The Global Lawyer: Is NAFTA 2.0 a litigator's dream?

On January 29, 2020, as the US Senate debated his impeachment, president Donald Trump announced that he was “ending” the country’s long national “nightmare”. No, he didn’t step down, despite echoing the line that accompanied Richard Nixon's resignation. Rather, he signed the Senate bill ratifying the treaty that replaced the North America Free Trade Agreement (Nafta).

Born of resurgent nationalism, the new trade treaty is known as USMCA in the US, CUSMA in Canada, and T-MEC in Mexico – and the disputes won’t stop with the title. The Global Lawyer counts at least seven systems of dispute resolution created from the wreckage of Nafta, all of which will keep lawyers busy. They are:

1. Investor-state claims between the US and Canada: Canada was sick of losing to US investors in Nafta arbitration, and America First-ers hate anything global. So the US and Canada agreed to kill investor-state arbitration, as between the US and Canada. Now these cases will be decided either via US court, Canadian court, or contract arbitration.

2. Investor-state claims between Canada and Mexico: There is no need for the US's neighbours to indulge the orange monster’s whims when their spat is with each other. These disputes will now be resolved under the state-of-the-art arbitration clauses of the Comprehensive and Progressive Trans-Pacific Partnership, better known for now as the TPP-11. 

3. Investor-state claims between the US and Mexico: Investor-state arbitration has had its wings clipped insofar as the new treaty (generally) requires the exhaustion of domestic remedies, and bars broader claims such as unfair treatment or indirect appropriation. However, lobbyists won an exception for the energy, power, telecoms, transport and infrastructure sectors. These sectors dominate high-stakes arbitration, and for them it appears to be business as usual. The only catch is that the new treaty says investors can’t bring claims under local law, and technically, US investors will need to bring their claims under US implementing legislation. Investor attorney Barry Appleton, who has studied the new text for the American Bar Association, argues that this sloppy drafting may prevent US investors from suing Mexico.

4. State-to-state arbitration over trade remedies (Nafta Chapter 19): Canada always loved it when arbitrators second guessed US authorities over dumping or subsidy penalties. Toronto was able to keep this pressure valve in place in return for accepting less protection for its dairy farmers.

5. State-to-state arbitration to enforce the treaty on North American trade (Nafta Chapter 20): This was a dead letter under Nafta, because the US blocked the appointment of arbitrators. Intriguingly, the US has agreed to remove the language that let it block regional arbitration panels, even as it uses panel-blocking to dismember the World Trade Organization appellate body. Perhaps the US is more amenable to trade dispute resolution at the regional level than it is at the global. 

6. State-to-state arbitration to enforce a state's compliance with its labour or environmental laws: Under the new treaty, unions or green non-governmental organisations may ask their state to diplomatically espouse a claim that another country has failed to enforce labour or environmental laws affecting trade or investment. Similar Nafta provisions inspired dozens of claims, often yielding change through public pressure, but never resulting in sanctions (because no state ever sought sanctions).

This tool is significantly strengthened through the new treaty’s presumption that trade is adversely affected by labour or environmental violations, unless the responding country can show otherwise. Environmental claims seem tougher to win, because the new treaty gives states discretion in environmental enforcement. But labour claims look promising, because countries are now obligated to have federal laws and practices consistent with International Labour Organization core standards on forced labour, child labour, freedom of association and collective bargaining. 

7. State-to-state arbitration to enforce corporate compliance with labour laws: The support of the AFLCIO union (and Senate ratification) was clinched by the USMCA’s creation of a 'rapid response mechanism', designed to police Mexican corporate accountability at the factory level. Mexico has a long tradition of corrupt ‘official unions’, tied to both management and government, quashing the formation of a new independent union. The US may now espouse a union-busting complaint and (if it chooses) seek harsh sanctions, with an offending factory subject to the escalating penalties of losing tariff protection, paying fines or forfeiting its exports.

Mr Trump’s post-Nafta dreamscape is so fragmented that it would be foolish to predict who will benefit. But it is clear the labour movement got more of its legal wish list than any other interest group, because the president needed it to achieve his dream. Arbitration experts are confounded. Environmentalists are distrustful. Only labour advocates, such as Lance Compa of Cornell Law School, optimistically welcome the new treaty as “a major step forward”.

Michael D Goldhaber serves as US correspondent for the International Bar Association. He has been tracking the world’s largest disputes since the turn of the millennium. Email: michael.goldhaber@gmail.com