United States, Mexico and Canada conclude new trade agreement

In December 2019, the United States, Mexico and Canada finalised the text of a new agreement (USMCA) to replace the North American Free Trade Agreement (NAFTA).  The USMCA’s investment protections are found in Chapter 14 and differ substantially from those under Chapter 11 of the NAFTA.

As regards substantive protections, the USMCA’s expropriation provision includes specific factors that must be considered when determining whether an action constitutes a direct or indirect expropriation.  It also confirms that non-discriminatory regulatory takings, to protect public welfare, do not constitute indirect expropriation.  In addition, the criterion of “public welfare” has been introduced for the assessment of “like circumstances” for the national treatment and most-favoured nation (MFN) provisions.  The USMCA also provides that the customary international law minimum standard of treatment, to be accorded to covered investments, includes fair and equitable treatment and full protection and security.

The USMCA’s dispute settlement provisions differ markedly from those under the NAFTA.  In particular, first, Canada has withdrawn entirely from investor-State dispute settlement (though Canada’s consent to arbitrate claims with respect to legacy investments under the NAFTA will not expire until three years after the NAFTA is terminated).  Second, arbitration under the USMCA is only available for breaches of national treatment, MFN, direct expropriation and, in limited circumstances, obligations regarding public debt and restructuring.  Third, before commencing arbitration (which should follow attempts to settle by consultation and negotiation), claimants are now required to exhaust local remedies first or wait 30 months following the initiation of domestic proceedings (though this requirement does not apply where domestic proceedings would be “futile”).  Fourth, arbitration claims must be brought within four years (and not three, as under the NAFTA) after the claimant first acquired (or should have acquired) knowledge of the alleged breach.  Fifth, arbitrators are not permitted to act as counsel, party-appointed expert or witness in any other arbitration pending under the USMCA.

The USMCA carves out a different regime for disputes involving government contracts in the oil and gas, power generation, transportation, telecommunications and infrastructure sectors.  Specifically, a claimant may initiate arbitration for alleged breaches of any of the substantive protections within Chapter 14, and the local litigation requirement of 30 months does not apply.

The USMCA will come into force three months after ratification by all three member States, at which point the NAFTA will be deemed superseded.

The text of the USMCA is here.