NAFTA 2.0 finalized, announced as USMCA: Mexico, United States agree to limit ISDS clause; Canada to pull out of ISDS after a three-year window

On September 30, 2018, U.S. Trade Representative (USTR) Robert Lighthizer and Canadian Foreign Affairs Minister Chrystia Freeland announced that the two countries had reached an agreement, alongside Mexico, on a modernized trade deal. NAFTA will be replaced once the new agreement, dubbed United States–Mexico–Canada Agreement (USMCA), enters into force.

Canada, Mexico and the United States embarked on NAFTA renegotiations in August 2017. After a July 2018 round, Canada took to the sidelines to let its partners work out bilateral differences, or possibly because it was frozen out by them. After Mexico and the United States reached a bilateral agreement on August 27, 2018, Canada rejoined negotiations with the United States.

While the investor protections in USMCA Chapter 14 are similar to those contained in the CPTPP, the ISDS clause is more limited. Investors may only bring claims with respect to the clauses on post-establishment national treatment or MFN, or direct expropriation. Before initiating arbitration, foreign investors must exhaust local remedies in the host state or pursue such remedies for at least 30 months.

Annex 14-D, containing the ISDS clause, is titled “Mexico–United States Investment Disputes,” signalling that the mechanism does not apply to Canadian claimants or Canada as a respondent state.

Investments made between NAFTA’s entry into force (January 1, 1994) and its termination and in existence when USMCA enters into force are defined as “legacy investments.” Under Annex 14-C, investors from all three USMCA parties may raise NAFTA-based claims with respect to legacy investments within three years of NAFTA’s termination. The three-year window does not affect currently pending proceedings or any legacy claims initiated.

Canada–Mexico ISDS disputes would still be possible under the CPTPP once it enters into force. However, after the USMCA’s three-year window for legacy claims, there would no longer be a treaty basis for ISDS between Canada and the United States.

Under Annex 14-E, Mexico–United States ISDS claims are also possible for investors in certain sectors who have a contract with their host government. These sectors include oil and gas, power generation, telecommunications, transportation and infrastructure. In these cases, investors may bring claims based on most investor protections in the USMCA without pursuing local remedies first.

In addition to investment, the agreement contains 33 other chapters, with disciplines on trade in goods and services, agriculture, rules of origin, government procurement, financial services, telecommunications, intellectual property, competition policy, labour and environment, among others.

According to Mexican Economy Secretary Ildefonso Guajardo Villareal, the USMCA may be signed by the Canadian, Mexican and U.S. leaders at the G20 summit in Buenos Aires in late November. All three parties must then ratify the agreement for it to enter into force and replace NAFTA.