USMCA Chapter 14: Implications of the New Mexican Investment Protection Regime

USMCA Chapter 14 is now in full force, having come into effect on 1 July 2020. In fact, the sunset clause of its predecessor, Chapter 11 of the 1994 North America Free Trade Agreement, lapsed on 30 June 2023, leaving the USMCA as the only remaining trilateral investment protection treaty between the North American countries.

Chapter 14 and its annexes reflect a global trend which has retrieved and narrowed the protections granted by states, mainly due to the increase of investor-state dispute settlement cases around the globe, as well as the existence of governments that have publicly considered that ISDS mechanisms set up an unfair system for the state.

The redefinition of the international protections granted to US and Mexican investors within Chapter 14 interrupted the construction of the NAFTA protections as they had been shaped ever since the Robert Aznian case. From the outset, it seems that some of the cases decided in favour of investors under NAFTA Chapter 11 would not necessarily have the same positive outcome if decided under the current USMCA framework. In this regard, one question remains: what has been introduced and what is left in the new Chapter 14 of USMCA investment protection regime for investors?

NAFTA did not have a provision requiring foreign investors to exhaust local remedies, but only a fork-in-the-road clause whereby the investor was required to waive its right “to initiate or continue before any administrative tribunal or court”. Instead, for claims arising out of standards of protection involving Expropriation, National Treatment, and Most Favoured Nation, the USMCA requires the exhaustion of local remedies before a competent court or administrative tribunals to the point where the investor shall obtain a final decision from the court of last resort of the respondent state or litigate domestically for a period of 30 months.

Appendix 3 of the USMCA provides a novel feature where US investors are barred from bringing a claim against Mexico if they have already “alleged the breach of an obligation” before Mexican judicial or administrative courts. There is no similar provision which imposes such restriction on Mexican investors that intend to submit a claim against the US, and this creates an asymmetry in favour of Mexico as it imposes an additional barrier for the bringing of USMCA claims, which does not exist for the US.

The USMCA created a privileged category of investments covered by contracts entered into between a state and an investor in the oil and natural gas, power generation, telecommunications, transportation, as well as roads, railways and bridges sectors. These contracts were granted protections not foreseen for other covered investments under USMCA, such as Minimum Standard of Treatment, indirect expropriation protections, as well as an exemption to exhaust local remedies prior to commencing arbitration.

NAFTA did not define the term expropriation, but instead prohibited the signatory states from expropriating directly or indirectly. It was mostly considered under NAFTA case law that indirect expropriation involved the depriving of a reasonably-to-be-expected economic benefit of the investor’s property.

Now, Annex 14-D expressly carves out indirect expropriations for non-privileged investments. Annex 14-B defines indirect expropriation as “an action or series of actions by a Party [that] has an effect equivalent to indirect expropriation without formal transfer of title or outright seizure”.

On the contrary, Covered Government Contracts do not incorporate such limitation, as per its definition contained in Annex 14-D. This distinction becomes relevant when considering that indirect expropriation has allowed investors to prevail in some of the most representative cases under NAFTA (such as the Metalclad or S.D. Myers cases).

The USMCA also removed the Minimum Standard of Treatment (including Fair and Equitable Treatment and Full Protection and Security) from the protections granted to Covered Investments other than Covered Government Contracts.

The amputation of the Minimum Standard of Treatment to general covered investment in Article 14.D.3 of the USMCA is also a major factor in the reshaping of the investment protection regime vis-à-vis NAFTA when considering that FET was the most common ground for NAFTA disputes.

For Covered Government Contracts, the USMCA establishes that the concepts of Fair and Equitable Treatment, as well as Full Protection and Security, are not to be interpreted beyond the Minimum Standard of Treatment. This provision follows the binding interpretation issued by the NAFTA Free Trade Commission in July 2001.

Nevertheless, Annex 14-A provides that the parties share an understanding that the Minimum Standard of Treatment is part of “customary international law”. Furthermore, Article 14.6 states that Fair and Equitable Treatment is part of such customary international law and thus it may be considered that the protections that conform to FET are also part of such customary international law.

The diluted or decaffeinated ISDS mechanism provides a de minimis framework especially for investments not considered as Covered Government Contracts. While Chapter 14 still constitutes safe haven for investors whose investment has been illegally deprived or affected, it must be anticipated that – in the case of Mexico – foreign investments will cease to be structured and protected under the USMCA, and instead may seek treaty protection through other Bilateral or Multilateral Investment Treaties which are more similar to NAFTA Chapter 11.

Furthermore, from a Mexican perspective, Canada’s absence from Chapter 14 of the USMCA may be countered with both countries’ adherence to the Trans-Pacific Partnership Agreement, where their investors may rely on such agreement’s substantive protections.

NAFTA is gone but not forgotten; decisions rendered under it will continue to be pivotal to treaty interpretation under USMCA, particularly in connection with those protections that did not change from one treaty to the other. It is reasonable to anticipate that US and Mexican investments will attempt to be considered as Covered Government Contracts and discussions shall arise on whether such investments fall within the covered sectors.