North American Business Leaders Declare NAFTA and its Investment Provisions an Outstanding Success

May 28, 2003

Chief executive members of the Canadian Council of Chief Executives, The Business Roundtable, and the Consejo Mexicano de Hombres de Negocios (the Mexican Business Council) today released a joint statement entitled Clearing the Smoke: The Success of NAFTA’s Investment Chapter.

“The North American Free Trade Agreement (NAFTA), including its investment provisions under Chapter 11, is clearly an outstanding success for all three countries,” said Thomas d’Aquino, President and Chief Executive of the Canadian Council of Chief Executives. “The NAFTA has produced positive results for workers and consumers and has helped strengthen the political, business and social fabric in all three countries.”

“The positive effects of NAFTA have been under-appreciated and the handful of concerns that have been raised with respect to investment provisions reflect inaccurate publicity and are unjustified,” according to John Castellani, President of The Business Roundtable. “By decreasing the risk to investors, NAFTA Chapter 11 has accelerated investment in all three countries.”

The three North American business groups conclude in the joint statement that the direct effects of NAFTA have been to stimulate both trade and investment in North America, and this has led to greater employment and higher average incomes for the North American community. Strong protections for investment and the right to enforce these guarantees through investor-state dispute settlement have contributed significantly to these positive outcomes.

“There are broader links between the NAFTA and investment,” according to Juan Gallardo, Chairman and Chief Executive Officer of Grupo Embotelladoras Unidas and Member of the Consejo Mexicano de Hombres de Negocios. “While NAFTA is not a political agreement, NAFTA has strengthened ties between the three countries and facilitated cooperation on a great many issues, such as border security.”

Looking forward, the three business groups strongly support the negotiation of an investment chapter in the proposed Free Trade Area of the Americas that includes recourse to an investor-state mechanism. “It is vital in our view to work with the investor-state mechanism, and to improve it, not to dispense with it,” according to Thomas d’Aquino.

The Canadian Council of Chief Executives, composed of the chief executive officers of 150 leading Canadian corporations, is Canada’s senior business organization. Its members head companies that administer in excess of C $2.1 trillion in assets, have annual revenues of more than C $500 billion and account for a significant majority of Canada’s private sector investment, exports, training and research and development.

The Council’s chief executives are actively engaged in work involving a triple mandate: the shaping of sound business and public policy solutions in Canada, North America and the world. The Council, Canada’s private sector leader in the development of the Canada-United States Free Trade Agreement, the North American Free Trade Agreement and the WTO agenda, continues to be actively engaged in international trade and investment issues.

The Business Roundtable is an association of chief executive officers of leading corporations with a combined workforce of more than 10 million employees in the United States and US $3.7 trillion in revenues. The chief executives are committed to advocating public policies that foster vigorous economic growth and a dynamic global economy.

The Consejo Mexicano de Hombres de Negocios – Mexican Business Council – is a non-profit organization established in 1963, made up of the chief executive officers of Mexico’s largest private companies, most of whom also have controlling interest in them. Its mandate is to provide initiatives and efforts for Mexico’s growth and development, and to promote the image of Mexico abroad. The Council has 34 members, who in the last five years invested more than US $40 billion, exported nearly US $55 billion and provided direct employment to almost 850,000 persons.

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STATEMENT OF
THE CANADIAN COUNCIL OF CHIEF EXECUTIVES
THE BUSINESS ROUNDTABLE
THE CONSEJO MEXICANO DE HOMBRES DE NEGOCIOS

CLEARING THE SMOKE: THE SUCCESS OF NAFTA’S
INVESTMENT CHAPTER

The North American Free Trade Agreement (NAFTA) has proven to be an extraordinary success for all three countries. This can be seen in NAFTA’s positive economic impact for workers and consumers, and in the stronger political and social fabric of North America weaved by the NAFTA and its side agreements. NAFTA was the first free trade agreement to draw together a middle-income country with high-income ones, and NAFTA’s demonstrated value has inspired other such agreements during the 10 years since. Today, NAFTA is the largest free trade area in the world.

One of the most innovative and fruitful chapters in NAFTA is Chapter Eleven on Investment. Because one part of Chapter Eleven-investor-state arbitration- has been the target of so much inaccurate publicity, the positive changes wrought by Chapter Eleven have been under-appreciated by the general public. The purpose of this transnational statement of business executives is to clear away the smoke about Chapter Eleven, and clarify the many reasons why Chapter Eleven is an outstanding success.

HOW NAFTA PRODUCES ECONOMIC GROWTH

NAFTA was the first free trade agreement to include broad coverage of both goods and services, and both trade and investment. (NAFTA built on, yet is considerably broader than, the United States-Canada Free Trade Agreement.) This holistic approach is a key reason why NAFTA has achieved so much. Because of these interconnections, one cannot simply attribute the generation of new trade to NAFTA’s trade provisions and the generation of new investment to Chapter Eleven. Instead, the interaction of both trade and investment rules in NAFTA deserves the credit for inducing the new jobs and higher incomes that have ensued in all three countries.

To see positive effects of NAFTA starting in 1994, just look at the record:

• Trade among the three countries is up 128 percent, making North America one of the most economically integrated regions of the world.
• Because of NAFTA, real wages are higher in all three countries. For example, according to a study at the Federal Reserve Bank of Cleveland, NAFTA induced a greater than two percent increase in Mexican wages, and smaller but real increases in Canada and the United States.
• Because of NAFTA, the level of inward capital investment is higher in all three countries. For example, annual foreign direct investment into Canada is four times higher than it was pre-NAFTA. In Mexico, the annual capital inflow is three times higher than it was pre-NAFTA. In the United States, direct foreign investment has more than doubled in the NAFTA era.
• Although some of the longtime critics of free trade continue to allege that NAFTA hurt the Mexican economy, the reality is that NAFTA has given Mexico a big boost. Under NAFTA, Mexican companies have expanded their exports to Canada and the United States by 225 percent. The companies producing these and other exports provide wages to workers nearly 40 percent higher than the average wages paid in the rest of Mexican manufacturing. Furthermore, the claim that NAFTA caused Mexico’s peso crisis of several years ago is not true, according to a recent study at the Washington-based Institute for International Economics. In fact, membership in NAFTA enabled Mexico to recover from the peso crisis with unparalleled speed.
  Thus, the evidence is clear that NAFTA has promoted North American prosperity by increasing the overall size of the economic pie for all three countries.

  THE BROADER LINKS BETWEEN NAFTA AND INVESTMENT

  Yet it is not just the pure economic dimension in which NAFTA shines. NAFTA also has important political, environmental, and social dimensions. NAFTA provided a new model for how countries could achieve regional integration without sacrificing their respective sovereignties.
  While NAFTA is not a political agreement, NAFTA has strengthened ties between the three countries, which has facilitated cooperation on other issues, such as border security.

  The environmental agreement has helped the three governments better understand the continent’s ecological challenges, and to address them through new cooperative programs. As a result, environmental investment in all three countries has increased. This is particularly so along the United States-Mexico border, which has benefited from the Border Environment Cooperation Commission and the North American Development Bank.

  The labor agreement has helped the three governments improve and better coordinate their programs for human resource development and labor standards. Investment in people is just as important as investment in new technology and plants, and NAFTA has promoted higher skill levels and more opportunities for North American workers. Furthermore, NAFTA’s provisions to facilitate the movement of business persons are a key element of the trade agreement’s social dimension.

  THE LEGAL NORMS OF CHAPTER ELEVEN

  NAFTA broke new ground for a free trade agreement by containing strong investment rules broadly applied. The key rules are: national treatment, most-favoured-nation treatment, the minimum standard of treatment, a requirement for fair compensation in instances of direct or indirect
  expropriation, a prohibition of investor performance requirements, and a prohibition on limits to out-transfers of profits. These rules are enforceable through government-to-government dispute settlement. It was in 1988 that the United States Congress designated investment protection as a key objective in future trade agreements, and this goal was immediately accepted by all three governments when the NAFTA negotiations began three years later.

  Recognizing the practical difficulties of addressing investment disputes merely on a government-to-government basis, the NAFTA negotiators also provided an investor-state dispute mechanism. In effect, this gives private investors a procedural right to lodge a case against a foreign government that the investor believes has violated any NAFTA investment rule. While such a private right of action had been a feature of investment treaties and investment agreements for decades, NAFTA was the first time such a mechanism (to hold governments directly accountable for the performance of their obligations) was included within a free trade agreement.

  Since 1994, there have been less than 20 Chapter Eleven cases brought by a private investor as well as a number of notices of intent to file a case. This seems a small number in view of the $1.7 billion a day in current North American trade and over $250 billion in new cross-border investment since 1994. Furthermore, several of these actions have been withdrawn or are still in consultations and may never reach a tribunal. Indeed, only 4 decisions have been adverse to one of the NAFTA Governments.

  To throw the baby out with the bath water because of a few decisions, as some non-governmental groups seem to want to do, is neither wise nor warranted. Over the past few years, we have heard arguments that future free trade agreements should leave out investor-state arbitration. It is said that foreign investors should have access only to the complaint mechanisms that domestic investors have.

  We strongly disagree with this view. Investor-state mechanisms contribute greatly to raising and sustaining the confidence of foreign investors that they will get a fair shake in host countries whatever the adequacy of those domestic legal systems. In planning a major investment, companies have to think many years into the future and cannot rely on the investment climate as it exists at the beginning of a new project. Nor can investors assume that foreign regulators and foreign courts will always act independently of political currents. That’s why investor-state mechanisms play such a useful role in establishing a procedural right to an independent tribunal. Such a right reduces the political risk to the investor, and hence will lead to more investment than would occur in the absence of the investor-state tribunals.

  This is why we strongly support the negotiation of an investment chapter in the Free Trade Areas of the Americas that includes recourse to an investor-state mechanism. It is vital in our view to work with the investor-state mechanism, and to improve it, not to dispense with it.

  Overall, ten years of experience with the NAFTA provides strong evidence that Chapter Eleven has achieved its objectives and that the substantive rules are sound.

  CONCLUSION

  In conclusion, NAFTA’s investment provisions are working well, perhaps even better than its architects imagined. The direct effects of NAFTA have been to stimulate North American trade and investment, and this has led to greater employment and higher incomes on average for the North American community. Among the reasons for NAFTA’s success are the strong protections for investment and the right to enforce these guarantees through investor-state dispute settlement.