Cut NAFTA’s corporate-power-boosting Investor-State Dispute Settlement regime that grants corporations rights to attack our laws and demand unlimited taxpayer compensation.

How does NAFTA 2.0 measure up?

The old NAFTA ISDS text, Chapter 11-B, is eliminated in NAFTA 2.0. ISDS between the United States and Canada is terminated, but investors would have three years after the new agreement goes into effect to bring claims related to investments already in place on that date. Going forward, U.S. and Canadian investors in the other country would only have recourse to domestic courts or administrative bodies to settle investment disputes with the other government. Terminating U.S.-Canada ISDS will significantly limit future ISDS attacks. To date all but one of the NAFTA ISDS payouts implicating environmental and health issues have involved U.S. firms challenging Canadian policies. And all but three of the 61 NAFTA ISDS attacks on U.S. and Canadian policies have been brought by investors from the other country. This change will eliminate 92 percent of U.S. ISDS liability under NAFTA and most U.S. ISDS exposure overall. While this change will prevent many ISDS attacks over the long term, the three-year phase-out period for claims on investments existing when NAFTA 2.0 goes into effect poses serious risks of more corporate attacks on environmental and health policies before the old NAFTA ISDS rules are entirely terminated.

With respect to Mexico, ISDS is replaced by a new approach that reflects some longstanding progressive demands. Annex 14-D, “Mexico-United States Investment Disputes,” eliminates the extreme investor rights relied on for almost all ISDS payouts: Minimum Standard of Treatment and the related Fair and Equitable Treatment standard, Indirect Expropriation, Performance Requirements, Transfers and pre-establishment “rights to invest.” The new process requires investors to exhaust domestic remedies. Only after doing so may a review be filed and only for Direct Expropriation and post-establishment discrimination (National Treatment or Most Favored Nation). Direct Expropriation is defined as when “an investment is nationalized or otherwise directly expropriated through formal transfer of title or outright seizure.” The annex explicitly states that the expansive substantive rights found in other trade or investment pacts may not be brought back into NAFTA via Most Favored Nation (MFN) claims, and that the MFN treatment required is limited to actual policies and practices of a country with respect to other foreign investors and “excludes the provisions in other international trade or investment agreements…”  The approach in this annex represents a significant scale back of investor power relative to governments, but the new system only starts three years after NAFTA 2.0 goes into effect.  

The annex also includes remedies to several major procedural problems with the old ISDS regime. ISDS allows foreign investors to skirt domestic courts. The new process requires an investor to initiate domestic remedies in a country’s courts and administrative bodies and see them through until a final decision or 30 months (2.5 years) pass with no decision. The people adjudicating claims in this system cannot simultaneously represent corporations suing governments and must meet enumerated ethical rules forbidding direct or indirect conflicts of interest. The NAFTA 2.0 text clarifies that investors may be compensated only for losses that they can prove on the “basis of satisfactory evidence and that is not inherently speculative,” to counter past outlandish awards of enormous sums that investors claim would be their expected future profits but for a challenged policy or act. Also, the annex explicitly states that a tribunal can only order compensation for an investor and may not order countries “to take or not take other actions, including the amendment, repeal, adoption, or implementation of a law or regulation.” This would prevent decisions like that in the Chevron v. Ecuador ISDS case, in which a tribunal ordered Ecuador’s president to violate the nation’s constitutional separation of powers by halting implementation of a ruling by the country’s highest court. The annex also states that procedures, including ISDS itself, or elements of other agreements’ ISDS procedures, may not be brought back in to NAFTA via Most Favored Nation claims.

What is otherwise real improvement on reining in the threats posed by ISDS has a significant loophole that must be closed. A very problematic secondary “Mexico-U.S. Investment Disputes Related to Covered Government Contracts” (Annex 14-E) preserves the full substantive ISDS rights for nine U.S. firms that obtained 13 contracts during the outgoing government’s partial privatization of Mexico’s oil and gas sector as long as Mexico provides such rights in pacts with other countries. Procedural reforms limiting awards and banning tribunalists from rotating between suing governments and deciding cases apply. To qualify for this exception, an investor must have a covered contract with the federal government in a listed sector. The listing of the oil and gas sector captures contracts with Mexico’s Hydrocarbon Authority, but the United States is excluded because it does not issue federal oil and gas contracts. In practice, the annex’s listing of other sectors beyond oil and gas is largely irrelevant given that neither the U.S. nor Mexican federal government uses contracts in the those sectors. Permits, licenses, and similar government-issued instruments are explicitly excluded from a narrow definition of “covered contracts.” Thus, neither government’s licenses and authorizations in telecommunication, another listed sector, nor U.S. federal permits for oil exploration are covered. Contracts in other listed sectors, for electricity generation for sale to the public on behalf of a government, the supply of transportation services for sale to the public on behalf of a government, and for the ownership and management of roads, bridges, railroads and canals, are with sub-federal governments in both countries and thus excluded. However, beyond the problem of preserving the expansive substantive NAFTA ISDS rights for the nine covered oil firms, their subsidiaries operating in the sector in Mexico can also qualify for this exception. At a minimum, this annex should be altered to ensure that only uncompensated cancellations of Mexican oil and gas contracts, not environmental and health policies, are subject to review.