Chemical Industry to Trump: Don’t Kill the NAFTA Golden Goose

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By Adam Allington

The overriding objective of negotiations resuming this weekend to overhaul the North American Free Trade Agreement should be to “do no harm,” American Chemistry Council Director of Global Affairs Greg Skelton told Bloomberg BNA.

President Donald Trump has threatened to pull out of NAFTA multiple times, saying the U.S. got fleeced in the 1994 pact among the U.S., Canada, and Mexico, which he has called “the worst trade deal ever.”

Yet few industries exemplify the success of the trade pact like the chemical sector—where trade has more than tripled, from $20 billion in 1994 to $63 billion in 2014. The U.S. now runs a $16.5 billion trade surplus in chemicals with Canada and Mexico, the two largest markets for U.S. chemical exports.

The U.S. is expected to engage in more horse trading in the third round of negotiations that kick off in Ottawa on Sept. 23. Trade politics however, have grown increasingly complex in the U.S. as anti-globalist sentiment has found support on both the left and right.

‘Not Interested in a Mere Tweaking’

Speaking at a press briefing last month after the first meeting of U.S., Canadian and Mexican negotiators, U.S. Trade Representative Robert Lighthizer laid out the Trump administration’s aggressive “America first” approach.

“I want to be clear, he [Trump] is not interested in a mere tweaking of a few provisions and a couple of updated chapters,” Lighthizer said. “NAFTA has fundamentally failed many, many Americans and needs major improvement.”

But chemical industry leaders worry that talk like that may end up hurting American companies most of all. “North America has become so integrated, throwing up tariffs or taxes would be like putting a toll booth in the middle of a factory,” Skelton told Bloomberg BNA Sept. 21.

“More than 70 percent of U.S. chemical imports and 50 percent of exports are intra-company trade. That’s why we’re making the argument that tariffs are basically a pure tax,” he said.

Modernizing NAFTA

The American Chemistry Council—which represents the interests of all the major U.S.-based chemical companies, including DowDupont, Eastman Chemical and ExxonMobil Chemical—does feel, however, that a modernized NAFTA presents an opportunity for manufacturers to further reduce barriers and create even greater supply chain efficiencies, Skelton said.

Earlier this year the U.S., Canadian, and Mexican chemical industry associations released a joint statement outlining priorities for NAFTA modernization, including recommendations for enhancing regulatory cooperation and relaxing “Rules of Origin” requirements.

Rules of origin stipulate the percentage of input components allowed from non-NAFTA countries, in order to still qualify for duty-free benefits. The groups propose raising the value of non-qualifying materials allowed under NAFTA from 7 to 15 percent. The groups also are pushing for rules to make it easier to qualify substances undergoing processes such as purification and blending in NAFTA countries.

According to the joint statement, a more efficient regulatory environment also would bring NAFTA into line with more recent trade agreements, and provide a significant boost to innovation and job growth, “while also ensuring that regulatory objectives are achieved to increase the overall health and safety for end use of products.”

“This might include greater alignment of classification and labeling procedures and a streamlined approach to regulatory approvals for new chemicals,” according to the statement.

The chemical groups also highlight the need to update NAFTA for the internet era by facilitating digital trade, and establishing stronger protections for cross-border data flows, which is an essential element of global value chains.

Jobs, Jobs, Jobs

During the 2016 campaign, Trump made jobs his number one issue, and not just any jobs, but manufacturing jobs he said were lost as a result of over-regulation and trade deals such as NAFTA and the Trans Pacific Partnership. The deals, Trump claimed, cost states hundreds of thousands of jobs.

Many economists argue that to divine NAFTA’s role in job creation over its 23 year history is pretty difficult when trying to assign jobs lost to automation vs. jobs lost to recessions and lost to Mexico.

A 2014 study by the Peterson Institute for International Economics found that about 15,000 U.S. jobs on net are lost each year because of the pact—but that for each of those jobs lost, the economy gains roughly $450,000 in the form of higher productivity and lower consumer prices.

Linda Dempsey of the National Association of Manufacturers touted the job-creating success of NAFTA, particularly for the U.S.

“Canada and Mexico purchase one-fifth of all manufactured goods produced in the United States, supporting the jobs of more than 2 million manufacturing workers,” Dempsey told reporters Sept. 22 on a conference call.

Strengthening Investment Protections

In addition to safeguarding access to markets and reducing barriers, business leaders are turning up the pressure on the White House to safeguard NAFTA’s investor protections.

Specifically, Chapter 11 of the trade pact focuses on so-called Investor-State Dispute Settlements (ISDS). Highly controversial, the ISDS provision ensures that corporations making investments and business deals in partner countries will have due process and compensation, according to the rule of law.

In practice, critics of the rule argue that ISDSs amount to little more than corporate kangaroo courts, allowing companies to avoid having to comply with the laws and regulations of sovereign nations.

On Sept. 19, Sen. Elizabeth Warren (D-Mass.), wrote to U.S. Trade Representative Lighthizer, urging him to push for the removal of ISDS provisions as he renegotiates the terms of NAFTA.

Warren maintains ISDS provisions, “would allow foreign companies to challenge U.S. laws—and potentially to pick up huge payouts from taxpayers—without ever stepping foot in a U.S. court.”

CEOs from top U.S. trade associations strongly disagreed in a Sept. 22 conference call with reporters: “From our industry perspective, ISDS is a critically important part of NAFTA,” said Jack Gerard, president of the American Petroleum Institute.

“We are concerned it hasn’t been put forward as a priority by current administration,” he said. ISDS protects investment by allowing disputes to be brought into international arbitration, which provides more incentive for his members to invest abroad, Gerard said.

‘We Go Where the Resource Is’

“When you think of natural resource extraction—we go where the resource is,” said Gerard. “We have major operations in Mexico that are being run out of Houston, not to mention export opportunities.”

Gerard’s comments were echoed by Cal Dooley, CEO of the American Chemistry Council.

“Any talk that is about eliminating ISDS will have the impact of discouraging the confidence of a company to make a major investment,” said Dooley.

In the past, Trump has criticized the ISDS provision as a threat to U.S. sovereignty. The administration is reportedly considering the option of allowing NAFTA governments to “opt in, or out” of the ISDS requirement, a move that would surely raise the ire of businesses and Republicans in Congress.

Dooley also dismissed the idea of a NAFTA “sunset” after a period of five years, which he claimed would not maintain the “certainty that a company needs to capitalize on investment.”

To contact the reporter on this story: Adam Allington in Washington at aallington@bna.com

To contact the editor responsible for this story: Rachael Daigle at rdaigle@bna.com

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