NAFTA v. USMCA: The Past and Future of Investor State Dispute Settlement

The United States-Mexico-Canada Agreement (“USMCA”) came into force on 1st July 2020, succeeding the North American Free Trade Agreement (“NAFTA”), which was implemented in 1994. The changes that have been brought in the new agreement will be imperative in determining the impact on the current Investor-State Dispute Settlement (“ISDS”) proceedings for the parties and their investors. The paper will primarily focus on Chapter 14 of the USMCA and its distinctiveness from Chapter 11 of NAFTA, where both were formulated to deal with its respective ISDS mechanism. In addition to this, there will be a brief insight and analysis in terms of the stance taken by each of the parties of the USMCA to fulfill sustainable trade opportunities for themselves. Particularly, Canada’s puzzling non-involvement in the ISDS mechanism under the USMCA. 

Some Changes Addressed by the New Agreement

When we consider Chapter 14 of the USMCA as a whole (with some exceptions), the most appreciable part is that it is more elaborate and detailed than NAFTA. Some significant highlights are:

• The expropriation (deprivation of proprietary rights by a party to an investor of another party) section of the USMCA (Article 14.8) more precisely defines indirect expropriation. It mentions that a government action that interferes with distinct and reasonable-backed expectations will be considered an indirect expropriation. The agreement provides two examples of what constitutes a reasonable investment-backed expectation as an indication of how it should be interpreted-written assurances from the government and the nature of government regulation in the relevant sector. 

• The conduction of the arbitration process is also much more detailed (Article 14.D.7). Amicus curiae participation is mentioned with defined requirements and fulfilments to be made by the amicus such as disclosing affiliations (if any) with any of the disputing parties etc. In addition to this, timelines are mentioned in this part concerning different aspects of arbitration.

• The limitation period to submit an arbitration claim has been increased from three to four years. (Article 14.D.5)

• Finally, some new aspects like corporate social responsibility (Article 14.17), arbitrator’s compliance with International Bar Association Guidelines on Conflicts of Interest in International Arbitration (Article 14.D.6) are also mentioned for greater transparency. 

Potential Downside

Article 14.D.5. requires the claimant to first initiate a proceeding before a competent court or administrative tribunal of the respondent concerning measures alleged to constitute a breach. An arbitration claim can only be made after 30 months have elapsed from the date from which the proceedings were initiated or the claimant or the enterprise obtained a final decision from the court of last resort. This condition defeats the purpose of arbitration which is meant to provide a relatively quick way for solving a dispute and also for decreasing the burden of cases on national courts. Both purposes are being compromised by this condition.

• Under Article 1108 of NAFTA, there was a timeline of 2 years after the enforcement of the agreement to set out any non-conforming measures maintained by a State or province. These non-conforming measures are exceptions to provisions like Most Favoured Nation (MFN), National Treatment, etc., this timeline of 2 years has not been mentioned in the new agreement (USMCA). So, this might create confusion in the minds of investors if a party does not set out its non-conforming measures within a reasonable period. There is also a carve-out for national treatment or MFN claims, “with respect to the establishment or acquisition of an investment.” All this stands in stark contrast to the former NAFTA regime, which allowed investors greater procedural and substantive rights. It will limit the scope of protected investors, and will also prioritize some investors over others.

Jurisdiction-Specific Insights

USMCA being a tripartite agreement encompasses different views regarding the needs and wants of different parties from it. The requirement of a new agreement, a promise by the Trump administration, Mexico’s cause for renegotiations, and Canada’s opt-out from the ISDS mechanism are all different horizons which can help in understanding the stance of different parties with the new agreement.

The United States

The Trump Administration came into office promising to replace NAFTA and expressed hostility towards investment protection. It wanted the new agreement to be more beneficial for the US even if it was detrimental to the other parties. President Trump in the 73rd session of the U.N. General assembly remarked that “the United States rejects globalism and would embrace the doctrine of patriotism”. This statement was justified when the Trump Administration applied aggressive import tariffs on both Canadian and Mexican goods to influence renegotiation. With the U.S. at the helm of increased trade wars, and adopting an “America First” ideology, the U.S. will likely turn to coercive measures to achieve its foreign policy goals. In its most recognizable form, this approach involves the use of embargos and economic sanctions.

Mexico

NAFTA’s ISDS Chapter (Chapter 11) was added due to concerns about Mexico’s history of nationalization. Trump’s campaign demand for greater border security along the Mexican border was soon followed by demands to terminate a twenty-five-year-old trade deal if renegotiations were not to his liking. Given its dependency on access to US markets, Mexico had to capitulate to the demands, and in so doing became the first nation to succumb to Trump’s “Art of the Deal.” There should be no surprise that Mexico was the first to agree to sign a trade deal with the Trump administration as more than 80 percent of Mexican exports goes to the United States. If the NAFTA agreement was terminated with no alternative, it would have crippled Mexico’s economy.

Canada

Perhaps the biggest limitation of the agreement is that Canada is not a party to Chapter 14 of the USMCA. The implication is that any investment dispute that arises will be only between the United States and Mexico, given that it envisions only three parties. This begs the question: why would one of the three parties back out from such an operative portion of the agreement?

For this, it is critical to consider Canada’s litigation history, costs, and experience with disputes under the NAFTA regime. Of the 77 known NAFTA investor-state disputes, 35 have been filed against Canada, 22 against Mexico, and 20 against the US. Canada has also had low successive rates with the disputes, losing 8 of them as compared to the US which has never lost a NAFTA dispute. It has paid out over $200 million to American investors. It has also spent more than $65 million defending itself in NAFTA challenges. Over 20 years after NAFTA was implemented, Canada became the third most sued developed country in the world.

Conclusion

The self-interested motivations of the Trump Administration, Canada’s rejection of the ISDS mechanism and the indirect coercion against Mexico to sign the agreements hints toward an unstable foundation for the newly signed USMCA. After considering both sides of the new agreement, it can be concluded that the gravity of cons outweigh its pros. Greater clarity cannot fill in the huge gap which is made by Canada not being a party to the ISDS mechanism and the latency which would be suffered by the investors/claimants due to the 30-month rule. 


Snehil Balani is a second year law student at Dr. Ram Manohar Lohiya National Law University, Lucknow (U.P.), India. His research interests include alternative dispute resolution and international law.


Image: AP.

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