Renegotiating NAFTA: Investor-State Disputes

On January 23, President Donald Trump began to carry out his campaign promises on trade, directing the U.S. Trade Representative (USTR) to withdraw the United States from the Trans-Pacific Partnership (TPP) Agreement and “to begin pursuing, wherever possible, bilateral trade negotiations”. He is expected to follow through on another campaign promise of requesting renegotiation of the North American Free Trade Agreement (NAFTA) after he meets with his NAFTA counterparts, the leaders of Canada and Mexico, on January 31. This post explores one of the items likely to be on the President’s NAFTA negotiating agenda: the Agreement’s investor-state dispute settlement (ISDS) mechanism.

ISDS exists in various forms in over 3,000 agreements worldwide, of which the United States is party to 50 bilateral investment treaties or free trade agreements (FTAs). The purpose of ISDS is to protect foreign investors and their investments from discriminatory, unfair or arbitrary treatment by the host government. Under NAFTA’s ISDS, an investor, with an investment in the territory of a NAFTA country, can bring a claim against that government for breaching a NAFTA obligation, such as discriminating against the investor or expropriating the investor’s property. Investors can have such claims heard before an international arbitration panel, rather than domestic courts.

The business community strongly supports ISDS as essential to provide certainty and protection for U.S. investors in foreign countries. However, the use of ISDS is coming under increasingly heavy criticism from a wide array of interests, including labor and public interest groups, in the U.S. and other countries. The use of ISDS was a point of contention in the negotiations of the TPP.  It has also been an issue in the ongoing negotiations of the Transatlantic Trade and Investment Partnership (TTIP) with the European Union. The AFL-CIO has called for the elimination of NAFTA’s ISDS, labeling it a “private justice system for foreign investors” that gives corporate rights a priority over citizens’ rights.

To respond to widespread criticism of ISDS in Europe, the EU has proposed an alternative. It persuaded Canada to replace the ISDS provisions in their trade agreement with a bilateral Investment Court System (ICS), comprised of a permanent tribunal and an appeal tribunal competent to review decisions of the tribunal, in place of ad hoc tribunals. The EU also included a bilateral ICS in its recently completed trade agreement with Vietnam and is proposing this system in all of its ongoing negotiations, including the TTIP. The EU would likely extend that approach to Mexico if the two sides take up investment protection in their recently commenced negotiations to upgrade an existing trade agreement.

The EU is now exploring the establishment of a permanent Multilateral Investment Court, which would replace the bilateral court systems and ISDS, if countries agreed. The EU agreements with both Canada and Vietnam include references to the possible creation of a multilateral court. In December 2016, the EU, along with Canada, held a consultation with interested countries in Geneva on the proposed multilateral court. It does not appear that the U.S. has not taken a position on it.

With Canada’s acceptance of the bilateral ICS in its EU agreement, will it propose such an approach in NAFTA renegotiations? Given its experience with the NAFTA’s investor-state provisions, it would likely be open to a revision of the current system. A 2015 study by a Canadian think tank of NAFTA investor-state disputes documented 77 NAFTA ISDS claims through 2014. The Canadian Centre for Policy Alternatives found that almost half (35) of those claims were against Canada, 22 against Mexico and 20 against the U.S. It also found that Canada has been required to pay out the most in damages in response to the investor claims, and that the three governments had “incurred tens of millions of dollars in legal costs to defend themselves against investor claims”.

According to USTR, and as found in the Canadian study, foreign investors have never successfully challenged the U.S. To explain that result, USTR points to the safeguards in U.S. trade agreements and bilateral investment treaties and the high standards of the American legal system.

What is unknown at this time is whether in a renegotiation of NAFTA, the Trump trade team will seek the elimination of ISDS, as called for by labor, or seek a modification of it. If so, will the EU’s proposed multilateral court, or even the factors underlying its proposal, be considered?

Jean Heilman Grier

January 24, 2017

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