Like most recent trade deals, NAFTA was negotiated quite explicitly to help businesses improve their profitability.
Essentially the George H.W. Bush administration, which negotiated most of the pact, sat down with major business groups and asked them what they would want in a trade deal with Mexico. This was the agenda they sought to pursue in negotiating the pact.
At the top of the list were rules protecting U.S. investments in Mexico. A major goal of the pact was to make it as easy as possible for major corporations like Ford or GE to set up factories in Mexico and take advantage of low-cost Mexican labor.
To make investments more secure, NAFTA included lengthy provisions protecting U.S. corporations from nationalizations or restrictions on repatriation of profits to America. It also included a special extrajudicial process that is exclusively for foreign investors: investor-state dispute settlement tribunals (ISDS).
The ISDS stand apart from the existing legal system. They allow a foreign investor to sue a country over an alleged violation of NAFTA.
The tribunal includes one member selected by the Mexican government, one by the company initiating the complaint, and one who is appointed by the other two.
The ruling of the tribunal overrides any domestic law. As a factual matter, the tribunal would not directly overturn a law, it would just impose a penalty for leaving it in place.
The rulings are not subject to appeal, nor are they bound by precedent. In principle, one tribunal can make a ruling that is directly opposite of the ruling of another tribunal.
As a bonus for corporations, the ISDS system was not just put in place in Mexico. All three countries in NAFTA are subject to suits brought by foreign investors through ISDS.
There have been several cases brought against the United States over environmental regulations, the most recent being a suit filed by a Canadian pipeline company over President Barack Obama’s decision to nix the Keystone Pipeline. ISDS provisions have been an important part of all post-NAFTA trade deals.
NAFTA was also designed to push corporate interests in other areas. Most notably, the agreement required Mexico to have stronger and longer patent and copyright protections. This was especially important in the case of prescription drugs.
As a result of patent and related protections, drugs that might sell for $10 or $20 per prescription in a free market, can instead sell for hundreds or even thousands of dollars.
The United States has made stronger patent and copyright protections central in every post-NAFTA trade pact. This is good news for the U.S. pharmaceutical, software, and entertainment industries But it is bad news for the people living in the other countries that are part of the deals — they will have to pay more money for a wide range of products — and it is also bad for the American people.
We spent more than $450 billion last year on prescription drugs. If these drugs were sold in a free market without patent protection, we likely would have spent less than $80 billion.
The difference of $370 billion is almost 2.0 percent of GDP, or roughly five times as much as we spend on the Supplemental Nutrition Assistance Program (SNAP), formerly known as the food stamp program.
Trade deals like NAFTA help to lock in our current system of patent financed research for drugs. This is the cause of outrageous prices for lifesaving drugs. It also leads to widespread corruption, as it gives drug companies enormous incentive to lie about the safety and effectiveness of their drugs.
Clearly, NAFTA was not designed with the well-being of the American people in mind. It is not possible to reverse history and bring back jobs lost over the last quarter century, but we can try to fix the worst features of the pact. Getting rid of the special ISDS tribunals would be a very good place to start.
ABOUT THE WRITER
Dean Baker is the founder and senior economist at the Center for Economic Policy and Research (CEPR). He received his B.A. from Swarthmore College and his Ph.D. in Economics from the University of Michigan. Readers may write him at CEPR, 1611 Connecticut Avenue, NW Suite 400 Washington, DC 20009.
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