On March 13, 2020, immediately preceding a declaration of a five-week shut down in response to COVID-19, Canada ratified1 the United States-Mexico-Canada Agreement (the USMCA), becoming the third and final country to do so.2 The State Parties to the USMCA must now align their internal rules and regulations with their obligations in the agreement.3 Once they do, each country must notify the other countries by letter stating their internal regulations have been modified to conform to the USMCA.4 The USMCA will then enter into force on the “first day of the third month following the last notification.”5
The legislature has indicated that all countries will have aligned their internal laws with the USMCA by June 1, 2020. But the U.S. automotive industry issued a joint statement asking the Trump administration to reconsider its target date given that the industry’s resources are currently focused on responding to the COVID-19 pandemic’s disruption of supply chains and that the USMCA’s Parties’ internal leadership have been unable to meet and provide industry guidelines necessary for the USMCA’s implementation.6 Mexico’s automakers have voiced similar concerns.7 If COVID-19 delays the USMCA’s entry into force, it will not be the only investment treaty affected by the pandemic. It has been reported that COVID-19 has also hampered treaty negotiations between the U.S., EU, and China, which together represent around 50 percent of global wealth.8
When the USMCA does enter into force,9 it will reduce the level of investor protection offered under Chapter 11 of the North American Free Trade Agreement (NAFTA), the treaty the USMCA was negotiated to replace. The most significant change under the USMCA is Canada’s withdrawal from investor-State arbitration, whether by Canadian nationals or by U.S. or Mexican nationals against the Canadian State. Under the USMCA, an investor may only bring a claim against Canada for violating the USMCA’s provisions in the local courts of Canada. With respect to investments in the U.S. or Mexico by nationals of the other country, investors may initiate international arbitration if (i) the investment is a “covered government contract” in a “covered sector” as defined in the USMCA, or (ii) it alleges the respondent State breached (a) Article 14.4 (National Treatment), (b) Article 14.5 (Most-Favored-Nation Treatment), or (c) the prohibition on direct expropriation without compensation under Article 14.8 (Expropriation and Compensation).10
This contrasts with the protections offered under NAFTA, which permits covered investors to bring claims for any violation under Section A of Chapter 11 to investor-State arbitration.11 For instance, unlike an investor protected by NAFTA, a covered investor under the USMCA cannot bring a claim under the most common causes of action in investor-State arbitration, which are that the respondent State treated its investment unfairly or inequitably, failed to provide full protection and security, or indirectly expropriated its investment without compensation.12
The USMCA’s requirement that investors exhaust local remedies for 30 months before initiating international arbitration against a host State is another of its impediments to investment protection.13 NAFTA, by contrast, does not require investors to exhaust local remedies and only contains a six-month “cooling off period” that some international arbitration tribunals have held to be “procedural and directory in nature, rather than jurisdictional and mandatory.”14 As with the USMCA’s substantive reductions in protection discussed above, however, the 30-month local remedies requirement will not apply to USMCA-covered investors in certain sectors (e.g., oil and gas, power generation, telecommunications, transportation), provided their investments benefit from a qualifying government contract.15
One silver lining is that investors currently covered under NAFTA will be able to commence arbitration under its terms for a legacy period of three years from the date NAFTA is terminated and the USMCA enters into force.16 Given these impending changes to the levels of protection offered to intra-North American investments, however, investors should be mindful of whether their investments will benefit from this three-year sunset period or whether they should look for alternative methods of reducing investment risk. It appears that COVID-19 might grant additional time for this consideration, but an indefinite delay is not currently expected.
- See House of Commons Debates, 43rd Parliament, 1st Session, Friday, March 13, 2020, available at ourcommons.ca.
- The United States ratified the agreement on January 16, 2020. See Senate.Gov, Roll Call Vote 116th Congress – 2nd Session, available at senate.gov. Mexico ratified the agreement on June 19, 2019. See Diario Oficial de la Federación, 29/07/2019 (Spanish), available at dof.gob.mx.
- See Protocol Replacing the North American Free Trade Agreement with the Agreement between the United States of America, the United Mexican States, and Canada, ¶ 2, available at ustr.gov.
- See id.
- See id.
- See “Auto Industry Urges Administration to Reconsider USMCA Implementation Date,” available at mema.org; see also Gabriel T. Rubin, “Auto Makers Push for Delay in Trumps USMCA Trade Deal Over Coronavirus Pandemic,” Wall St. J., available at wsj.com (“When you add the Covid-19 crisis, this is really beyond understanding that the administration is trying to do this,” “If you force use to try to comply by June 1, we will not comply, and tariffs will be unnecessarily paid.”).
- See Sharay Angulo, “Mexico's automakers want to delay USMCA rules, cite coronavirus, lack of time,” Reuters, available at reuters.com.
- See Fraser Cameron, “Coronavirus outbreak affects EU-US-China ties,” China Daily, available at khmertimeskh.com; see also Nayanima Basu, “India-EU Summit deferred over coronavirus threat, Modi cancels trip to Brussels,” The Print, available at theprint.in.
- The USMCA enters into force “on the first day of the third month following the last notification” that each country’s internal procedures have been modified to conform with the text of the agreement. See USMCA, Art. 34.5; see also Protocol Replacing the North American Free Trade Agreement with the Agreement between the United States of America, the United Mexican States, and Canada, ¶ 2.
- See USMCA, Annexes 14-D and 14-E.
- See North American Trade Agreement Free Trade Agreement, Art. 1116.
- See Investment Policy UNCTAD.org, Breaches of IIA Provisions Alleged and Found, available at investmentpolicy.unctad.org
- See USMCA, Art. 14.D.5.
- See NAFTA, Art. 1120 ; see also Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania, ICSID Case No. ARB/05/22, ¶ 343 Award (July 24, 2008).
- USMCA, Annex 14-E (6)(b).
- USMCA, Annex 14-C (3).
Client Alert 2020-138
