July 18, 2017
House Ways & Means Trade Subcommittee: Modernization of the North American Free Trade Agreement (NAFTA)
Key Topics & Takeaways
- Investor-State Dispute Settlement (ISDS): Kansas City Southern’s Patrick Ottensmeyer explained that ISDS is necessary to protect investments that have “created the supply chain infrastructure required to support U.S. exports.” Sempra Energy’s Dennis Arriola added that the importance of ISDS is “not academic, it’s for real,” and argued that American companies need access to a “fair tribunal” to support overseas investments. He pointed to the expropriation of a large energy company in Argentina in 2012 that he said demonstrates the necessity of these investor protections. The AFL-CIO’s Celeste Drake called on negotiators to eliminate ISDS, which she claimed puts “corporate rights ahead of [U.S.] democracy and amounts to little more than crony capitalism.”
- Digital Trade: Rep. Erik Paulsen (R-Minn.) underscored the importance that strong provisions on digital trade be incorporated into the modernized North American Free Trade Agreement (NAFTA). Cummins’ Chairman and CEO Tom Linebarger agreed that digital trade is important for “every sector of the economy,” adding that it is a “critical element of the value [provided] to customers,” and a “major source of income and competitiveness” for the manufacturing sector. The Coalition of Services Industries’ Christine Bliss cautioned that there would be “adverse consequences” for industry if the modernized NAFTA failed to include a comprehensive e-commerce chapter addressing digital trade, adding that it would be a “missed opportunity” and would “send the wrong signal” by inadvertently enabling data localization and restrictions on cross-border data flow.
- Tom Linebarger, Chairman and Chief Executive Officer, Cummins, Inc.
- Patrick J. Ottensmeyer, Chief Executive Officer, Kansas City Southern
- Dennis Arriola, Executive Vice President – Corporate Strategy and External Affairs, Sempra Energy
- Celeste Drake, Trade and Globalization Policy Specialist, AFL-CIO
- Jason Perdue, President of the York County, Nebraska Farm Bureau
- Christine Bliss, President, Coalition of Services Industries
- Stan Ryan, Chief Executive Officer and President, Darigold, Inc.
- Althea Erickson, Senior Director – Global Advocacy and Policy, Etsy, Inc.
- Susan Helper, Frank Tracy Carlton Professor of Economics, Case Western Reserve University
Rep. Dave Reichert (R-Wash.), Chairman, House Ways & Means Trade Subcommittee
In his opening statement, Reichert noted that the North American Free Trade Agreement (NAFTA) “transformed” the U.S. economy by reducing tariffs on exports and affording U.S. industry a “huge advantage” in creating regional supply chains. He referenced the increased exports to Canada and Mexico since NAFTA was instituted, and linked it to job creation across the American agricultural, services and manufacturing sectors. Yet “despite its success,” Reichert maintained that the “need for modern trade rules is clear.” He expressed support for modernizing NAFTA to address the rise of the digital economy, non-tariff barriers to trade, and other 21st century trade issues. For instance, Reichert emphasized the Administration’s “high and ambitious bar” to address challenges for the digital economy–notably “forced localization requirements” and cross-border data transfer. He encouraged the Administration to ensure the agreement addresses distortions created by state-owned-enterprises, offers effective dispute settlement through the Investor-State Dispute Settlement (ISDS) mechanism, and provides other protections to encourage innovation in the technology sector. Reichert stated that the modernized NAFTA should serve as a “template” for future trade agreements, offer a “seamless” transition, and “preserve the good” that the current agreement affords American industry.
Rep. Bill Pascrell (D-N.J.), Ranking Member, Trade Subcommittee
During his opening remarks, Pascrell referenced his testimony delivered to the U.S. International Trade Commission hearing on June 27th. He maintained the that Administration’s “number one priority [in the renegotiation] has to be jobs and wages in the U.S.,” and he criticized the Administration’s NAFTA renegotiating objectives for lacking “specificity” and “evidence” that they will engender job creation or wage growth in the U.S. Pascrell argued that lax labor standards, currency manipulation, lack of meaningful enforcement mechanisms, and low wages in Mexico have reduced the standard of living for many Americans. He underscored the importance of his bill – H.R. 2756, the Jobs and Trade Competitiveness Act – which he claimed would “crack down on cheating in trade,” “reward insourcing instead of outsourcing American jobs,” “meaningfully crack down on currency manipulation” and make it easier for cases to be brought against countries that “break the rules.”
Tom Linebarger, Chairman and Chief Executive Officer, Cummins, Inc.
In his testimony, Linebarger highlighted international trade as the “single most contributor” to jobs and wage growth at Cummins, Inc. He argued that it is “imperative” for his company to have access to overseas consumers to grow and compete, and explained that his company remains “cost effective because of NAFTA.” Linebarger stated that trade allows Cummins to “add jobs and invest in American communities,” and that NAFTA specifically reduced barriers to trade, allowing his company to “manufacture more” and “purchase more” from U.S.-based suppliers. He pledged his “overwhelming support for trade” due to the economic benefits it affords his company’s customers and communities, and he encouraged the Administration to modernize the agreement to promote digital commerce, protect cross-border data flows, safeguard intellectual property rights (IPR), and strengthen labor and environmental standards.
Patrick Ottensmeyer, President and CEO, Kansas City Southern
In his testimony, Ottensmeyer highlighted the “tremendous benefits” that NAFTA currently affords
consumers, businesses and workers, and urged policymakers to “do no harm” to the existing agreement. He explained that NAFTA is “critically important” to the American railroad industry; for instance, he stated that at least 35 percent of his company’s revenue and 50,000 jobs depend directly on international trade. Ottensmeyer encouraged policymakers to: 1) ensure NAFTA remains a “trilateral” agreement; 2) avoid disruptions to current supply chains; 3) “do no harm” to market access afforded under the current agreement; 4) seek uniformity in trilateral customs and border procedures; and 5) preserve chapter 11 and the ISDS to protect investments that have “created the supply chain infrastructure required to support U.S. exports.”
Dennis Arriola, Executive Vice President-Corporate Strategy and External Affairs, Sempra Energy
Arriola highlighted his company’s investments in Mexico, which he said amounted to 7 billion dollars and generated “hundreds of good paying new jobs” as well as “improved the environment in both countries.” He heralded NAFTA as “a big win for the U.S. energy market,” as underscored by the 11-billion-dollar surplus in energy trade with NAFTA countries. He urged policymakers to “maintain existing benefits of NAFTA” while improving it in ways that “expand trade and investment.” Specifically, Arriola underscored the importance of maintaining strong investment protections enforceable by ISDS, which he said are necessary to safeguard investments worth hundreds of millions of dollars in economies with less developed legal systems. He explained that ISDS provides a “neutral forum” and serves as an important “insurance policy” for U.S. investors. He also recommended that policymakers: 1) amend the text of NAFTA to reflect the current level of market openness; 2) expand investment protections to be consistent with other free trade agreements; and 3) modernize the agreement to increase regulatory coordination in the energy sector.
Celeste Drake, Trade and Globalization Policy Specialist, AFL-CIO
Drake criticized NAFTA for decreasing American jobs and wages. She argued that NAFTA “redistributed income upwards” and made it “tougher for [middle-income households] to succeed.” She also blasted the USTR’s negotiating objectives, stating that they “lack both the [desired] ambition and specificity.” Drake recommended that negotiators: 1) eliminate ISDS, which she claimed puts “corporate rights ahead of [U.S.] democracy and amounts to little more than crony capitalism;” 2) replace environmental and labor side deals with binding text to raise those standards; 3) address currency manipulation by creating “binding rules” subject to enforcement; 4) update rules-of-origin on automobile (and parts) manufacturing to support job retention; and 5) update government procurement policies.
Question and Answer
Access to Foreign Markets
Linebarger explained that his company invests a lot on research and development, and needs scale to make its business profitable. He stated that there are “not enough customers in the U.S.” to afford the investments his company needs, and that expanding access to customers in foreign markets enables them to grow, hire more workers, raise wages, as well as meet requirements of the Clean Air Act and other environmental improvement standards.
Administration’s Negotiating Objectives
Drake stated that the Administration’s negotiating objectives for NAFTA amount to “tweaking around the edges” and were based on the Trans-Pacific Partnership (TPP), which she said Trump criticized as a “failed agreement.” Drake highlighted the trade remedies objectives as a “bright spot” but noted that they cannot create jobs, rather defend those being harmed by unfair trade practices.
Drake criticized the labor side agreement to NAFTA, stating that it does not adequately protect workers. She explained that 39 cases have been filed under the labor side agreement but that “none of them” resulted in wage increases or labor organizations being created. She called for more “radical” changes and a better enforcement mechanism in the modernized agreement.
Rep. Sander Levin (D-Mich.) pointed to the “dramatic shift” of automobile production from the U.S. to Mexico, which he attributed to labor costs. He claimed that Mexican auto workers earn only 14 percent of U.S. workers in Detroit, and expressed his desire to address that problem to avoid further “slippage” of production to Mexico. Levin claimed that the “only way” to address this problem is to ensure Mexico is held to international standards on labor rights.
Ottensmeyer explained that ISDS provides important investor protections that have justified the 4.5 billion dollars invested in the rail network in Mexico. Arriola added that the importance of ISDS is “not academic, it’s for real.” He explained that energy companies must invest large sums of money in overseas infrastructure that supports jobs and wages in the U.S., as well, and stated that American companies need access to a “fair tribunal” to support those investments. He pointed to the expropriation of a large energy company in Argentina in 2012 that he said demonstrate the necessity of these investor protections.
Rep. Ron Kind (D-Wisc.) claimed that the TPP withdrawal will go down as one of the nation’s biggest strategic “mistakes” and argued that trade with NAFTA countries is “vital to [Americans’] economic well-being.” He cautioned against starting “trade wars” and urged the Administration to “build upon” “what was accomplished in TPP” to avoid “re-creat[ing] the wheel.”
Rep. Erik Paulsen (R-Minn.) underscored the importance that strong provisions on digital trade be incorporated into NAFTA. He foreshadowed that the Digital Trade Caucus will send a letter to the Administration to encourage them to eliminate data localization, streamline customs procedures and safeguard cross-border data flows. Linebarger agreed that digital trade is important for “every sector of the economy,” adding that it is a “critical element of the value [provided] to customers,” and a “major source of income and competitiveness” for the manufacturing sector.
Risk of Terminating NAFTA
Linebarger cautioned that it would be “very detrimental” to industry to terminate NAFTA, adding that his firm would have to “lower sales” and “reduce [its] workforce” if that happened.
Rep. Tom Rice (R-S.C.) recognized the benefits of NAFTA as a “net plus” for the U.S., but stated that it has been “bad” for his district. He expressed concern that tax reform has been “divorced” from the NAFTA modernization effort, and cautioned that the U.S. will be unable to compete with Mexico and other countries if border adjustment taxes are not “offset.” Linebarger agreed that tax reform is important in this discussion, and suggested avoiding taxing overseas profits.
Stan Ryan, Chief Executive Officer and President, Darigold, Inc.
In his testimony, Ryan stated that maintaining consistent market access and a level playing field is “vital” to the “prosperity” of his company. He encouraged policymakers to “lean forward into trade” given the size of the consumer base that resides outside the U.S. Ryan claimed that agricultural exports have “quadrupled” to NAFTA countries, and that Mexico is the largest export destination for his firm. Yet he explained that Canada is “more complex and challenging for dairy” since the original NAFTA “did not open up” Canada’s dairy market as it did in Mexico. Ryan also pointed to the rise of “subsidized dumping” in Canada’s dairy market, and urged policymakers to seek duty-free access to Canada’s dairy market in the modernized agreement.
Christine Bliss, President, Coalition of Services Industries
In her testimony, Bliss noted that NAFTA provides U.S. services companies with “guaranteed and nondiscriminatory market access” to Canada and Mexico, as well as strong investment protections and an opportunity to compete in the government procurement market. She highlighted digital trade as a priority “across the spectrum” of services industries, and encouraged policymakers to: 1) “do no harm” to the existing benefits afforded by NAFTA; 2) ensure the modernized agreement is consistent with Trade Promotion Authority (TPA); 3) ensure it remains a trilateral agreement; and 4) provide a transparent and efficient negotiation to minimize commercial uncertainty; 5) ensure continued use of the negative list and ratchet clause; 6) cover new services to make the agreement continually relevant; 7) oppose Canada’s “cultural carveout;” 8) negotiate a “comprehensive” e-commerce chapter for digital trade; and 9) ensure financial services are afforded parity in liberalization commitments; etc.
Althea Erickson, Senior Director, Global Advocacy and Policy, Etsy, Inc.
In her testimony, Erickson explained that creative, independent businesses lack the information and know-how to access international markets to export their goods. She encouraged policymakers to modernize the agreement to enable peer-to-peer trading and support microbusinesses, such as by raising the de-minimus customs threshold and developing a smaller, simpler tariff system for microbusinesses.
Jason Perdue, President of the York County, Nebraska Farm Bureau, testifying on behalf of Steve Nelson, President, Nebraska Farm Bureau
In his testimony, Perdue stated that NAFTA has been beneficial for farmers, ranchers, and associated businesses; adding that U.S. agricultural exports increased significantly under the agreement, amounting to 38.1 billion in 2016. He stated that individual commodities (such as tomatoes, sugar, and dairy) face challenges in NAFTA economies, and suggested the agreement reverse Canada’s “long-standing barriers” to dairy, poultry and eggs imports. Perdue also expressed support for “science-based” terms of trade and dispute resolution, adding provisions on geo-indicators and biotechnology, and mandatory country-of-origin labeling for beef and crops.
Susan Helper, Frank Tracy Carlton Professor of Economics, Case Western Reserve University
In her testimony, Helper argued that the benefits of trade should “offer gains for everyone,” rather than be based on other countries’ willingness to “exploit” workers and the environment. She called on policymakers to end “special courts for investors” and convene stakeholders to develop industry-specific strategies to ensure supply chains in Canada and Mexico do not substitute U.S. suppliers. She also suggested reviewing rules-of-origin and improving the labor and environmental standard in a modernized agreement.
Question and Answer
Bliss cautioned that there would be “adverse consequences” for industry if the modernized NAFTA failed to include a comprehensive e-commerce chapter addressing digital trade. She stated that it would be a “missed opportunity” that would lead to unintended consequences beyond NAFTA, and that it would “send the wrong signal” by inadvertently enabling data localization and restrictions on cross-border data flow.
Bliss explained that services companies invest abroad to capture market share and create additional jobs back home, as well as repatriate earnings. She clarified that such investments do not aim to offshore U.S. jobs. She added that the services sector plays a vital role in enhancing the competitiveness of the manufacturing sector.
Additional information on this hearing can be accessed here.