NAFTA: THE CENTRALITY OF THE INVESTOR-STATE PROVISIONS

"I tell my students that, really, if they want to understand NAFTA, it's Chapter 11, plus everything else." 

John Magnus
June 23, 2017

John Magnus, the president of TradeWins LLC and vice chairman of GBD's Board of Advisors, served as the moderator for the diplomatic panel at GBD's June 23 event, which focused on the EU and North America. The panel had three diplomats, three officials, from relevant countries: Colin Bird from the Canadian Embassy, Francisco Sandoval from the Embassy of Mexico, and Damien Levie from the Delegation of the European Union. There was no official from the U.S. Government on the panel, and so Mr. Magnus led off with a series of comments on what an outside observer - someone armed only with press reports and his own interest in the issues - might reasonably conclude about America's posture and goals vis-à-vis, Canada, Mexico, and the EU. Without a doubt, his was a more candid assessment of U.S. goals than any official could have given, and later this week we shall return to that portion of his remarks.

Today's quote, however, is from something Mr. Magnus said as the Q&A for his panel was coming to a close. There had been a couple of questions about trade policy and investor-state dispute settlement procedures, such as those found in Chapter 11 of the NAFTA. One questioner raised the issue of the compatibility of ISDS provisions with national sovereignty. Another wondered whether anything was being offered in the new NAFTA negotiations that would in fact weaken the North American Free Trade Agreement. Each of the diplomats on the panel responded. 

Canada has been sued quite a bit under Chapter 11, and Colin Bird of the Canadian Embassy referenced that fact. He also said, however, that "Fundamentally, Canada is a big believer in investor-state protection." 

Franciso Sandoval said that the Government of Mexico is still in the process of consulting with the Mexican private sector on these issues, and he left open the possibility that Mexican businesses might ask for some improvement in Chapter 11. That said, he shared his impression that Mexico's private sector is essentially content with the current arrangement. 

Damien Levie from the EU made two points. On the issue of sovereignty, he said that in the EU's agreement with Canada, CETA, the issue is addressed in provisions that ensure that the parties to the agreement, the sovereign entities, of the right to regulate. 

 
As for NAFTA, Mr. Levie pointed out that the Trans-Pacific Partnership Agreement, TPP, included its own, separate ISDS provision. Had it been adopted, companies in the three NAFTA countries - all signatories to TPP - would have been able to choose which route to follow, Chapter 11 of NAFTA or TPP's ISDS provision, in the event of a dispute between a company and a host government.

 
What set Mr. Magnus's remarks apart from most NAFTA commentary was the fact that he put the ISDS provisions, Chapter 11, at the center of the NAFTA achievement. We shall quote his comment in full in a moment. First, here are two statements from Wikipedia entries, which may aid the reader in appreciating Mr. Magnus's assessment. 

On Chapter 11, Wikipedia explains that "Chapter 11 allows corporations or individuals to sue Mexico, Canada, or the United States for compensation when actions taken by those governments ... violate the international law."

On the Calvo Doctrine, Wikipedia explains that the doctrine, named after Argentine jurist Carlos Calvo "has been applied throughout Latin America and in other parts of the world. Essentially, the Calvo Doctrine "holds that jurisdiction in international investment disputes lies with the country in which the investment is located. ... An investor, under this doctrine, has no recourse but to use local court ... ." 

Now here is what John Magnus said at the conclusion of the Diplomatic Panel.

 
"That was the achievement. Right? We cut the tariffs, we did other stuff, but that was the big deal. And it's still the big deal. And if that were to change, then it would very substantially weaken NAFTA in what Judge refers to in his TTALK Quotes as the heartwood."

We have nothing to add to the above. It does, however, trigger a memory that seems to fit here, two really. One is a Biblical passage we have always thought of as inspiring (if a bit grim). It is from Ecclesiastes. You probably know it. In the King James version it reads: 

"Whatsoever thy hand findeth  to do, do it with thy might, for there is no work, nor device, nor knowledge, nor wisdom in the grave, whither thou goest." 

We quote that passage because it highlights America's NAFTA dilemma. A country cannot easily do with its might what it is seriously conflicted about. The NAFTA agreement was signed by President George H.W. Bush on December 17, 1993, including, of course, the ISDS provisions discussed above. A year later the NAFTA implementing legislation was signed into law by President Clinton, and the Clinton administration, one can infer, had a very different approach to U.S. foreign direct investment than did its predecessor. Your editor has a clear memory, for example, of listening to a telephone conversation in which two Cabinet officers of the Clinton Administration attempted to persuade the head of a major U.S. trade association to make a public pledge about NAFTA. They wanted him to pledge that his members would not make any new investment in Mexico once NAFTA became law. 

 
That is one of those many things that never happened, of course, but America's ambivalence about foreign direct investment is still very much alive. One can only hope that it will not unduly complicate the upcoming negotiations for a revised NAFTA.