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Several U.S. oil companies were among the winners of petroleum contracts awarded by the Mexican Hydrocarbon Commission to develop deep water projects.

On December 5, 2016, several U.S. oil companies were among the winners of petroleum contracts awarded by the Mexican Hydrocarbon Commission to develop deep water projects in the Gulf of Mexico. From a legal standpoint, an initial assumption could be that the North American Free Trade Agreement (NAFTA) became more relevant to these “American” companies entering into the Mexican oil market. Indeed, the legal regime provided by NAFTA Chapter 11, which was designed to protect property rights in long-term investments, could be essential to ventures involving operations that might last for over two decades.

Later, President-elect Donald Trump announced Rex Tillerson as his nominee for Secretary of State. Until 2016, Tillerson was the CEO of Exxon Mobil, one of the U.S. oil companies investing in the new projects in Mexico.

During the first year in office, Trump and Tillerson, assuming Tillerson is confirmed by the Senate, will navigate national and international politics to grapple with issues arising from promises made during Trump’s presidential campaign. Among these promises was Trump’s pledge to renegotiate or to terminate NAFTA.

Yet now that U.S. oil corporations plan to heavily invest in multi-billion dollar projects in Mexican territory, Tillerson should be aware that U.S. oil companies might prefer to keep NAFTA, in contrast with the anti-NAFTA rhetoric and nationalist positions expressed by some Trump supporters. Nevertheless, both views require a closer look to identify the benefits of the agreement, since protecting U.S. oil investments in Mexico under NAFTA is far from a question with a unique and straightforward answer.

As a matter of fact, U.S. oil companies will initially face two NAFTA caveats. First, the conflicting interpretations of the agreement concerning the application of NAFTA Chapter 11. This is caused by the divided opinion of the legal community on the validity of the Mexican reservation to NAFTA that blocks protection of investment in the energy sector. For some, this reservation was implicitly waived after the approval of the Mexican energy reforms, whilst for others, the reservation remains and limits the application of some sections of the agreement.
Second, if one decides to ignore this debate and considers that NAFTA Chapter 11 applies, then they should bear in mind that, as Professor Gus Van Harten from York University has highlighted, NAFTA has no “survival clause.” A survival clause is a provision typically included in treaties for the protection of investments, which provides the continuing protection of the agreement for existing investments for periods of 10 to 15 years, even after the treaty has been unilaterally terminated. Without this clause, a NAFTA party can terminate the agreement on six months’ notice and could deprive foreign investors of the protection of international law and international arbitration. Hence, the framework, currently a subject of a public and politicized debate, seems far from providing the certainty of the rule of law required for these investments.

Then, why expose multi-billion-dollar projects to this degree of uncertainty? In recent years, U.S. investors have been able to place investments through subsidiaries incorporated in other countries to acquire the protection of an investment treaty. Indeed, in a time when oil majors operate around the world, corporation nationality has turned into a malleable concept.

Since the last decade, international arbitration tribunals have recognized “treaty shopping” as a legitimate practice to gain access to the protection of an investment treaty. For instance, oil companies like Exxon and Chevron (both among the winners of the Mexican deep water bidding round) have circumvented the lack of investment protection in countries like Venezuela, investing through Dutch or Danish subsidiaries that provide access to treaty protection. Consequently, we would expect that oil companies could use the Mexican network of several investment treaties to gain the protection provided by international law.
Moreover, this is not a one-sided legal agreement. NAFTA is not only relevant to U.S. corporations, but it has also become important to Mexican investments in the U.S. Mexican investments, such as those conducted by Carlos Slim, have invested in the U.S. real estate market; in the media sector through his ownership of 17% of the New York Times; and even in the oil and gas sector through the company Wellaware. Furthermore, Mexican investors have not ignored the investment treaty system. In fact, Slim’s companies have recently profited from it and filed an arbitration claim against Colombia before the International Centre for Settlement of Investment Disputes at the World Bank. We may never know whether NAFTA was a topic during the recent meeting between the Mexican multi-billionaire and Donald Trump. However, what we certainly know from Trump’s Twitter account is that after the meeting he called Slim a “great guy,” and that Trump’s relationship with the New York Times is far from being “great.”

Based on the uncertainty created around NAFTA, the practice of “treaty shopping” reveals that NAFTA is one of a variety of options available to transnational corporations acting as foreign investors.

Does this make NAFTA a useless treaty? Of course not. NAFTA not only governs the protection of foreign investments. It has been the main legal framework that incentivized cross-border trade growth and investment relations between Mexico, the U.S. and Canada. Even Tillerson has publicly recognized the value of NAFTA in a conference before the Council on Foreign Relations in 2012. Despite Trump’s position blaming NAFTA as the cause of all evils suffered by American workers, some scholars, such as Harvard Professor Ricardo Hausmann, have recently highlighted the benefits of NAFTA to the economies of the United States and Mexico, increasing trade and expanding markets.

Therefore, blaming international treaties for economic mismanagement seems like a misleading approach. Of course, treaties, investment protection and trade can always be improved. Moreover, States have the sovereign power to do so and the renegotiation of treaties could open the door for improvements. However, by focusing on the withdrawal from one or two trade agreements, neither the Republicans nor the Democrats will solve the biggest problem of global competition or undue globalization.

Mexican and U.S. investors should take a closer look at this situation. On the U.S. side, the final decision regarding whether to renegotiate or withdraw from NAFTA might also consist of a lengthy decision-making process that would require the agreement of Mexico and Canada, and the support of the U.S. Congress. In the case of NAFTA withdrawal, there are still legal uncertainties since there is not a definitive answer on whether the U.S. president has the power to withdraw the U.S. from NAFTA by an executive action, without consulting Congress. Nonetheless, if Trump decides to dispatch a notice of termination to NAFTA parties without the Congress’ support, not only would this action spark a national debate, it would also be sufficient to terminate the agreement as a matter of international law.

Hence, the NAFTA case during the first year in office will show how the new administration will deal with national debates and the role of the U.S. finding new ways of leading in international trade and investment.

Source: Forbes

Post By: Julián Cárdenas García, Research Professor, University of Houston Law Center

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