Keep But Reform NAFTA, Industry Leaders Say

S&P Global Platts
Written By: Jim Magill
S&P Global Platts
Written By: Jim Magill

Retaining and strengthening the North American Free Trade Agreement, rather than rescinding the deal, is the best way to ensure that US oil, natural gas and petrochemicals will continue to have needed access to international markets, industry leaders contend.

As trade representatives from the US, Canada and Mexico meet in Ottawa this week to conduct the third round of talks aimed at renegotiating the treaty, trade associations representing energy and other industries are urging the Trump administration not to scrap the deal.

"Quitting NAFTA would be an economic, political and national-security disaster," US Chamber of Commerce President and CEO Tom Donohue said in a Monday op-ed in the Wall Street Journal.

Donohue's comments echoed those Jack Gerard, president and CEO of the American Petroleum Institute, who joined leaders of other oil, gas and petchems industry associations in a webcast Friday to call for a measured approach in the trade negotiations.

"NAFTA has helped North America rise by allowing for the more efficient flow of energy capital and talent between our countries," he said.

"It's also helped to make US, Mexico and Canada more energy secure by reducing reliance on outside energy sources and is critical to energy integration," he said.

Gerad and the other speakers in the webcast worried that a move to jettison the 23-year-old trade deal, as President Donald Trump had threatened to do on the campaign trail, would have a profoundly negative impact on trade between the US and its two closest neighbors in many commodities, but particularly gas.

US gas exports Mexico have ramped up exponentially over the last seven years, especially picking up over the last three years as new projects have increased US export capacity, according to Platts Analytics' Bentek Energy.

Since the beginning of 2010, US exports to Mexico have grown by 3.0 Bcf/d to their current 3.9 Bcf/d average for September. Most of this growth has come from Texas, which currently exports an average 3.2 Bcf/d to Mexico, while the Southwest region makes up the remainder, exporting an average 0.7 Bcf/d.

Trade War?

Gerard called on US trade negotiators to reform NAFTA, while maintaining some of its strongest trade protections, such as the right of individual companies to sue countries for alleged discriminatory practices through the Investor-State Dispute Settlement (ISDS) system.

"NAFTA's investment protections, including ISDS, provide US companies fair and equitable treatment for our investments abroad. Without ISDS, countries like Mexico can turn to more outside investment, like the Chinese, when it comes to energy investment," Gerard said.

Advocates calling for the retention of NAFTA also warn that its repeal could spark a trade war between the US and its neighbors, resulting in higher tariffs on imported commodities such as gas.

A tax on Canadian imports could have substantial impacts on the US gas supply picture, as the US imported an average of 7.5 Bcf/d from its neighbor to the north in 2012-2016, according to Platts Analytics.

A rollback of the NAFTA treaty also could have negative impacts for the rapidly growing US petrochemical industry. That industry has seen a renaissance in recent years as a result of the shale gas production boom, which has provided a plentiful and inexpensive source of feedstock for chemical manufacturers, Cal Dooley, president and CEO of the American Chemistry Council, said during Friday's webcast.

"Since 1994, we've seen our chemical trade within the NAFTA region increase from $20 billion to $63 billion," Dooley said. "We have gone from one of the highest cost manufacturers of chemicals 10 to 15 years ago to now the world's competitive chemical manufacturer."

Dooley said the growth of the petrochemical industry in recent years is leading to $185 billion in new capital investment coming into the US in chemical manufacturing, with the bulk of that, over 62%, resulting from direct foreign investment.

"Any thought about withdrawing from NAFTA or any other global trade agreement, and consideration to further restrict the flows of goods outside of the US, has the potential to undermine this once-in-a-generation opportunity we have to capitalize on a global competitive position," he said.

Dooley also warned against a proposal being floated that would call for NAFTA to expire after five years, forcing another renegotiation at the end of that period.

"Five years is such a short time that again, this does not maintain the certainty that the chemical industry needs to make the investments to capitalize on the opportunity that we have in the US," he said.