Does Canada’s NAFTA wish list contain key to compromise?

By Doug Beazley August 25, 201725 August 2017

Does Canada’s NAFTA wish list contain key to compromise?

Every new article about the negotiations to modernize the North American Free Trade Agreement ought to start the way this one does — by admitting that, really, nobody knows anything.

During a rally speech on August 22, U.S. President Donald Trump threatened — again — to tear the agreement up. That was just days after a first round of talks in Washington, D.C. wrapped up with all three NAFTA negotiating teams still very far apart on the key files, such as rules-of-origin and ‘Buy American’.

So the NAFTA talks could end in a deal or in a messy political confrontation between the President and a reluctant Congress over whether he can cancel NAFTA on his own. Oddly enough, one of the most controversial sections in the agreement is offering a glimmer of hope for a compromise.

The Trudeau government wants to amend Chapter 11, NAFTA’s Investor-State Dispute Settlement mechanism — ISDS for short.

ISDS clauses are written into more than 3,000 trade treaties worldwide. Under ISDS, a foreign investor has the right to sue the governments of countries in which it invests over arbitrary actions that void or limit its property rights. The decisions that emerge from ISDS cannot be used directly to overturn a state’s policy — but they can order a state to pay vast sums in compensation. Example: In a single ISDS claim brought against Ecuador after it cancelled an oil-exploration contract, the state was ordered by an ISDS tribunal to pay 1.77-billion (U.S.) in compensation — roughly what Ecuador spent annually on health services at the time. (That’s on the high end, of course; ISDS awards tend to average around $10-million.)

Because ISDS clauses allow private interests to sue foreign governments for a lot of money, many see them as limiting the power of sovereign states to legislate in the public interest. ISDS can’t overturn government decisions — but it could make them costly enough to convince a government to change its policy in response.

Canada has faced the largest number of ISDS claims of the three NAFTA nations. American firms have sued Ottawa 39 times under NAFTA Chapter 11. The federal government has paid out $215-million in ISDS compensation since NAFTA took effect in 1994 (the U.S. has yet to lose a single case).

So it came as no surprise when Foreign Affairs Minister Chrystia Freeland expressed an interest in amending Chapter 11 to affirm the “unassailable right” of NAFTA states “to regulate in the public interest” without being punished by an ISDS claim. Canadian negotiators are proposing a “general exception” to cover legitimate domestic objectives, such as the protection of public health, safety and security (fun fact: Canada proposed the same thing when NAFTA was being negotiated).

Would such changes actually matter? Would they amount to more than virtue-signalling by a government feeling the need to reassure its left-leaning supporters? Opinions vary.

“It could help in cases where Canadian legislation was being challenged before a sympathetic (Chapter 11) panel,” says Gus Van Harten, who teaches international investment law at York University and is one of the world’s foremost critics of ISDS.

“But many of these panels have an anti-government bent and I can’t see how this is going to make a significant difference to the way these cases are heard.”

“It would offer governments a defence in Chapter 11 cases,” says Louise Barrington, a chartered international trade arbitrator based in Toronto and Hong Kong. “We won’t know whether this is window-dressing until it’s actually applied in a specific case.

“Canada has high labour and safety standards, higher in some respects than the Americans have. If we can’t retain those standards in the face of foreign investment, Canadians are bound to be pretty angry about it.”

In signaling her desire for a revamped Chapter 11, Freeland appears to be pointing to a model: the ISDS chapter in Canada’s new Comprehensive Economic and Trade Agreement (CETA) with the European Union. CETA did address some of the key criticisms of ISDS.

It creates a 15-member standing tribunal, replacing the ad-hoc ISDS panels appointed by parties to the case. It demands that tribunal members be independent of the parties and steer clear of conflicts of interest by applying the International Bar Association’s code of conduct (Van Harten points out that the IBA code doesn’t prevent arbitrators from also serving as counsel, so it’s not a complete shield against conflicts). It also forbids tribunal members from “acting as counsel or as a party-appointed expert or witness” in any other pending ISDS case (but it doesn’t forbid them from working as arbitrators under other treaties — another loophole, says Van Harten).

And it addresses one of the most damning criticisms of ISDS — that the system isn’t designed to correct its own mistakes — by establishing an appellate tribunal able to change, or quash, a ruling based on errors in law or of fact.

It still might be a tough sell. The Americans, after all, have done well by Chapter 11. Their problem is with Chapter 19, the bi-national dispute settlement mechanism they see as unconstitutional and unfair. Canada’s NAFTA wish list may be designed to allow Ottawa to sacrifice what it doesn’t need to get what it really wants; it could, for example, drop Chapter 19 (which isn’t used much these days) to get a deal on Chapter 11, or Buy American, or something else entirely.

Or the Americans might balk at a revised Chapter 11 because of domestic political pressure. This is where the possible compromise comes in.

Andrea Bjorklund, the L. Yves Fortier Chair in International Arbitration and International Commercial Law at McGill, has been hearing a rumour that the U.S. negotiating team is floating the idea of an “opt-in” ISDS mechanism that would not be part of NAFTA itself. The idea is that a modernized NAFTA without ISDS would be an easier sell in Congress, where many powerful politicians — both Republican and Democrat — loathe the idea of foreign corporations suing Washington.

“The idea is that a nation would be required to opt-in to ISDS in totality, not on a case-by-case basis,” says Bjorklund. “The suggestion I’m hearing is that Mexico would be expected to opt-in to attract foreign investment.

“But why Mexico would do that without Canada and the United States doing the same thing is beyond me.”

Doug Beazley is a journalist based in Ottawa

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