Members debate issues to be included in NAFTA update, such as cross-border data flow, customs 'red tape,' ISDS dispute resolution, 'ratchet' market reforms in Mexico

The House Ways and Means Trade Subcommittee on July 18, held a hearing on "Modernization of the North American Free Trade Agreement (NAFTA)." Testimony from the hearing is posted here. The witnesses were:

First panel

— Tom Linebarger, Chairman and CEO, Cummins, Inc.
— Patrick Ottensmeyer, CEO, Kansas City Southern
— Dennis Arriola, Executive Vice President, Corporate Strategy and External Affairs, Sempra Energy
— Celeste Drake, Trade and Globalization Policy Specialist, AFL-CIO

Second panel

— Jason Perdue, President of the York County, Nebraska, Farm Bureau
— Christine Bliss, President, Coalition of Services Industries
— Stan Ryan, President and CEO, Darigold Inc.
— Althea Erickson, Senior Director of Global Advocacy and Policy, Etsy Inc.
— Susan Helper, Professor of Economics, Case Western Reserve University

In his opening statement, subcommittee Chairman Dave Reichert (R-WA) said that since it came into force in 1994, NAFTA had transformed the North American economy. Reichert said the agreement had "reduced barriers to our exports and allowed American businesses to sell their goods and services more freely and competitively to markets around the world," helping to create an integrated production base and supply chain that has improved the U.S. competitive advantage against China, for example. But "today's challenges require new rules, not only to reduce tariffs on our exports but to remove non-tariff barriers as well." Reichert said the Trump administration's objectives for renegotiating the pact, released yesterday on July 17, "set a high and ambitious bar to address many of these challenges head on." The challenges for NAFTA modernization that Reichert listed included: burdensome customs procedures; the expansion of forced localization requirements; restrictions on the flow of cross-border data; inadequate rules governing e-commerce; "arbitrary sanitary and phytosanitary restrictions not based on science"; the use of geographic indicators as a form of protectionism; distortions created by state-owned enterprises; and enforcing rules through dispute settlement provisions, "including the proven tool of investor-state dispute settlement" (ISDS).

In his statement, subcommittee Ranking Member Bill Pascrell (D-NJ) pointed to a "lack of clarity and vision from the Administration thus far on what a new NAFTA should include." He said the USTR's negotiating objectives offered "little specificity … After waffling and contradicting themselves throughout this process, we finally have some milquetoast objectives that look like a recycled version of the same old, same old" policies in the Trans-Pacific Partnership (TPP) that President Trump had railed against. Pascrell said that while the USTR's goals "would make strides on the issues of countervailing duties and treatment of state-owned enterprises," top issues such as low wages in Mexico and lax labor laws, currency manipulation abroad, and lack of meaningful enforcement "are nowhere to be found in these objectives." Pascrell said he had introduced HR 2756, the Jobs and Trade Competitiveness Act, which would crack down on cheating in trade, discourage offshoring U.S. jobs and make it easier for firms to bring cases against countries that flout the rules. "If, at the end of this process, all we have to show for it is a trade arrangement that looks a lot like the TPP but with fewer countries, it will be a massive waste of time," Pascrell said.

Among the witnesses, Tom Linebarger,chairman and CEO of Cummins Inc., highlighted the positive changes brought by NAFTA since it took effect in 1994, saying Cummins today "sells nearly $600 million worth of products into Mexico's market each year, of which 80% is imported from the United States," and has a strong engine-exporting business with Canada as well. Linebarger said that for Camcraft, an Illinois-based supplier for Cummins, "Trade agreements like NAFTA and others have allowed their sales to expand globally in a fashion that was not available to them previously." He said Congress should "embrace this opportunity to modernize and strengthen NAFTA. At the same time, we should preserve the existing agreement and not move backwards." Linebarger said a modernized NAFTA should: 1) include provisions that enable cross-border data flows for all types of data; 2) prohibit members from forcing companies to use or locate computing facilities or servers within a member country; and 3) strengthen NAFTA's environmental and labor standards and incorporate them into the updated agreement itself.

Patrick Ottensmeyer,CEO of Kansas City Southern, said his company supports efforts to update NAFTA, but "a major shift toward more protectionist policies would threaten rail jobs all over the country." Ottensmeyer said there should be a U.S. focus on "enhancing the flow of trade across our borders; avoiding the high tariffs and other trade barriers that preceded NAFTA; and following the procedures established in the Bipartisan Congressional Trade Priorities and Accountability Act of 2015." He said talks should proceed "promptly and trilaterally, to avoid uncertainty that disrupts supply chains and investment, and should use NAFTA's amendment process under Article 2202." The U.S. also should work to achieve "trilateral uniformity for Customs and Border Control procedures to improve the fluidity and security of export freight movements," and preserve Chapter 11 and ISDS to protect investments by U.S. companies that have created the export supply chain infrastructure.

Dennis Arriola,Executive Vice President of Sempra Energy, said NAFTA has been "a big win for the U.S. energy sector," helping to create a robust North American energy market. His recommendations for updates included: 1) zero tariffs on all energy goods, including electricity and natural gas; 2) open markets and non-discriminatory treatment for energy services and investment, including power generation and transmission; 3) strong investment protections for cross-border projects, enforceable by ISDS; 4) a provision that locks in market-opening reforms that Mexico has enacted since NAFTA was signed, known as "the ratchet"; 5) removing Mexico's broad exception for energy, replacing it with "a short and specific list of exceptions"; 6) language covering so-called investment agreements; and 7) adding a "tail" of investment protection if the agreement is ever terminated.

Celeste Drake,a trade specialist with the AFL-CIO, said that under NAFTA, "U.S. firms and workers lost more than 850,000 jobs. A much more widespread impact, though less frequently discussed, is the wage suppression that affects about two-thirds of America's workers." She said that the structure of the new NAFTA "must recognize that trade and globalization have pushed wages down and weakened worker negotiating power," while building in counterbalancing incentives and tools to raise wages. Drake proposed several changes to "democratize" the renegotiation process by making it more transparent and inclusive. The 18 other changes that the AFL-CIO proposed included adding strong labor rules with swift enforcement; "requiring that parties not waive or derogate from any of their labor laws, regardless of the sector"; eliminating ISDS dispute settlement; enforceable currency rules; strengthening rules of origin and eliminating Chapter 19 obstacles to trade enforcement.

Questions

Chairman Reichert noted that Linebarger's statement had quoted a report citing Columbus, Indiana, as being the most trade-dependent community in the U.S. He asked which "burdensome customs procedures and regulations" could be eliminated, such as the need to streamline customs processes with electronic forms and authentication. Linebarger said Columbus has become trade-dependent because growth has allowed the city to access customers outside the U.S. The cost of participating in the commercial engine business is high in terms of R&D, he said, "So we need to sell a lot of units, but there's not enough customers in the U.S." Linebarger said it was "the small parts" of the NAFTA agreement that need changes, such as long lines at the borders where trucks get stopped. He said new technologies could replace older, manual processes, and advocated "science-based standards and transparency in the rules."

Lynn Jenkins (R-KS) said ISDS dispute mechanisms are one of the most important elements of the latest trade agreements, and noted that the administration has been clear that it intends to follow TPA for modernizing NAFTA. She asked Ottensmeyer how the legal protection provided by ISDS has been important for KCS' investment decisions. Ottensmeyer highlighted the large-scale investments KSC had made, including building its Mexican rail network, where 60% of the company's cross-border movement of freight is "export, southbound," and "the largest single commodity, by a large margin, is grain." Without such investments, he said, products couldn't move in the quantity they move today."

Ron Kind (D-WI) said that "these one-off bilateral renegotiations only get you so far. I said at a previous hearing that our rejection of TPP will go down as one of the great strategic mistakes we made as a country in the 20th century." Kind argued for enhanced labor and environmental protections in any renegotiation. "My advice to the Trump team was: 1) no trade wars, and 2) take what was accomplished in TPP and build upon that. But we have an administration that appears hostile to environmental issues and collective bargaining rights." Linebarger told Kind it was important to continue strengthening labor and environmental standards, with strong enforcement.

Erik Paulsen (R-MN) said it is critical that strong digital trade protections be included in a renegotiated NAFTA, noting that he had sent a letter listing areas of digital trade that should be include in any rewrite, such as cross-border data flows and prohibiting unnecessary regulation of digital services.

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