Author: Jean Lambert
| Jurisdiction: United States Canada Mexico |
Topics: USMCA NAFTA Investment Disputes |
Last month, the US, Canada, and Mexico announced the terms of the “new NAFTA’, the USMCA; a renegotiated trade deal at the insistence of US President Donald Trump.[1] Under NAFTA, citizens of Canada, Mexico, or the US with investments in one of the other signatory States could bring an investment arbitration claim under ICSID or UNCITRAL rules. The new USMCA, under the recently released terms, has drastically different arbitration obligations for Canada and Mexico.
While the new deal hasn’t been signed or ratified in any state yet, Columbia Society of International Law (CSIL) put together a panel to discuss the potential obligations and liabilities for states under the new treaty. The panel included Professor Petros Mavroidis, an expert on World Trade Organization (WTO) law, Professor Lisa Sachs, head of Columbia Center of Sustainable Investment (CCSI), and Dr. Mislav Mataija of the European Commission’s Legal Service.
Canada negotiated out of investor-state arbitration altogether, which is understandable considering their history with NAFTA. Under NAFTA, investors brought 41 suits against Canada, the most out of the three member nations, worth $200 million in damages and settlements, not to mention the costs of arbitrating the claims in the first place.[2]
Under Annex 14-D, Chapter 14 covers Investment between the states, of the US-MCA, Mexican investors in the US and US investors in Mexico may still resort to investor-state arbitration but under more limited situations and with heightened domestic remedy requirements.[3] All investors may bring claims under a limited number of claims including, national treatment, most favored nation treatment, and expropriation; while investors with government contracts in five carved-out industries, oil and gas, power generation, telecommunications, transportation, and road and highway management, may still bring claims under a wider array of treaty claims, including fair and equitable treatment.[4] The heightened exhaustion of domestic remedies standards require most investors in Mexico and the US to bring their claim in domestic courts for a set period of time before resorting to investor-state arbitration. Again, investors with government contracts in the aforementioned sectors, will not be subject to the same exhaustion of domestic remedies standard.
The panelists agreed these changes in the availability of arbitration for investors under the USMCA reflect the US Trade Representative, Ambassador Robert E. Lighthizer’s anti-investor-state dispute settlement (ISDS) stance.[5] In talks, Ambassador Lighthizer characterized ISDS as free insurance for US investors to take their money abroad.
Professor Mavroidis theorized the Trump administration hopes the loss of ISDS and increased pressure to use domestic courts will dissuade US investors from moving capital and creating jobs outside the country. On the other hand, Professor Sachs maintained she is also critical of ISDS but not for the same reasons as the Ambassador. Professor Sachs’ criticisms of ISDS stem from a potential hampering effect large awards have on state incentives to protect their citizens and their environment from corporate exploitation. Under NAFTA and other bilateral investment treaties, Sachs’ argues, nations may be held liable to investors for passing laws damaging foreign investment even if they are generally applicable. This may make states less likely to take such measures in the future after tribunals find them liable for awards in the billions of dollars. So, while Professor Mavroidis felt the exhaustion of domestic remedies in Mexican courts would dissuade US investment there, Professor Sachs felt like it was a positive opportunity for Mexican courts to build a stronger jurisprudence and more transparency in important investment cases.
Troubling all the panelists was the carve-out for the oil and gas industry in US-Mexico investor-state arbitration. Maintaining ISDS for oil and gas industries doesn’t dissuade US companies from continuing large-scale investment abroad and may continue to hamper Mexican officials from institution legislation to protect the environment. The discrepancy in how US investors will be treated in Canada and Mexico may also reflect a disparity in bargaining power between more-developed and less-developed trading partners.
Ambassador Lighthizer has previously touted state-to-state settlement as an alternative to the current ISDS regime.[6] The lack of ISDS between Canadian and US investors and the host state puts them on more equal footing for any such bi-lateral dispute settlement or negotiation. Alternatively, Mexico will still be subject to costly and lengthy arbitration proceedings by investors from its more developed treaty partners.[7] It is expected for Canada and Mexico to agree to ISDS under the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), the new TPP, but that treaty does not yet have enough signatories to be in full effect.
If more developed countries, like Canada and the US pull-back from ISDS it may increase the gap between the bargaining power of more-developed and less-developed economies have to negotiate with foreign investors. Less-developed economies may continue to be vulnerable to costly investor-state arbitration proceedings while nations with more-developed economies negotiate deals among themselves on behalf of investor interests. The USMCA may be an interesting experiment on how much access to ISDS effects investment trends from developed economies to less developed economies if US investors in the five categories with extended protection under Annex 14-D react differently compared to those without the extended protection. If access to ISDS has no effect in investment trends, it may encourage other developing countries to place more restrictions on access to ISDS without fear of serious repercussions to their economies and growth. If there is a change between the industry sectors it may well be a clear warning to developing nations that foreign investors will continue to be wary without the safety of investor-state arbitration as a so-called “insurance policy.”
[1] Heather Long, U.S., Canada and Mexico just reached a sweeping new NAFTA deal. Here’s what’s in it., Wash. Times (October 1, 2018), https://www.washingtonpost.com/business/2018/10/01/us-canada-mexico-just-reached-sweeping-new-nafta-deal-heres-whats-it/?utm_term=.d95aeb9ee9e8.
[2] Scott Sinclair, Canada’s Track Record Under NAFTA Chapter 11: North American Investor-State Disputes to January 2018, Canadian Centre for Policy Alternatives (January 16, 2018), https://www.policyalternatives.ca/sites/default/files/uploads/publications/National%20Office/2018/01/NAFTA%20Dispute%20Table%20Report%202018.pdf.
[3] Office of the U.S. Trade Rep, Exec. Office of the President, United States-Mexico-Canada Agreement, Can.-Mex.-U.S., Annex 14-D (proposed Sep. 30, 2018), https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/14%20Investment.pdf
[4] Id.; USMCA Curbs How Much Investors Can Sue Countries—Sort of, International Institute for Sustainable Development (Nov. 8, 2018), https://www.iisd.org/library/usmca-investors
[5] U.S. Trade Policy Agenda, C-SPAN (Mar. 21, 2018), https://www.c-span.org/video/?442889-1/us-trade-representative-lighthizer-testifies-steel-aluminum-tariffs.
[6] Id.
[7] Anton Strezhnev, Why Rich Countries Win Investment Disputes: Taking Selection Seriously (Sep. 22 2017) (unpublished working paper), https://static1.squarespace.com/static/5931baca440243906ef65ca3/t/59c55e2829f187ed71aba071/1506106921710/why_rich_countries_win_investment_disputes.pdf.