Goodbye NAFTA! Welcome to USMCA and to the unprecedent limitation to the ISDS

Valentina Cagnin

Research Fellow, Ca’ Foscari University of Venice 

15th February 2021

1. “Americans First”: from NAFTA to USMCA (and beyond) 

            U.S. President Donald Trump has clearly broken with the traditional liberal trade policy of his predecessors, openly implementing protectionisttrade policies and renegotiating what it deems fairer and more balanced trade agreements to promote the creation of U.S. jobs and prosperity. 

            That’s why Trump ended any potential free trade agreements that could have been considered as a potential menace for Americans, deciding to stop the Transatlantic Trade and Investment Partnership (TTIP) with Europe and to withdraw from the Trans-Pacific Partnership (TPP, entered into force without the US under the name of CPTTP, Comprehensive and Progressive Agreement for Trans-Pacific Partnership or TPP-11). 

            But at the top of his “American First” agenda stood the re-negotiation of the North America Free Trade Agreement (NAFTA).

            NAFTA was established on January 1st, 1994, to remove trade barriers between the three signatories: Mexico, Canada and United States. 

            At that time, it was the first and the only trade pact with a labour dimension, promoting a virtuouslinkage among social policies and international trade regulation, not in the agreement itself but through NAALC (North American Agreement on Labour Cooperation), a side agreement. 

            Despite the general trade increasing and the economy boosting realized thanks to this agreement, Trump considered the NAFTA as “the worst agreement ever signed by the US” for destroying half a million American jobs (mostly in the manufacturing industries in New York, California, Michigan and Texas, where manufacturers moved to Mexico to take advantage of lower labour costs), lowering US wages (US workers who kept jobs in those industries had to accept lower wages) and increasing the US trade deficit. 

            Therefore, after Trump took office in January 2017, he sought to replace NAFTA with a new agreement, beginning negotiations with Canada and Mexico. 

             In September 2018, the three countries reached an agreement, the USMCA (United States, Mexico and Canada Agreement), which entered into force on July 1, 2020, replacing NAFTA. USMCA also ends NAALC, bringing labour (Chapter 23) into the trade agreement. 

2. The Investor-State Dispute Settlement (ISDS): what’s new? 

            NAFTA (Chapter 11) was protecting the rights of investors with the Investor-State Dispute Settlement (ISDS) clause. 

            ISDS usually allows investors to sue governments for lost profits due to laws or policies designed to protect such things as public health, social rights or the environment. 

            This mechanism of dispute resolution gives power to private investors to sue governments providing for signatory-country investors making investment in other signatory countries the opportunity to submit to arbitration a claim to an international private tribunal, skipping the domestic court and asking for a compensation of damage. 

            According to NAFTA (Chapter 11), an investor of a Party can submits a claim to arbitration if another Party has breached an obligation and thus go to a tribunal (Art. 1116), with three arbitrators (art. 1123), and ask for compensation for all or part of its alleged damages (art. 1137). 

            Since 1992, 70 ISDS cases started in the framework of NAFTA (none under NAALC). 

            The USMCA, according to Annex 14-D Mexico – United States investment disputes, has several significant differences from the NAFTA ISDS regime. 

            First of all, unlike NAFTA, under the USMCA investor–state arbitration is limited to the United States and Mexico: Canada is not party to the USMCA’s ISDS provisions


            Canada did not join Annex 14-D for several reasons: firstly, because Canada has been subject to more investor-state claims under NAFTA Chapter 11 than either the United States or Mexico. Secondly, Canada is one of the most frequent respondent States in the world with 29 (known) cases in total (See figure). Thirdly, because of the results of ISDS cases: Canada has lost eight such cases (while the United States has never lost a case) and at the same time, Canadian investors who have brought claims against foreign states have also had a low success rate.  

Source: UNCTAD, Investor-State dispute settlement cases pass the 1000 mark: cases and outcomes in 2019, in IIA Issues Note, International Investment Agreements, July 2020, Issue 2. 

            Alternatively, Canadian investors in the US and Mexico, and US and Mexican investors in Canada will use the ISDS available through the CPTTP to which both Mexico and Canada are a party. 

            USMCA differs from NAFTA also in terms of what pre-suit proceedings and conditions apply: the claimant and the respondents, before starting a dispute in a Court, should seek to resolve the dispute through consultation and negotiation (USMCA, Art. 14.D.2) and, in any case, no claim shall be submitted to arbitration unless the claimant first initiated a proceeding before a competent local court (USMCA, Article 14.D.5, Conditions and Limitations on Consent). 

            Then, under the USMCA, transparency has raised, solving one of the worst critics of ISDS under NAFTA: the notice of intent and that of arbitrations, pleadings, memorials, orders, awards and decisions of the tribunal must all be available to the public (Art. 14.D.8).      

            The new USMCA mechanism of dispute resolution between States and investors is even limited in scope, granting the right for Mexico and for US to adopt, maintain or enforce “any measure (…) that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental, health, safety, or other regulatory objectives” (Art. 14.16). This clause limits the number of hypothetical litigations, preventing the use of ISDS for regulatory provisions decided in terms for example of a new rule on the raising of the minimum wage (as it was the case of Veolia Propreté v. Arab Republic of Egypt ICSID, Case No. ARB/12/15). 

            According to USMCA Annex 14-D ISDS disputes have far more limited grounds for making a claim:  claims for direct expropriation may be submitted to ISDS but claims for indirect expropriation may not (Art. 14.D.3, Art. 14.8)

            Finally, under Annex 14-E, the new limitation of ISDS will not apply to foreign investors if those (both) conditions are respected: investors must be parties to “a covered government contract” and they must belong to five “covered sectors”: oil and natural gas (i), power generation services (ii), telecommunications (iii), transportation services (iv) and some infrastructure (v) as roads, railways, bridges or canals. In those cases, investors have a broader protection, as it was given in NAFTA Chapter 11 (such as for example, indirect expropriation). 

3. A real new future for social rights? 

            Canada’s withdrawal from ISDS provisions under the USMCA and the new rules for investors to submit claims reflects the broader global (and mostly European) push to limit the use of this arbitration.  

            As a matter of fact, ISDS is currently hardly criticized for many aspects: the lack of predictability of ISDS decisions, the costly procedures, the transparency and the accountability of the court system, the impartiality of arbitrators, the limited mechanism to ensure the correctness of arbitral decisions and, above all, the risk of the freezing of law as ISDS systems threatens the regulatory power of States. It is thus considered as a powerful weapon for investors against States and almost everywhere in the world, from scholars, institutions and NGOs, there are efforts to modify this mechanism of dispute resolution. 

            The European Commission, for example, already took the distance from ISDS in the last years proposing a new Investment Court System (ICS) to replace the old investor-state dispute system, including ICS provisions in the agreements with Canada, Singapore, Mexico and Vietnam and in all the future negotiations of bilateral agreements with other partners. ICS would eliminate some ISDS problems: provisions includes a permanent court inspired by public international courts, it is made up of a Tribunal of First Instance and an Appeal Tribunal; ICS is then not based on temporary ad hoc tribunals; adjudicators must be independent and professional and will work transparently by opening up hearings to the public; publishing documents submitted during cases; allowing interested parties (NGOs, trade unions, citizens’ representatives) to intervene in the proceedings and make submissions. 

            In theory, the bilateral ICS included in EU trade and investment agreements would be soon replaced by the Multilateral Investment Court, a permanent body to decide investment disputes (the European Commission has been working to establish it since 2015). 

            This shift from NAFTA to USMA in terms of ISDS provisions clearly demonstrates the need of a desired shift, from investment promotion and protection to investment regulation, preserving the State’s right to regulate in the public interest, rebalancing the ISDS and promoting the labour dimension of a FTA. 

            The only problem is that, according to Annex 14-c (legacy investment claims and pending claims) each party can submit a claim to arbitration in accordance with the NAFTA Chapter 11 rules, within 3 years of the termination of NAFTA. This implies that the potential limit and effectiveness of these rules could be valuated, concretely, only after this period expires (from July 2023). 

            We must, on the other side, consider, that the new, diluted, ISDS system is not the only novelty in USMCA in terms of labour provisions. 

            Above all the novelties, it deserves particular attention the Parties commitment to the ILO Declaration on rights and work, their obligations with respect “to minimum wages, hours of work, and occupational safety and health” (Art. 23.3.2 USMCA), keeping the NAALC unusual reference to the protection of migrant workers (whether they are nationals or non-nationals) (Art. 23.8) and enlarging the sphere of the ILO core social rights usually named in FTAs. Or, again, it deserves attention the insertion of Annex 23-A, which commits Mexico to enact its new labor legislation designed to facilitate the formation of independent unions and effective collective bargaining and it opens the opportunity to start petitions under the USMCA labour Chapter, granting a rapid response labour mechanism. 

            Will the USMCA open the door to a real fair trade among US, Canada and Mexico, respecting social rights and providing an example of social clauses for other countries (as it was NAALC)? Only time will tell the truth. 

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