parties. Canada concluded bodog casino a BIT with China in 2012 with modified ISDS provisions. The country concluded CETA with the EU in 2017, with the EU’s still pending arbitration court/appellate mechanism, and published a model BIT in 2021 with contemporary ISDS provisions.

There appear to be no trade or investment agreements concluded by Canada since December 2018. Still, as the 2021 model BIT indicates, Canada has not necessarily rejected ISDS for the future. 

Elsewhere

China is the country with the most BITs concluded, as recently as 2023, as noted earlier; 146 are reportedly in existence, although some are not in force. It is not known how many are currently under negotiation. Japan, another major capital exporting nation, has negotiated only 38 BITs, the most recent in 2023; thus, it is too soon to predict whether Japan’s policy is under review. South Korea also appears active regarding BITs, with its most recent agreement concluded in 2023, the 105th it has negotiated. Singapore, another developed economy, remains a leader in concluding investment agreements with ISDS, including its 53 BITs and 42 FTAs, most recently concluded in 2023.

In the U.K., opposition exists to the ECT, as in the EU. However, views on ISDS seem unclear; in any event they have not been clearly articulated by the new Labour government. The U.K. accepted traditional ISDS in the negotiations with the CPTPP and in the continuation agreement with Canada. As one analysis concludes, “The UK’s position on the inclusion of ISDS seems ambivalent.”

VI. Conclusions

As noted earlier, several countries have withdrawn from the ICSID. Others such as South Africa, Brazil, and India have eschewed agreements with traditional ISDS provisions. But even if the EU continues to insist on their unique investment court and appellate mechanism approach to ISDS, many countries, including Canada, China, Hong Kong, Japan, Singapore, and South Korea, have not followed suit. If the capital exporting countries that are part of the EU and the U.S. oppose ISDS agreements in the future, and the Commission has no more success with its investment court mechanism than it has in the past, this could have a significant impact in the body of investment treaty law in the coming decade. 

The impact on several thousand existing and new BITs and FTA investment provisions would be minimal, at least in the short and medium term, since renegotiation or termination of most such agreements is problematic. It is also possible that future U.S. policies may seek to broaden restrictions on outbound investments to China, Hong Kong, and Macao beyond current law for national security or other reasons.

EU or U.S. investors’ decisions to reduce their activities in countries where they enjoy no ISDS protection, whether for green energy or other long-term projects, would be more significant in their impacts. Given the fact that there are currently thousands of U.S. and EU private sector investments in China, Brazil, and India — where ISDS protections do not exist for the U.S. and in most cases for the EU — one hesitates to make such predictions. However, as long as the EU countries and U.S. investors account for a disproportionate share of FDI, the U.S. and EU countries, including former member the U.K., represented five of the top 10 foreign investors, with the others being Hong Kong, China, Japan, and Canada. Per World Bank data from 2012–22, the six accounted for 70% of the total — the anti-ISDS policy changes could ultimately have a significant impact.

A promise by developed countries to provide $100 billion annually to developing countries for climate action has not materialized. Thus, ironically, broad opposition to ISDS from environmental groups concerned with “sovereignty” or other related issues could backfire by discouraging new green investment, particularly in countries where the rule of law is uncertain, as in Mexico as well as much of Latin America and Africa.

To read the report as it was published on the Rice University’s Baker Institute for Public Policy webpage, click here

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One of the most high-profile results of a friend-shoring policy is that Canada and Mexico have recently replaced China as America’s largest trading partners by total trade, while Mexico has overtaken China as America’s top importer. This followed the introduction of Donald Trump’s trade strategy, which aimed to reduce US dependence on Chinese goods – partly for political reasons and partly because of Trump’s perception of China as a rival power.

Joe Biden has also placed restrictions on trade with China in an attempt to strengthen US competitiveness with China and grow the US tech industry.

The US raised tariffs on imports from China significantly during the Trump administration. These levels remain high, making the costs of importing goods from China to the US more expensive.

In addition, the International Labor Organization Global Wage Report 2022-23 shows that China has experienced the highest rate of real wage growth among all G20 countries over the period 2008-22, also pushing up the price of Chinese goods.

The Biden administration continues to champion friend-shoring, which has further encouraged companies to shift production from China to Mexico as they weigh up geopolitical risks against differences in the costs of production.

While data on the number of firms relocating production is not available, the latest trade data suggests Mexico has managed to capitalise on the US-China rivalry.

Closer relationships with allies can be created by forming new trade agreements, for example, the US, Mexico, Canada Agreement (USMCA), which is more about geopolitics and friend-shoring than lowering tariff barriers as was the case of its predecessor, the North America Free Trade Agreement (Nafta).

But the USMCA was also a product of its time. US political will had shifted towards undermining political competitors and setting out anti-China political statements that resonated with voters.

Trump, a consistent critic of Nafta, had argued that it undermined American jobs and wages, a statement that undoubtedly played well in US industrial states experiencing manufacturing decline. A paper from the National Bureau of Economic Research suggested that far more US jobs were lost due to competition with China.

Doing business with your friends

Friend-shoring is a new term for something that has been around for a long time. Countries engaged in sanctions, blockades, and friend-shoring during the first and second world wars on a much larger scale.

In 1948, the US initiated economic sanctions against the Soviet Union, a 50-year-long strategy that started with export restrictions and was solidified by the Export Control Act of 1949.

These sanctions, intensified after the Battle Act of 1951, were aimed at limiting strategic goods to the Soviet bloc and became a permanent fixture of cold war policy following the escalation of the Korean war.

Data analysis shows how trade responds to political factors. For over sixty years, trade economists have made extensive use of the gravity model of trade, which has provided empirical evidence that countries tend to trade more with countries geographically closer to them as well as where there is a common language, common legal system, common exchange rate regime and shared colonial history.

Research also shows how political distance between countries and formal military alliances affects trade.

Governments can use trade policy to strategically support their own industries, so reducing trade with rivals can be part of a political agenda based on boosting domestic manufacturing (and jobs) rather than relying on imports. The US Chips and Science Act, and in the EU, the European Chips Act, are examples of policies that can inflict economic pain on adversaries while ensuring domestic production of this key component in high-technology manufacturing.

However, developing an industry takes time. By the time the industry is established, it may not pay off, either due to falling prices caused by increased supply or an economic slowdown that suppresses demand.

In the case of US chips, it is particularly interesting to note that the existing industry focuses on design and production of high-quality chips. Therefore, the latest policy will see low-cost microchips, the mainstay of the Chinese chip industry, start to be produced in the US and compete with the established US high-end suppliers.

The US has experienced the negative effects of these types of policies before. Just consider the US support for the steel industry, a popular choice among US presidents, including the current administration. Under the Trump administration, this saw 25% tariffs imposed on steel imports, which benefited the US industry but imposed costs on steel users.

Countries such as Australia were exempt from this policy, while other allies, such as the EU, were hit hard. Industrial policy can reduce dependence on rivals, but it’s not clear that friends always get special treatment.

Other policies can tie in with a friend-shoring agenda. The new generation of EU trade agreements deal with issues including labour rights and environmental protection, making it clear that third countries that want to do business with the EU need to meet the same standards. The EU has also been debating new anti-forced labour legislation, so this type of legislation may also start to get more serious consideration in the UK, for instance.

Friend-shoring policies aren’t new, but the slogan is. Self-sufficiency at the national level can inflict short-term pain on adversaries but may hold limited benefits in the medium term. However, there is broader acceptance that businesses need to have the certainty of trading bloc friends.

Half of all trade currently takes place between members of trade blocs, and recent trade data for the US and Mexico suggests that trade blocs may become more important over time as production moves.

To read the full article as it appears on The Conversation’s website, click here.

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Almost since its inception, the North American Free Trade Agreement has generated controversy far out of proportion to its economic consequences. From Ross Perot’s 1992 warning that NAFTA would create a “giant sucking sound” of jobs flowing to Mexico to Barack Obama’s (and Hillary Clinton’s) campaign trail threat to pull out of the agreement to Donald Trump’s 2016 description of it as a “disaster,” criticism of the trade deal has been a near‐​constant feature of American politics.

Veracity aside, such swipes are curious. The agreement signed among Mexico, Canada, and the United States — building on a pre‐​existing free trade deal between the latter two — was never going to significantly alter the United States’ economic trajectory. It just wasn’t possible. Eliminating US tariffs on imports from a single, relatively smaller country already facing very low tariffs — an average of two percent — isn’t the stuff that economic game‐​changers are made of.

Perhaps, then, NAFTA is best understood as a lightning rod for criticism of globalization more broadly. Ire directed at the agreement is as much aimed at trade conceptually as it is at NAFTA itself, if not more so.

It is in this spirit that one best understands Helen Andrews’ recent critique of NAFTA in The American Conservative to mark the agreement’s 30th birthday. While Andrews, a senior editor at The American Conservative, directs several barbs at the trade deal, her main beef is the era of globalization she holds NAFTA responsible for helping usher in.

In Andrews’ telling, NAFTA was merely the first of several important free trade dominos to fall, setting off a “chain of events that allowed globalization to run free the way it did.” NAFTA’s entrance into force on January 1, 1994, she notes, was accompanied around the same time by other important milestones of expanded economic integration including the agreement creating the World Trade Organization, the formation of the European Union, and the opening of the Chunnel connecting the United Kingdom and France.

Boom, globalization was off to the races.

But the idea that 1994 heralded a new economic era is a strained interpretation of events. Put more bluntly, it’s false. Globalization — the process of increasing international economic integration—has been underway for centuries, if not millennia. (The first evidence of long‐​distance trade dates back to 3000 BCE) Sometimes it has ebbed (the outbreak of the world wars) and other times it has flowed (the Age of Discovery and the Industrial Age) but the direction has long been toward more expanded linkages. Indeed, each of the items cited by Andrews weren’t revolutionary events but further evolutions of events long underway.

The European Union, for example, was the successor to the European Community, which in turn traces its origins to the European Coal and Steel Community. The World Trade Organization, meanwhile, was preceded by the General Agreement on Tariffs and Trade (GATT), which had successfully reduced tariffs around the world through a series of negotiating rounds spanning many decades. Before the Channel Tunnel’s opening, commerce between the UK and its European neighbors took place via shipping and airplanes (and still does). And prior to NAFTA, there was the US‐​Canada Free Trade Agreement signed in 1988. Globalization has long been apace.

Andrews also errs in other elements of her narrative about globalization’s forward march. While she holds neoconservatives responsible for Republicans’ 1990s‐​era departure from their traditional pro‐​tariff stance and Ronald Reagan’s “nuanced and pragmatic” trade policies, she ignores that NAFTA was in many ways the realization of a vision first outlined by Reagan.

In Reagan’s 1979 announcement of his candidacy for president, he called for a “North American accord” — incorporated into the 1980 GOP platform — to develop closer ties among the United States, Canada, and Mexico. While the exact contours of this proposal were not spelled out, Reagan mentioned in his speech his dream of a future in which “a map of the world might show the North American continent as one in which the people’s commerce of its three strong countries flow more freely across their present borders than they do today.”

There’s also the small matter that the US‐​Canada free trade agreement that served as NAFTA’s foundation was signed by Reagan in 1988. Hardly a neoconservative, Reagan was arguably NAFTA’s intellectual godfather.

This miscasting of history, however, is a relatively bodog casino minor detail. More notable is the thin nature of Andrews’ NAFTA criticism, which consists as much of promises unfulfilled as actual harms inflicted. She claims, for example, that Mexicans imported their goods from Asia instead of the US (in fact, US exports to Mexico more than doubled from 1994–2000), and points out that a bilateral trade balance that had been in US surplus swung to a deficit (an irrelevant measure of economic success). NAFTA’s immediate wake also saw an “explosion” of illegal immigration, “much” of which Andrews says — baselessly — the trade deal was “directly responsible for.”

On Mexico’s side of the ledger, meanwhile, she dings the agreement for rising obesity levels in the country, two million campesinos (rural farmers) losing their employment as US corn flooded in and then looking for work across the border, and a rising tide of progressive social policy including abortion, marriage equality, and permitting same‐​sex couples to adopt (which this author happens to support).

The idea that seismic economic or societal shifts would result from a free trade agreement, however, should be met with considerable skepticism.

Regarding the surge in illegal immigration, for example, it’s worth considering other contemporaneous events. In addition to NAFTA, 1994 also saw the so‐​called “Tequila Crisis” that plunged Mexico into recession (NAFTA helped facilitate the subsequent recovery). On the US side, the go‐​go economy of the late 1990s saw unemployment drop below 5 percent from May 1997 through August 2001. That immigration increased under such circumstances should surprise no one.

More relevant when evaluating a free trade agreement are economic outcomes — and from that perspective, NAFTA looks pretty good. From the date of the agreement to the present day, per‐​capita GDP has nearly doubled in Mexico and almost tripled in the United States, and US manufacturing output, median wages, and median household income have all experienced healthy gains. To be clear, it’s a mistake to single‐​handedly credit NAFTA with such outcomes — correlation isn’t causation. But the same principle applies to NAFTA’s critics, who often blame the agreement for any and all economic problems since 1994.

Interestingly, even Andrews concedes that the number of jobs lost to Mexico was “relatively small.” But, keeping with her overarching narrative, she nonetheless holds NAFTA culpable for its alleged unleashing of forces that allowed globalization to run riot, contributing to various economic ills, including the loss of 5 million manufacturing jobs from 1995–2015.

But NAFTA’s claimed role is ahistorical, and blame placed on globalization for manufacturing job losses is mistaken. The decline in US manufacturing jobs — something that has been taking place since 1979 — is more a story of technology (robots, computers, and the like) and changing US consumer tastes than it is about trade. We know this because while the number of manufacturing jobs has declined, output has risen. Manufacturing jobs have declined abroad too, even in China. More recent US manufacturing job gains, meanwhile, have been accompanied by stagnant industrial productivity. Most lost manufacturing jobs were claimed by automation and economic development, not Mexico and China.

So what is NAFTA’s real record? Literature on the subject paints a consistent picture: the agreement significantly expanded trilateral trade but had only a modest — and beneficial — economic impact. A 2012 OECD literature review of NAFTA studies generally found small but positive results, as did a 2013 US International Trade Commission (USITC) review. GDP, productivity, and wages increased by modest amounts — economic welfare increased. Another 2014 paper examining NAFTA’s effects produced similar results. Given NAFTA’s scope and the long‐​established gains of free trade, that’s about what one should expect.

It also bears mentioning that some of the agreement’s benefits are not easily quantifiable. The trade deal, for example, means that Americans now have easier access to out‐​of‐​season fruits and vegetables that can be grown in Mexico’s favorable climes. Since the late 1990s the amount of fresh vegetables imported into the United States — primarily from Mexico and Canada — has nearly doubled.

NAFTA has also played a role in bolstering the resilience of the US auto industry at a time of rising global competition, especially from Asia. The elimination of duties between the United States and Mexico has provided additional export opportunities for both US automakers and auto parts producers as well as a more competitive source of crucial inputs. The result: a more competitive North American auto industry, with the United States at its center. Indeed, it is for this reason that the Center for Automotive Research warned in 2017 that Detroit would be hard hit by a US withdrawal from NAFTA.

Admittedly, the removal of trade barriers does produce some disruption, particularly for workers previously insulated from import competition. But some context is in order. The dynamic US economy destroys and creates millions of jobs each year due to technology, trade (both international and interstate), innovation, and other factors. According to a 2014 Peterson Institute for International Economics analysis, however, only 5 percent of the job losses were attributable to trade with Mexico. An economy without job loss, whatever the reason, is an economy locked in stagnation and suffering.

If the United States has been harmed by NAFTA, it is perhaps found in the misplaced attention it receives. Energy devoted to the trade deal’s alleged harm is attention deflected from actual policy missteps. That’s useful to politicians and others for whom NAFTA (and other trade issues) provide a useful distraction from actual sources of economic damage such as overwrought environmental regulations, ballooning infrastructure costs, and protectionist policies that undermine US competitiveness such as tariffs on imported metals and the Jones Act.

Focusing on such realistic threats might roil powerful special interests, so blame is instead assigned to NAFTA and foreign competition.

NAFTA has, overall, produced limited but small benefits for the United States, and 30 years on should be regarded as a modest policy success. Its participants have, on net, benefitted from the deal. Three decades on, its critics should finally sheathe their rhetorical swords and move on to actual economic challenges facing the country.

Colin Grabow is a research fellow at the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies where his research focuses on domestic forms of trade protectionism such as the Jones Act and the U.S. sugar program.

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Over this period, India’s engagement with the outside world has evolved in response to domestic imperatives and to its external environment. India is engaged in a major reset at this time, moving from market-driven global integration to strategic trade and investment policy, what Prime Minister Narendra Modi has labelled self-reliance. What are the forces shaping India’s present external posture and what are the associated risks?

As the economist Pravin Krishna has observed, at its independence India inherited a relatively open trade regime and in 1948 was one of the 23 original ‘contracting parties’ to the General Agreement on Tariffs and Trade, the WTO’s predecessor. India’s turn inward was facilitated a decade later when the GATT permitted ‘special and differential treatment’ for its poorer members.

Policy was then reinforced by geopolitics. Indira Gandhi of the Congress party became prime minister in 1966 and increasingly sided with the USSR in the Cold War in reaction to US support of Pakistan and China under President Richard Nixon. The outcome was economic stagnation but ‘strategic autonomy’ was preserved.

India’s return to openness in 1991 also occurred on the watch of a Congress-led government. Elections in 1989 led to rejection of the ruling Congress party led by Indira Gandhi’s son, Rajiv Gandhi. The inexperienced coalition government that took office was not in a position to handle a fiscal and balance of payments crisis. The crisis was exacerbated by external events: the collapse of the Soviet Union, an important trade and defence partner, and the first Gulf War. In the 1991 election campaign, Rajiv Gandhi was assassinated, as his mother had been seven years earlier.

The electoral outcome was a Congress-led coalition government headed by PV Narasimha Rao, the first Congress prime minister from outside the Nehru–Gandhi family. Rao’s technocratic finance minister, Manmohan Singh, advised the prime minister to seek support from the IMF. The program submitted to the IMF included comprehensive reforms covering trade, public finance, the exchange rate regime and capital markets. While prime minister Rao provided valuable political cover for these reforms, he was not inclined to mount a frontal challenge to the party’s centre-left orthodoxy External integration remained a largely technocratic project that came to be known as ‘reform by stealth’ which is why it remains subject to reversal.

Though weak, this impetus to liberalisation survived for the next two decades till the global financial crisis. There was substantial reduction in average applied industrial tariffs, though agriculture remained very highly protected. Liberalisation was largely unilateral, driven by a desire to emulate the export-led manufacturing success of the economies of Asia.

India was an active but unconvinced participant in the WTO’s Doha round launched in 2001. India argued — with some justification — that a new round was premature as there was unfinished business from the earlier Uruguay Round to be dealt with, particularly where agricultural trade was concerned. Washington’s retreat from committed multilateralism towards preferential agreements — first with Canada and later including Mexico through the North American Free Trade Agreement (NAFTA) — and its support for China’s WTO accession, together with the steady expansion of the European Community, undermined India’s faith in the multilateral order in the 1990s and early 2000s.

India remains by instinct a multilateral trading power, preferring to trade under the GATT’s most-favoured-nation rules. It actively uses the flexibility afforded by the gap between applied and bound tariffs, as well as trade remedies such as anti-dumping and safeguard measures in order to manage domestic lobbies, despite the uncertainty that such interventions create for domestic and international investors. In the first decade of the new century, it began to flirt with relatively shallow bilateral preferential trade agreements with a range of partners. It also agreed to participate in negotiations on the Regional Comprehensive Partnership Agreement (RCEP) in 2012 but withdrew in 2019.

By the size of its economy, India is now a consequential, though still poor, middle power. However, the share of manufacturing value added in GDP, needed to accommodate its rapidly growing labour force, has remained stagnant. Instead, the services sector has boomed. While the overall balance of payments has remained comfortable, its structure has been closer to that of an advanced country, with a large deficit in manufacturing trade balanced by surpluses in agriculture and services. The concentration of the manufacturing deficit in India’s trade with China has added to bilateral political and diplomatic tensions.

As in the 1960s and 1990s, a combination of external and domestic forces has again prompted a re-evaluation of India’s external engagement. The economic, medical, humanitarian and political dimensions of the COVID-19 scourge have exposed and reinforced weaknesses in India’s development trajectory, and may have contributed to a setback to Modi’s party in important recent state-level elections. China’s long-term economic success and its current political assertiveness are now shaping both the regional and global economic order as well as its bilateral relations with India.

In its post-COVID-19 recovery, India will wish to consolidate market access for its export of services to rich countries and to make access to the country’s growing market most attractive for those willing to bring the latest technology. The risk is that more active government intervention will get hijacked by powerful domestic lobbies as happened before. India is also refocusing on trade with its South Asian neighbours and investing greater energy in links with Europe and the United States. By contrast, an early return to the RCEP negotiations seems unlikely.

Suman Bery was most recently Shell’s Chief Economist, based in The Hague, The Netherlands. He is currently a Nonresident Fellow of the Brussels think-tank Bruegel, as well as a Senior Fellow of the Mastercard Center for Inclusive Growth.

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Over the past several years, so the story goes, the free and open, multi-stakeholder-governed internet has been undermined by self-interested states, led by China and Russia, who wish to control the internet within their borders. Making things worse is that these countries are exporting their censorship- and surveillance-laden “digital authoritarianism” to democratic countries, risking the destruction of the global internet. This trend toward a “splinternet,” following this line of logic, has risen exponentially with the United States’ early August decision to effectively outlaw TikTok and WeChat in the United States, and its announcement of plans for a “clean network” Bodog Poker devoid of Chinese connections or companies such as Huawei. This final straw could lead, we are told, to “the end of cyberspace” itself.

In this story, parochial, authoritarian-tinged states are to blame for ruining the beauty of a truly global network.

This narrative may be useful for legitimizing the current internet governance framework, but there exists another way to understand these internet upheavals, one that will be familiar to long-standing observers of North American regional politics. It involves understanding the internet as having always been an American — not global — network, defined by and for American interests. Multi-stakeholder governance has always existed within these limits. When US perceptions of its interests change, so will the network.

This dynamic exists because, in North America, and with respect to the internet, the United States is a hegemonic power, with the ability and desire to shape regulations in ways that reflect its views, values and interests.

The late, great Canadian political scientist Stephen Clarkson was as astute an observer of North American relations as the country has ever produced. One of his starting points, elaborated nicely in this 2002 Canadian Centre for Policy Alternatives paper, was that the United States, as the regional hegemon, was capable of unilaterally defining and redefining the overall context within which its neighbours, Mexico and Canada, operated. The two smaller countries have significant room to manoeuvre within this context, and are able to influence some of the rules, but the overall direction is set by Washington.

The United States has unilaterally altered the foundations of North American governance twice since the 1994 implementation of the North American Free Trade Agreement (NAFTA). The first was after the September 11, 2001, terrorist attacks, when the United States unilaterally altered the continental covenant to reflect a newfound (and borderline paranoid) interest in raising barriers to entry to the American “homeland” (a term that entered the US political lexicon at about that time).

The second involved replacing NAFTA, at the insistence of US President Donald Trump, with the United States-Mexico-Canada Agreement (the USMCA, or CUSMA, as Canadians know it). The conventional wisdom holds that the new agreement is mostly just NAFTA by another name, but this assessment downplays the magnitude of the changes to North American governance. The inclusion, in Article 34.7, of a sunset clause and mandates for regular reviews signals that North America is entering an imperial phase, in which Washington will have a much greater ability to influence its neighbours’ domestic policies, through the omnipresent threat of removing preferential access to the US market. The USMCA also gives Washington more power to influence its partners’ monetary policy and determine with whom they may sign trade agreements.

Both the development of internet governance — in particular, the emphasis on “internet freedom” as maximized interconnection and interoperability — and the seriousness with which people are taking the US administration’s TikTok/WeChat/Huawei pronouncements — are examples of US hegemony in action. Several scholars have pointed out that both multi-stakeholder governance and “internet freedom” reflect US values and interests. As Madeline Carr notes in her book US Power and the Internet in International Relations: The Irony of the Information Age, the internet’s multi-stakeholder governance is dominated by American companies and actors. Echoing her, Shawn Powers and Michael Jablonski’s book The Real Cyber War: The Political Economy of Internet Freedom, highlights how “internet freedom” fits squarely within a century-old American policy designed to promote the dominance of American companies through easy access to foreign markets, in this case via a thoroughly commercialized internet – a point that I also develop in a further article with Jablonski. From this perspective, multi-stakeholder governance is underwritten by and inseparable from American hegemony. Actors can exert influence via multi-stakeholder governance, but they have to colour within the lines

The essence of hegemony is the ability of the hegemon to change the rules when it so desires. American internet hegemony has both similarities to and differences from American hegemony generally in North America. The unchangeable fact of their geographic locations means that Canada and Mexico have little choice but to follow US flights of fancy in most matters. In contrast, US global internet hegemony has always been somewhat weaker and more contingent. For example, as Dwayne Winseck has observed, “ownership and control of core elements of the global internet infrastructure such as the fibre optic submarine cables, autonomous system numbers (ASN) and the internet exchange points (IXP) that constitute the guts of the internet, is steadily tilting [away from the United States and] toward the rest of the world, especially Europe and the BRICS (Brazil, Russia, India, China and South Africa).”. Resistance to and even exit from policy areas dominated by the United States are more plausible for countries – particularly large countries like China – that are less tied to the United States than its two neighbours.

While China and Russia are challengers, it is the hegemon that has the most say over the internet’s overall shape. That US actions against TikTok and WeChat are being touted as game-changers suggests that analysts believe that the United States is, indeed, a hegemon. To the extent that the internet becomes the “splinternet,” it will not be because authoritarian challenger states have tried to seize power over the internet, but because the one state that has largely underwritten the entire project has decided that an internet based on its very self-interested version of “internet freedom” and maximized interconnection is no longer in its interest. When the hegemonic power decides that the rules change, they change.

The irony is that these recent US actions are likely to diminish, not increase, US internet hegemony and power. Hegemony is driven by interdependence, the creation of indispensable connections with the hegemonic power at the heart of the deal. By attempting to sever all ties with China, the United States is not only creating a more splintered internet. It effectively is putting China, and likely many other countries, outside its sphere of influence. Donald Trump’s expression of pure power may turn out to be the internet hegemon’s final gasp.

The opinions expressed in this article/multimedia are those of the author(s) and do not necessarily reflect the views of CIGI or its Board of Directors.

Blayne Haggart is a CIGI senior fellow and associate professor of political science at Brock University in St. Catharines, Canada. Blayne is also a senior associate fellow with the Käte Hamburger Kolleg/Centre for Global Cooperation Research at the University of Duisburg-Essen, Germany. His research focuses on the global political economy of data and intellectual property, online platforms, internet governance, and North American economic governance. 

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It is the latest of the 303 regional trade agreements (RTAs) currently in force—whose rank is likely to increase in the foreseeable future. The RTAs have hollowed out the World Trade Organization (WTO), and this process is likely to accelerate going forward. About half of world trade is now covered by the RTAs, reducing the scope and relevance of WTO rules and tariff schedules, as well as its dispute settlement and appeal mechanism.

If the USMCA is used as a template for future US trade negotiations, that would hasten the regionalization of world trade, fragmenting the global trading system based on the WTO and marginalizing the organization.

Below are key features of the USMCA, most of which are new in a US trade agreement.

• Auto parts rules of origin: raising the threshold from 62.5 percent to 75 percent (and 70 percent for steel and aluminum used in making parts).

• Use of quota: while being frowned upon by the WTO, the USMCA contains side letters to exempt 2.6 million passenger vehicles each from Canada and Mexico from potential Section 232 tariffs (of the US Trade Expansion Act of 1962, threatened by the United States on national security ground) on an annual basis, and roughly current annual volumes of auto parts.

• New labor requirements: 40 to 45 percent of auto parts must be made by workers earning at least $16 per hour by 2023—to be more comparable to the US average wage levels in this sector. Mexico has also passed labor reform law promoting the unionization and collective bargaining rights of their workers.

• Agricultural markets: US farmers can have better access to Canada which has agreed to raise its tariff-free quotas on dairy, poultry, and egg products under its supply management regime.

• Digital trade: for the first time, there is a full chapter on free digital trade in an FTA. The chapter prohibits import duties and other charges on electronically transmitted digital products; discriminatory treatment of cross-border data transfers; and forced data localization.

• Dispute settlement: state-to-state disputes regarding a matter which arises under this agreement, or under another international agreement, including the WTO agreement, to which the disputing parties are party, are to be settled in a forum selected by the complaining party—giving it a choice of forum most favorable to its position, instead of automatically referring WTO disputes to the WTO dispute settlement system. Furthermore, if the formation of the arbitration panel (in a chosen forum) is being blocked by noncooperative responding parties, the USMCA Implementation Act (US Public Law 116-113) allows the United States to use its domestic laws to impose safeguards on any surges in imports from Canada and Mexico.

• Dealing with state-owned enterprises (SOEs) and subsidies: requiring SOEs to compete on commercial basis and that any advantages such as subsidies enjoyed by the SOEs do not have adverse effects on US companies and workers. These provisions are more comprehensive than the WTO’s rules on subsidies and countervailing duties.

• Dealing with a non-market economy: any member wanting to negotiate a free trade agreement with a non-market economy (as defined by a member—primarily aiming at China) has to keep other members informed; and upon conclusion of such agreement, the other members can withdraw from the USMCA with a six month notice.

• Including a chapter on currency manipulation: this is the first time currency manipulation is included in a trade agreement. Traditionally, currency issues are dealt with by the US Treasury, normally in consultation with the International Monetary Fund (IMF) and its members.

Potential impacts of the USMCA

Several features of the USMCA can be viewed as representing the US template in future trade negotiations. Many of those features enjoy bipartisan political support and therefore are likely to stay beyond US President Donald J. Trump’s presidency. Specifically, US emphases on free digital trade, reducing tariff and non-tariff barriers to its agricultural exports, dealing with SOEs and subsidies, dealing with a non-market economy, preserving the US ability to enforce its trade laws in trade remedies—including the anti-dumping, countervailing duties and safeguards laws, and currency manipulation can be found in the US Trade Representative’s negotiating objectives vis-a-vis the United Kingdom and the European Union (EU).

In addition to agriculture, there are new areas of frictions concerning the upcoming trade negotiations with the United Kingdom and the EU. The free digital trade emphasis in the USMCA would be at odds with the plan of many European countries (Austria, France, Hungary, Poland, Turkey, the United Kingdom, and others) to proceed with their national versions of a digital services tax after the United States pulled out of the multilateral negotiations sponsored by the Organization for Economic Co-operation and Development (OECD). The United States has threatened retaliatory tariffs on any country imposing digital taxes.

In addition, the USMCA emphasis on free cross-border flows of data would need to be reconciled with the EU General Data Privacy Regulation (GDPR). Obviously, the difference between the US position and China’s security-driven restrictions on cross-border flows of data is much more glaring.

Also problematic is the USMCA chapter dealing with non-market economies—this would complicate the EU’s effort to negotiate a Comprehensive Agreement in Investment with China as well as the United Kingdom’s desire to seek a trade deal with China. On top of those issues, the US threat of imposing Section 232 tariffs on automobiles and auto parts remains a major irritant in the negotiations.

For developing countries, in the context of its effort to tighten the self-designation as “developing countries,” if the United States makes regular use of its demands contained in the automobiles chapter, for example the requirement that 40 to 45 percent of auto parts have to be made by workers earning at least $16 per hour, that would dilute the comparative advantages enjoyed by developing countries in their efforts to promote foreign trade to industrialize their economies.

More generally, the emphasis on tightening rules of origin for auto parts will strengthen emerging trends toward regionalization. Many companies have taken advantage of technological advances, especially in automation, and followed a desire to be close to their customers by setting up local production facilities to supply large national or regional markets such as North America. Recently, this regionalization trend has received strong impetus from the US-China trade war and from efforts to diversify and streamline complex global supply chains due to disruptions caused by the COVID-19 pandemic.

Finally, quite detrimental to the integrity of the WTO is the USMCA use of quota in side letters (exempting current volumes of automobiles and parts imports from Canada and Mexico fro potential future tariffs); provisions for a complaining party to select the forum to settle disputes even if the matters arise under the WTO agreement; and preserving the US ability to use its domestic laws to remedy trade complaints. These will lead to a further marginalization of the WTO dispute settlement mechanism. Already the WTO Appellate Body has been rendered inoperative due to lack of the necessary quorum to hear cases since the beginning of the year. Furthermore, the United States has signaled its opposition to using WTO resources to support the alternative trade dispute bodog casino appeal system recently launched by the EU, China, and eighteen other countries. The US opposition to the use of WTO resources to support activities benefiting a subset of the membership can also have a detrimental effect on the plurilateral approach—increasingly used by many WTO members trying to make headway in new trade negotiations with like-minded countries since the global multilateral approach has failed over the past decades.

In short, while the USMCA preserves free-trade flows among the three member countries, its use by the United States as a template for future trade negotiations, starting with the EU and the United Kingdom, would have a far-reaching effect on future developments of world trade. The global trading regime based on the WTO would shift more and more toward regional trading arrangements, in the process further fragmenting world trade and marginalizing the role of the WTO. This is all happening at a vulnerable moment for the WTO, which is going through a process of selecting a new director-general.

Hung Tran is a nonresident senior fellow at the Atlantic Council and former Executive Managing Director at the Institute of International Finance.

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Canada’s Automotive Parts Manufacturers’ Assn. (APMA) is optimistic that the U.S.-Mexico-Canada Agreement (USMCA) will deliver more sustained work to the country’s supply chain once the deal comes into force July 1. 

It replaces the North American Free Trade Agreement (NAFTA) in place since 1994. A key change with the new agreement is that Canadian (as well as American and Mexican) automakers may have to increase their USMCA-bloc sourcing to ensure 75% of a vehicle’s parts are made a signatory country, up from the current 62.5% under NAFTA; and that 40%-45% of auto content be made by workers earning at least $16 per hour. 

This will have an impact, although an increase in costs will be reined in, predicts APMA President Flavio Volpe. He thinks Canada’s high-tech manufacturing and research hubs, which are developing expertise in industry 4.0 tech such as artificial intelligence and machine learning, will enable parts makers to keep costs down. 

“We see a 25% increase in Canada” regarding parts sourcing, and while there would not be a similar increase in jobs, “there will be more work and there will not be 25% more costs. Maybe 5% across all vehicle costs,” he says. 

This would not be enough to force automakers to raise prices, especially given the focus on purchasing volumes over revenues in the sector, Volpe tells Wards. 

He thinks the Canadian parts sector may see “partial benefits” within a year, even though USMCA governments and industries have three years to fully implement the deal. As automakers assess medium-term strategies in the meantime, the 75% rule will start to push sourcing changes. 

And looking ahead, with autos, their parts and related production being increasingly automated – with labor a declining portion of costs – the ability of a higher-tech manufacturing center such as Canada to competitively supply components and materials will grow, predicts Volpe. 

Trade deals look ahead 25 years, and toward the end of that period driverless cars could be making accidents less likely, reducing the need for expensive anti-collision systems and costly materials, he suggests – making autos’ technological features an increasingly valuable component delivered by brains rather than brawn. 

His comments contrast with concerns by some researchers the USMCA will inflate auto costs and possibly depress demand and sales. A paper presented in June 2019 at the Global Trade Analysis Project in Warsaw, Poland, predicted 7.7% of the value of USMCA-bloc automotive input sales would shift move back into the signatory countries from other exporters. While this will generate work, it also will cost money – with auto production costs rising 0.8% in Canada and Mexico and 0.3% in the U.S., the paper predicts. 

David Adams, president and CEO of Global Automakers of Canada, agrees costs could rise: “It’s the only trade agreement where costs are going up instead of going down…It’s really not a free-trade agreement, it’s a managed-trade agreement,” he tells Wards. 

Canadian auto and parts makers could be “collateral damage beneficiaries” of the USMCA, he suggests, although, he adds, the impacts are likely to be so complex and unanticipated, a clear picture of the agreement’s effect on the North American auto sector may not emerge for two years. 

Companies will have to provide proof of compliance with USMCA sourcing rules from July 1, but Adams predicts tough enforcement by regulators will not happen immediately, especially given the industry is coping with the effects of COVID-19. 

The pandemic has pushed automakers into reconsidering extended supply chains and reappraising local sourcing, and this process probably will combine with the USMCA to increase Canadian parts purchases, he suggests. 

Will price competitiveness suffer? Maybe, especially initially, hindering automakers’ ability to export outside North America while competing with Asian manufacturers who “take advantage of global supply chains to get the highest quality for the lowest cost,” Adams says. 

Could automation help? He agrees it might, although the 2008-2010 financial crash pushed many manufacturers to abandon manual-based systems. The Canadian government has helped by allowing investors to write off capital stock in one year rather than many, Adams notes. 

Ultimately, whether this change will be good news for the three countries’ auto sectors is disputed. The International Monetary Fund (IMF) also predicted in March 2019 that USMCA sourcing rules would increase costs, preventing automakers from buying inexpensive parts from outside the bloc. All three countries would see their auto and parts exports fall as a result, including trade among the three signatory countries, the IMF projected. 

Says Adams, “There’s a lot of questions about the impact on auto and parts makers, and these questions won’t be answered anytime soon.”

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WHAT THEY’RE SAYING

On the USMCA

Bernie Sanders

“This deal—and I think the proponents of it acknowledge—will result in the continuation of the loss of hundreds of thousands of good-paying jobs as a result of outsourcing . . . Every major environmental organization has said no to this new trade agreement because it does not even have the phrase “climate change” in it. And given the fact that climate change is right now the greatest threat facing this planet, I will not vote for a trade agreement that does not incorporate very, very strong principles to significantly lower fossil fuel emissions in the world. ”

Elizabeth Warren

“We have workers who are hurting because the agreements that have already been cut really don’t have enforcement on workers’ rights. This new trade deal is a modest improvement . . . It will give some relief to our farmers. It will give some relief to our workers. I believe we accept that relief, we try to help the people who need help, and we get up the next day and fight for a better trade deal.”

Amy Klobuchar

“These are real people hurt by Donald Trump’s trade war. So, what we should do, and I support the USMCA, I am glad that these improvements were made that are supported by people like Richard Trumka and Sherrod Brown on labor and environment and on pharma.”

Pete Buttigieg

“Yes, it has been improved, it is not perfect. But when you sit down with the people who are most impacted, they share just how much harm has been done to them by things like the trade war and just how much we can benefit, American consumers and workers and farmers, by making sure we have the right kind of labor and enforceability, as Democrats ensured we got in this USMCA.”

Joe Biden

“There will be no trade agreements signed in my administration without environmentalists and labor at the table. And there will be no trade agreement until we invest more in American workers.”

Tom Steyer

“I would not sign this deal, because if climate is your number one priority, you can’t sign a deal, even if it’s marginally better for working people until climate is also taken into consideration . . . We cannot put climate on the backseat all the time and say we’re going to sign this one more deal, we’re going to do one more thing without putting climate first.”

From the USMCA and Debate Stage to Where?

It’s the end of the road for the USMCA in Congress (for now—there will be ample opportunity for future presidents to renegotiate the agreement), but the deal raises some fundamental questions about the future of U.S. trade policy. Support for the USMCA, despite its inclusion of automotive rules that tilt in the direction of managed trade, raises questions about how much managed trade can be stomached by politicians and the private sector and whether rules of origin in trade agreements may become vehicles for industrial policy-lite. Another open question is whether future U.S. comprehensive trade agreements will include a built-in sunset clause as is present in the USMCA. The USMCA is potentially precedent setting in other areas, including currency, the treatment of trade negotiations with non-market economies, labor, and digital trade.

Other questions are reflected in the disagreement among Democratic presidential candidates, such as how trade and climate change should be prioritized. At its core, the proposition that trade agreements must include climate change commitments is fraught with policy questions that should be carefully considered. A fundamental question arises out of how to balance the two objectives of mitigating climate change while expanding trade. A number of studies suggest a link between trade liberalization and increased emissions, although development levels among trading partners and the adoption of renewable energy are important variables. How should a trade agreement be weighed if it includes strict climate change requirements that ultimately limit trade?

A second set of questions arises when considering how to treat goods and services that limit emissions or otherwise mitigate climate change. Should those products be granted exceptions to trade rules, shielded from antidumping duties, countervailing duties, and global safeguards and be off-limits from World Trade Organization litigation? Warren’s plan for trade policy suggests such an approach.

With changes in U.S. trade policy abound, it appears a corner has been turned. The USMCA has created a new measuring stick for future agreements and simultaneously drawn attention to the demand that trade agreements include climate change commitments. Whether the USMCA model is sustainable and how trade negotiators grapple with the increasingly urgent climate crisis are two large uncertainties that suggest the road ahead is likely full of more twists and turns.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Jack Caporal is an associate fellow with the CSIS Scholl Chair.

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