Reed Smith Client Alerts

The United States-Mexico-Canada Agreement (the USMCA), which will replace the North American Free Trade Agreement (NAFTA) after more than 25 years of existence, was recently ratified by Canada, becoming the final of the three countries to do so. However, the agreement  does not enter into force until the first day of the third month following notification that each of the State Parties has aligned its internal laws and regulations with the USMCA’s provisions. As the three countries scramble to align their internal regulations by June 1, 2020, the target date given by the Trump administration, COVID-19 has disrupted the internal implementation process, and the USMCA Parties’ internal leadership has been unable to meet to provide industry guidelines necessary for the implementation. This alert examines the most relevant investor protections lost under the USMCA and identifies issues for investors with investments currently covered under NAFTA to consider while the COVID-19 outbreak continues to hamper efforts to implement the USMCA by the June 1, 2020 target date.
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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