NAFTA Renegotiation: ISDS reform objectives

The United States will lobby for changes to the investor-state dispute settlement ("ISDS") provisions of the North American Free Trade Agreement ("NAFTA") in the upcoming discussions to renegotiate the regional treaty.

ISDS reform is one of several "negotiating objectives" announced last month by the Office of the United States Trade Representative (the "USTR"), the federal agency with responsibility for US trade negotiations.  The disclosure was made public in accordance with a 2015 statute that requires the USTR to release objectives at least 30 days before the start of formal trade negotiations.  The NAFTA talks are set to begin in Washington D.C. on August 16.

On the agenda are modest proposals for increased transparency in the NAFTA ISDS process, such as the introduction of mandatory public access to NAFTA arbitration hearings, and submissions, and awards.  Those amendments would be broadly in line with the recent trend toward greater public transparency throughout the investment treaty space.  A more striking departure from current practice is suggested by the proposed introduction of a "right" of "non-governmental entities . . . to request making written submissions to a panel." 

The remaining ISDS objectives are, as drafted, exceedingly vague.  For instance, the USTR will seek reforms to "encourage the early identification and settlement of disputes through consultation and other mechanisms" and to "establish a dispute settlement mechanism that is effective, timely, and in which panel determinations are based on the provisions of the Agreement and the submissions of the parties and are provided in a reasoned manner."  In a similar vein, the US will call for "provisions that encourage compliance with the obligations of the Agreement."  Quite what that entails is, for now, unclear.

The Trump Administration's decision, announced in May, to formally begin the renegotiation process was widely expected.  Yet while President Trump has been a persistent detractor of NAFTA ("the worst trade deal maybe ever signed, anywhere"), his negative assessment of the treaty has focused largely on its purportedly detrimental effects on American industry and trade.  ISDS has figured little, if at all in the President's periodic denouncements of NAFTA.  Rather, the critique of NAFTA arbitration has come predominantly from the left—driven mostly by concerns that corporate entities (i.e. investors) have manipulated ISDS to subvert domestic environmental, consumer, and other public interest regulation.

Chapter 11 of NAFTA contains the treaty's principal ISDS provisions.  Those, in turn, represent fairly standard investment treaty provisions such as national treatment, most-favored-nation, and anti-expropriation clauses.  American, Canadian, and Mexican investors may bring claims under Chapter 11 against a member state under the ICSID or UNCITRAL Rules.  According to one published study, there were 77 known NAFTA claims filed after the treaty's adoption in 1994 up to January 1, 2015.  The United States has never lost NAFTA arbitration.

It is far too soon to predict whether the surprise inclusion of ISDS in the American negotiating objectives will yield substantive changes to NAFTA. Still, compared to the many fraught economic issues presented by the upcoming renegotiation, the parties may find agreement on some limited arbitration reform much easier to come by.

For more information, please contact Christian Leathley, Partner, Conor Doyle, Law Clerk or your usual Herbert Smith Freehills contact.