USMCA strikes a welcome blow against investor-state dispute settlement

At CCPA we have been poring over the nearly 2,000-page USMCA text. In the weeks and months to come we will be providing analysis of key issues. This first blog in the series examines one of the most positive developments in USMCA: the phasing out of investor-state dispute settlement (ISDS) between Canada and the U.S. Stay tuned to this space for future analyses of the agreement’s disappointing environment chapter, some of the USMCA’s new deregulatory aspects, and more.

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Despite Donald Trump’s bombastic attacks on NAFTA—calling it the “the worst trade deal ever made”—in most respects its replacement is just another NAFTA-style trade deal. The United States Mexico Canada Agreement (USMCA) builds on the NAFTA 1994 framework and draws heavily on provisions from the Trans-Pacific Partnership (TPP), another deal denounced by Trump.

For Canada, it’s hard to see the USMCA as anything more than damage control. The U.S. pulled in its horns on several of its worst demands, such as the complete elimination of Canada’s supply management system, but Canada still made big concessions. To name just a few, we further undermined supply management for dairy, poultry and egg farmers; accepted longer, more costly terms of monopoly protection for biologic medicines and copyrights; and even gave the U.S. a veto of sorts on any future trade deal with China, one of many capitulations to an America First worldview.

Meanwhile, Canada did not achieve several of its key negotiating objectives, such as gaining an immediate exemption from the Trump administration’s unjustifiable national security tariffs on steel and aluminum, incorporating chapters on gender and Indigenous rights, or improving access to U.S. government procurement markets. The Trudeau government’s one big win—preserving the NAFTA chapter 19 dispute settlement mechanism—is arguably more about symbolism than substance.

Still, from a progressive perspective, the USMCA is more of a mixed bag than previous trade deals. It includes a few changes the left has long advocated for, most notably the elimination of investor-state dispute settlement (ISDS), at least in our part of North America.

ISDS has (mostly) disappeared
Under the USMCA, ISDS will be eliminated between Canada and the U.S., and scaled back between Mexico and the U.S. This is an incredible achievement. NAFTA’s ISDS mechanism, embedded in NAFTA Chapter 11, allowed investors to bypass the domestic courts and sue governments before private international tribunals when public policy choices, laws or regulations allegedly harmed their investments. Of the three NAFTA countries, Canada has been the most sued, with U.S. investors frequently targeting federal and provincial environmental regulations.

In the recent Bilcon case, for instance, a NAFTA tribunal ruled against Canada over a federal-provincial environmental impact assessment that recommended against a massive quarry project on the Bay of Fundy. Monetary damages in the Bilcon case are still being decided by the arbitral tribunal, but Canada has already paid out over $300 million in fines, settlements and legal costs in other Chapter 11 disputes.

If or once the USMCA is ratified by all three countries, the NAFTA ISDS process will live on for another three years. Unfortunately, that means that during this transition period, foreign investors will be able to launch ISDS claims against the governments of Canada, Mexico or the U.S. for so-called “legacy investments” made during the NAFTA period. Such claims will be decided under the old NAFTA Chapter 11 rules. If a case is initiated during the three-year period, the tribunal proceedings will continue until finished and any arbitral tribunal damage awards will be fully enforceable, even beyond the three-year phase-out.

This extension will undoubtedly encourage a wave of new cases as foreign investors hasten to exploit their right to arbitration before it expires. Two U.S. investors have already brought forward a new claim against Mexico, because of uncertainty about the future of ISDS. The transition period was an unnecessary and harmful concession. Unlike many other investment treaties, NAFTA’s investment chapter contains no “survival clause” that would have allowed investor claims beyond its termination.

Mexico still partially covered by ISDS
The future of ISDS between Mexico and the U.S. is less encouraging. Under USMCA, existing contracts with the Mexican government in energy and several other key sectors will remain subject to full ISDS. The annex in the USMCA describing this process may lead to future investor-state conflicts as the new Lopez Obrador government moves to fulfil its pledges to achieve energy independence for Mexico.  

Going forward, ISDS claims by U.S. investors against the Mexican government and by Mexican investors against the U.S government will be limited to matters of direct expropriation (when the state takes over real property with or without compensating an investor) and post-establishment national treatment (i.e., governments must treat existing investments by U.S. and Mexican investors in the same way).

Foreign investors must also first try to resolve the disputes through the domestic courts—Mexican courts in the case of U.S. investors in that country, and U.S. courts for Mexican investors in that country. Crucially, USMCA will deny foreign investors the right to invoke much-abused provisions—in NAFTA and now thousands of other bilateral investment treaties—on minimum standards of treatment, indirect expropriation, and for planned, but not yet established, investments. From a public policy perspective, this is a vast improvement over the NAFTA status quo.

Unfortunately, Canadian investors in Mexico and vice versa will retain access to old-style ISDS through the pending, falsely labelled Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Investors from Japan, Australia, Malaysia and other Pacific Rim countries will also gain the right to challenge Canadian public policy measures using ISDS.

U.S. investors in Canada, especially in highly contested sectors such as fossil fuels or mining, can also be expected to structure their investments through subsidiaries in CPTPP or other countries with which Canada has treaties providing for investor-state arbitration. Likewise, we can expect Bay Street law firms to be advising Canadian firms to do the same in order to make ISDS cases against the United States.

The fight against ISDS is far from over. But its phasing out between Canada and the U.S. and its retrenchment between Mexico and the U.S is a remarkable victory for social movements in North America and globally, who have tirelessly campaigned to eliminate this insidious impediment to progressive public policy.  


Scott Sinclair is a senior research fellow with the CCPA and director of the centre’s Trade and Investment Research Project.

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