Replacing NAFTA: What the USMCA means for the future of North American trade and investment – a Q&A

After almost two years of negotiations, the United States, Canada, and Mexico reached an agreement to enter into a new trade agreement to replace NAFTA. Though the agreements may seem similar in many regards, there are also numerous important differences. In these Q&As, we ask contributors from each of the jurisdictions to discuss several key considerations.

What is the status of the USMCA in your jurisdiction?

CANADA: The Canada-United States-Mexico Agreement Implementation Act^[1] received royal assent on March 20, 2020. The Agreement itself went into effect on July 1, 2020.

MEXICO: The USMCA entered in force in Mexico on July 1, 2020. Like many countries with a civil law tradition, once the corresponding approval process is complete, international treaties automatically become part of Mexican domestic law (ie, without the need for implementing legislation).

UNITED STATES: The USMCA received Congressional approval in January 2020 after it was approved by the US Senate, following approval by the House of Representatives in December 2019. It was signed into law by President Donald Trump on January 29, 2020 and took effect on July 1, 2020.

What should investors in your jurisdiction know about investments made before the USMCA took effect? How will legacy investments be treated?

CANADA: The USMCA does have a chapter protecting investments, the substantive protections of which are not altogether different than those in Chapter 11 of NAFTA. Unlike with NAFTA, however, the investment chapter of the USMCA does not provide for investor-state arbitration against Canada or brought by Canadian investors. The situation is different for “legacy investments”  – investments made while NAFTA remained in effect. NAFTA’s investor-state dispute mechanism remains in place for such investments for three years following NAFTA’s termination.

MEXICO: With respect to legacy investments,^[2] parties must submit arbitral claims in accordance with NAFTA’s Chapter 11, Section B within three years after the termination of NAFTA. Likewise, an arbitration initiated while NAFTA was in force may proceed to its conclusion in accordance with Chapter 11.

UNITED STATES: As noted above, “legacy investments” that predate the entry into force of the USMCA remain subject to NAFTA for three years. However, for new investments and legacy investments following the expiration of the three-year sunset period, the USMCA represents a significant retreat from the investor-state arbitration regime that had previously existed under NAFTA, both in terms of the procedural options available to investors, but also with regard to many of the substantive protections afforded to foreign investments.

How does the USMCA affect dispute resolution options for investors from your jurisdiction?

CANADA: The USMCA does not allow investors to bring international arbitration claims against Canada with respect to alleged violations of the USMCA’s substantive investment protections. The impact of this, and potential options for Mexican and American investors and investments is different. Mexico and Canada are parties to the Trans-Pacific Partnership, which provides for similar substantive rights as those contained in the USMCA, which may be enforced through investor-state arbitration. Mexican investors and their investments in Canada will, therefore, continue to enjoy access to investor-state arbitration against Canada, and Canadian investors and their investments in Mexico will continue to have access to investor-state arbitration against Mexico. American investors will not. They will have to avail themselves of assistance from the United States government in enforcing the USMCA’s protections or will have to seek redress in Canadian courts pursuant to Canadian law.  Depending on the circumstances, traditional domestic claims may remain available. In addition, the Supreme Court of Canada recently confirmed that Canadian law incorporates customary international law and determined that it could not rule out the possibility of the private enforcement of these rights. It is thus theoretically possible for an American investor to enforce rights under customary international law, such as the minimum standard for the treatment, despite being unable to do so under the USMCA itself. A claim cannot, however, be brought in Canadian courts for a violation of obligations under the USMCA or pursuant to the statute by which it was implemented.

MEXICO: An investor may only submit an arbitration claim under the USMCA’s Annex 14-D (Mexico-United States Investment Disputes) if (i) the claimant has first initiated a proceeding before a competent court or administrative tribunal of the respondent; (ii) the claimant has obtained a final decision from a court or 30 months have elapsed from the date the proceeding was initiated; (iii) no more than four years have elapsed from the date on which the claimant first acquired, or should have first acquired, both knowledge of the breach alleged and that the claimant has incurred loss or damage^[3]; and (iv) the requirements for the consent and notice of arbitration provided therein are met. Annex 14-E (Mexico-United States Investment Disputes Related to Covered Government Contracts) does not provide for the need to fulfil the local litigation requirement. It only requires that six months have elapsed since the events giving rise to the claim and that no more than three years have elapsed from the date on which the claimant first acquired, or should have first acquired, knowledge of the alleged breach.

UNITED STATES: With the limited exceptions outlined above, the USMCA largely does away with investor-state arbitration between the United States and Canada. Although investor-state arbitration remains possible under the USMCA between the United States and Mexico, it has been substantially circumscribed, includes a local litigation requirement, and is subject to new limitations, including with regard to the time when claims may be brought and the substantive protections afforded.

How has USMCA changed the investment protections in NAFTA for investors from your jurisdiction?

CANADA: The USMCA severely limits investors’ ability to enforce the substantive rights it afford. The change for American investors is a complete displacement of the investor-state investor arbitration system. The change for Mexican investors is less significant as they may instead rely on the TPP’s substantive protections and arbitration provisions.

MEXICO: Investors may only submit claims on the basis of: (i) national treatment; (ii) most-favored-nation treatment; or (iii) direct expropriation. In other words, the most common grounds for investment claims, including fair and equitable treatment and indirect expropriation are unavailable to investors under the USMCA, unless that the investment is related to a covered sector.

UNITED STATES: Apart from “covered” investments in certain specified sectors – including oil and gas, power, telecommunications  – which continue to benefit from the substantially higher protections previously afforded under NAFTA, most investments will be subject to reduced protections and more limited access to investor-state arbitration. In addition to the new limitation on the substantive claims outlined above, the USMCA also includes local litigation requirements and limitation periods requiring that claims be brought promptly.

What else should an investor from your jurisdiction know about USMCA?

CANADA: The USMCA significantly changes the protections available for American investors in Canada. Legacy investors and investments from the United States should be mindful of the three-year limit on NAFTA claims. Parties with Mexican legacy investments should be mindful of the three-year legacy investment extension but should also consider in what ways their investments are protected by the TPP.

MEXICO: Although Annex 14-E looks less problematic at first glance, it still raises some questions. For example, are claims arising from a contract with a municipal authority admissible to arbitration? Are institutions such as the Mexican Federal Electricity Commission (CFE) considered national authorities? Would the subsidiaries of the Mexican state-owned petroleum company PEMEX qualify for inclusion in this Annex? Furthermore, if the investor is from any other sector not contemplated as a “covered sector” under Annex 14-E (eg, pharmaceuticals, aerospace, agriculture), investor protectors have been significantly reduced.

UNITED STATES: In addition to the significant changes to the investor-state dispute mechanisms previously available under NAFTA, which have been described above, the USMCA has also implemented new procedural standards on investor-state proceedings, which remain in place, and which are intended to foster greater transparency and to prevent many of the conflicts of interest that critics of investor-state dispute resolution have long complained about. For example, arbitrators are prohibited from acting in other capacities, including as counsel, and proceedings are largely required to be public.

Read this article in Spanish.