International Trade Law Prof Blog

Renegotiating Investment Treaties – NAFTA, the India Model BIT, CETA, TTIP and a whole can of worms

On May 18, 2017, Robert Lighthizer, the US Trade Representative, officially notified Congress concerning plans to renegotiate NAFTA. Congress has 90 days of domestic consultation before negotiations between the US, Canada and Mexico can begin. 

Rather than focusing broadly on the potential areas for renegotiation, however, I wanted to introduce some of the interesting developments in investment treaties, which are at least peripherally relevant to NAFTA’s (in)famous Chapter 11 on investment. Since the negotiation of Chapter 11 in 1993, international investment law has evolved considerably while growing in importance, with the pro-investor enthusiasm of the 1990s giving way to a degree of sovereign concern over the investor-state dispute settlement mechanism (ISDS).

Today, the future of the traditional bilateral investment treaty (BIT) is uncertain, as countries terminate and renegotiate their agreements with other states. Notably, in early May, Ecuador’s legislature voted to terminate Ecuador’s remaining BITs, on the basis that Ecuador had not benefitted from foreign direct investment due to the BITs, instead experience disproportionally high costs as a result of ISDS. 

Ecuador is far from alone, with other countries, including South Africa, Indonesia and India looking to exit or renegotiate investment agreements on favorable terms. So what comes next? What can we expect future investment treaties to look like?

Perhaps most instructive in evaluating the future of investment treaties for developing countries that are looking for a more equitable bargain between themselves and the states that provide most of the private foreign direct investment is the model India BIT, which was released in January 2016.

India’s model BIT departs from a number of standard provisions in significant ways. In particular, it requires exhaustion of domestic remedies for five years before investor state arbitration may be pursued (Article 15.2). Additionally, there is no umbrella clause (which has been controversial in some formulations in extending the scope of the BIT to contractual relationships between states and private investors), nor is there an MFN clause. What there is that has not previously appeared in BITs (and for those of us who are trade law geeks this is particularly exciting) is a general exception clause (Article 32), not dissimilar to Article XX of the GATT. Exceptions include protecting public morals, protecting human, animal or plant life or health, and protecting the environment.

The model BIT also includes a corporate social responsibility provision (Article 12), which states that investors and their enterprises “shall endeavor to voluntarily incorporate” corporate social responsibility standards. While this is a soft law provision, it is a step in the direction of requiring investors to hold up their end of the bargain in providing benefits to the host country. This shift in the power dynamic, with previous BITs heavily favoring investors, is also reflected in the definition of investment in the model BIT. Under the model BIT definition of investment, the enterprise is required to have characteristics of an investment, including “a significance for the development of the Party in whose territory the investment is made”. Economic development is one of the elements in the Salini test, and one that has given rise to the most divergence of opinion by subsequent arbitral tribunals. For a very thorough and insightful analysis of the model BIT, see Grant Hanessian and Kabir Duggal’s recent article in ICSID Review.

Going back to the US, from a US perspective, how NAFTA will be renegotiated is likely to depend in part on the Canadian government’s position with respect to Canada’s recently agreed free trade agreement with the EU, the Comprehensive Economic and Trade Agreement (CETA). In CETA, the EU and Canada agreed to replace traditional ISDS with a permanent investment court system, the first step in an ambitious plan by the EU to replace ISDS in all of its investment agreements with a more transparent, multilateral judicial system that would include an appellate level of review. 

If Canada were to choose to push for adherence to a multilateral investment court system in the renegotiation of NAFTA, it seems unlikely that the parties would reach agreement, given the distrust of the current administration, and Lighthizer in particular, of multilateral dispute settlement systems that would impinge on national sovereignty. 

In the midst of all of this discussion of renegotiation, we shouldn’t forget that the negotiations of the Transatlantic Trade and Investment Partnership (TTIP) between the US and the EU have not been called off, although they are on hold. As with CETA, the EU has moved away from ISDS and towards the multilateral investment court model in TTIP, in part a result of increasing Member State concerns regarding ISDS.

As for the EU push towards a multilateral permanent investment court, it appears that any such mechanism will now require the buy-in of all of the Member States. A recent European Court of Justice ruling in relation to the EU-Singapore free trade agreement found that the EU lacks exclusive competence to conclude deals that involve dispute settlement between investors and states, while having exclusive competence with respect to most other areas. This means that before CETA can come into force, the EU Member States will have to unanimously agree to the new dispute settlement mechanism. The same goes for TTIP, if it is ever finalized and if such a dispute settlement system is included in the agreement.

As with so many other areas of law and politics, the international investment regime is today in a state of flux, just as some sense of the state of investment law was emerging from the jurisprudence of the ad hoc arbitral tribunals after several decades of arbitration awards. A recurring theme has been the lack of consistency in these arbitral awards and allegations of unfair biases towards developing countries who have borne the brunt of the financial costs in these awards. (See Rob Howse’s fantastic paper providing a conceptual framework for international investment law and arbitration.) These factors are driving the international investment regime to seek out new treaty language and alternative models for resolving disputes between states and investors.

The renegotiation of NAFTA is unlikely to do much to move the world of international investment law forward. The most likely outcome is something not too dissimilar to the text of TPP. Where we are likely to see significant developments is in renegotiated BITs between developing countries and other states (and amongst themselves) and in the EU push for a multilateral investment court. India's model BIT may be the beginning of a trend that profoundly changes the substance of these agreements and the face of investment law itself. In parallel, the EU is reenvisioning how dispute settlement should operate in relation to investment disputes. Both of these efforts would bring greater balance to a system that has historically favored investors over states, even to the detriment of legitimate domestic regulatory policy.

State of Trade - 100+ Days Later

Perhaps one of the most curious developments of the past 100+ days of the Trump administration has been the lack of progress on the trade front. The only campaign promise that has been delivered on is the withdrawal from the Trans-Pacific Partnership (TPP), which to give President Trump credit, was done the next business day after he was sworn into office, on January 23, 2017. 

For his hundredth day in office, President Trump was set to announce the US’s withdrawal from NAFTA, a move he soon backtracked from when informed that many of the areas that would be hardest hit were heavily Trump-supporting agricultural areas. It is unclear when and if NAFTA will be renegotiated, although it seems likely that, rather than unilateral withdrawal, the United States will instead attempt to renegotiate the agreement with Canada and Mexico.

The TPP page on the USTR website has finally been updated to reflect the withdrawal (for several months the full text remained, along with praise for the agreement). Despite President Trump’s rhetoric regarding the awfulness of the deal and the need to renegotiate NAFTA, however, the NAFTA page continues to extol the virtues of the current agreement.

That trade has not been a priority is especially clear from the state of the Office of the United States Trade Representative. The USTR Twitter account hasn’t tweeted since October 2016. Robert Lighthizer, Trump’s official nominee, has yet to be confirmed, delayed by the need to obtain a waiver of the rule prohibiting persons who represented a foreign government from serving as US Trade Representative. (Interestingly, a provision in the new budget bill has bypassed the waiver requirement, even though he would not be the first USTR appointee who needed a waiver and it seems clear that his representation of foreign governments in the 1980s and 1990s does not pose any conflict of interest.)

In March 2017, President Trump appointed Stephen Vaughn, a member of his transition team, acting United States Trade Representative. The positions of Deputy Trade Representative and Deputy Trade Representative in Geneva (which deals with the WTO) remain vacant. Given Lighthizer’s bipartisan support, it appears likely that he will be confirmed in the near future, which should pave the way to a more functional USTR.

With trade having been such an important talking point of the election cycle on both sides of the political spectrum, the disregard for trade policy in recent months is indicative of chaos in the administration and the well-documented conflict between Trump’s campaign populism and presidential status-quoism. As my co-blogger, Alison Peck, noted in her post on trade and security in Asia, trade policies are not conducted in a vacuum.

In an interesting twist, with China recently banning the import of North Korea coal and turning back coal shipments in an effort to pressure North Korea into curtailing its nuclear testing, the United States has stepped up as a major coal supplier to China. The United States supplied no coking coal (used for making steel) to China between 2014 and 2016, but supplied 400,000 tons in February 2017. If President Trump is going to make good on his promise to revitalize the American coal industry, this is certainly one way to go about it.  

So where does this leave us?  

NAFTA is likely to be renegotiated at some point. President Trump has also suggested replacing TPP with bilateral agreements. The irony there is that TPP was largely based on recent US FTAs, with entire chapters containing almost identical language to that found in agreements such as the US-Chile FTA and the US-Korea FTA. This was a US-driven text that would have been great for US business interests (there were plenty of other issues with TPP, but those are outside the scope of this post).

Both Lighthizer and Vaughn are trade law experts and understand the realities of international trade policy. It is hard to imagine them straying far from the existing bilateral FTAs. Since the USTR will be led by pragmatists, once it is ultimately fully staffed, it seems likely that any new bilateral agreements and a potentially renegotiated NAFTA will reflect much that is already existing. Of course, this all remains to be seen, and if support for President Trump were to wane in agricultural regions of the country, the possibility of unilateral withdrawal from NAFTA of course remains on the table.

Buy American, Blow Off the WTO?

On April 18, President Trump signed an Executive Order setting out his “Buy American, Hire American” policy. A month earlier, the Department of Commerce issued a request for comments on requiring a specified minimum domestic content in pipeline construction.

Both of these moves are consistent with Trump’s campaign promises to promote American industry. But both may violate the WTO Agreements and, if successfully challenged, could give rise to trade retaliation by other countries against U.S. industries.

What’s more, those moves are likely to tick off other countries and lead to the imposition of more domestic content requirements of their own. It’s difficult to see how strict enforcement of Buy American laws would offset the costs to U.S. industry if the world descends into a flurry of protectionist procurement legislation.

The National Treatment Principle under the GATT

The DOC’s potential imposition of domestic content requirements on the pipeline construction industry is the more legally thorny of the two. First of all, it’s also not clear whether the domestic content requirements on private contractors are valid. It’s one thing for a government to set guidelines for purchasing by its own agencies (although there are limits there too), and another thing for a government to tell private industry like pipeline construction contractors who they are allowed to do business with. In its comments on the DOC notice, the European Union noted that imposing domestic content requirements on the purchasing decisions of private companies would be “unprecedented” in the trade sphere and “would have serious consequences also with respect to policies with third countries.”

Moreover, domestic content requirements – or legal requirements that producers include a certain amount of domestically-produced raw materials into a final manufactured product – were among the types of restrictions that nations deliberately limited when they entered into free trade and investment agreements in the first place. Domestic content requirements fly in the face of the “National Treatment principle,” one of the pillars of the General Agreement on Tariffs and Trade (one of the many agreements that makes up the WTO Agreements). “National Treatment” is a somewhat confusing name, sounding at first blush perhaps like an endorsement of nationalism in trade relations. National Treatment actually means that a nation may not treat the products of its trading partners differently than the products of its own nation. (Likewise, National Treatment’s ironic sister principle, Most Favored Nation, prohibits favoritism among different foreign countries’ products. Never a dull moment in trade law.)

The National Treatment principle for the GATT is stated in Article III. Entitled “National Treatment on Internal Taxation and Regulation,” Article III, paragraph 4 says,

The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation distribution or use. …

In other words, all WTO members have a legal obligation not to discriminate against foreign products that are “like products” to those produced in their own country. (Whether two products are “like products” is a fact-based inquiry based on the products’ physical properties, end uses, and consumer tastes and habits as to substitutability.)

The governments of both Canada and the EU made the point in their comments on DOC’s request for information that any minimum domestic content requirements on pipelines would appear to violate the National Treatment principle. Were the U.S. to require that pipeline contractors purchase a minimum amount of domestic steel (or be denied federal permits, presumably), it is almost certain that someone – Canada, the EU, and other countries whose steel industries compete for those contracts – would challenge the regulation before the WTO.

In introducing the President’s trade policy agenda in an annual report by the Office of the United States Trade Representative, USTR suggested that the Trump Administration might not comply with adverse WTO decisions, but that’s questionable and complicated (and a post for another day). Suffice it to say that any persistent failure to respect an unfavorable WTO decision would trigger WTO-sanctioned retaliation against other U.S. products or industries that those industries would surely not take kindly to in the next domestic election cycle. It’s not so easy just to blow off the WTO.

Limiting the "Public Interest" Exemption from Buy American Laws

Does the order change anything? The short answer is maybe. 

In the short term, the Executive Order directs federal agencies to strictly comply with Buy American laws already on the books. One thing that might change immediately is contractors’ ability to obtain waivers from the Buy American laws. Right now, the Federal Acquisition Regulations allow waivers when purchasing from a foreign supplier is in the “public interest” because a trade agreements (like the WTO) allows it; where the material is unavailable domestically; or when the domestic supplier’s price is “unreasaonble” based on a prescribed calculation. 

The "public interest" exemption is what saves the Buy American statutes from violating National Treatment right now. If agencies are now instructed to apply that exemption strictly, does that mean that they won't grant an exemption even where the Buy American requirement would violate National Treatment? 

Opaquely, the order instructs Commerce and the United States Trade Representative to “assess the impacts of all United States free trade agreements and the World Trade Organization Agreement on Government Procurement on the operation of Buy American laws” with 150 days of the signing of the order. It could be that he plans to use this study to be sure that Buy American laws, and the new Executive Order, comply with the United States’ international obligations.

But it would be more consistent with Trump’s rhetoric to use that assessment to decide whether to renegotiate or terminate U.S. commitments that he believes impair U.S. industry. Although Trump seems to have decided against withdrawing from NAFTA for now, it’s unclear what demands he will make to renegotiate both NAFTA and the WTO Agreements and what might make him change his mind and walk away. “Assessing the impacts” of the country’s free trade agreements on domestic sourcing laws might give him a starting point for crafting his positions in renegotiating.

National Treatment in Government Procurement

The WTO Agreement on Government Procurement also incorporates the National Treatment principle of nondiscrimination, although subject to many exceptions. The interaction between Buy American laws and those articulated exceptions will be studied by DOC and USTR.

Only nineteen WTO members, including the U.S. (and the EU on behalf of all its members), are parties to the Agreement on Government Procurement, a “plurilateral” side agreement to the WTO Agreements. That suggests that renegotiation or withdrawal from that Agreement might be more feasible than tampering with any of the 100-plus member multilateral agreements in the WTO. If Trump is unsatisfied with the results of Commerce and USTR’s study about the impacts of the agreement on Buy American laws and wants to identify the low-hanging fruit of renegotiation in the WTO, this might be a place to start.

Policy Concerns

If Trump decides to go down the road of minimum domestic requirements for construction and tougher Buy American laws in government procurement, hopefully he will consider the potential effects of those policies. First, other countries may follow the lead of the U.S. and implement Buy National policies of their own, cutting off overseas market for U.S. products and services. The European Union emphasized this risk in its comments on the Commerce notice:

Both the US and the EU have in the past been pursuing a clear policy against localization requirements in third countries, including China, India, and Russia. … These potential measures, which would be harmful to US industry, would also make the international fight against third countries’ local content requirements much more difficult.

Second, requiring private industry like the pipeline construction industry to source domestic products even when prices or quality are not competitive could degrade those firms’ competitiveness and potentially lead to the elimination of American jobs. The Associated General Contractors of America made this point in its comments to Commerce. For example, the Executive Order excludes a certain segment of the steel industry from qualifying as “produced in the United States” because the industry’s raw materials (steel slabs) are not commercially available in the U.S. Currently, the industry’s products are still considered to be products of U.S. origin due to waivers of the Buy American laws. The Executive Order, as currently drafted, eliminates that option and makes U.S. slab converters noncompetitive. The AGC said:

If a key aim of the memorandum is to maximize jobs in the U.S. steel industry, we are concerned that it will more likely have the effect of shuttering many U.S. operations spread around the country and replace some of those operations with a consolidated finished steel industry that will be limited both geographically and by ownership.

There’s been recent evidence that Trump can be persuaded to consider the larger impacts that his policies would have on U.S. industry, beyond their stump-speech value. Last week, news reports indicated that Trump was persuaded by some members of his cabinet, especially Secretary of Agriculture Sonny Perdue, not to withdraw from NAFTA. According to the reports, Perdue showed Trump a map of regions that would be hard hit by loss of NAFTA trade, a map that overlapped substantially with one showing strong voter support for Trump. It is likely that a map of the steel industry would as well. The assessments Trump is commissioning may show that this is another case of what he has learned in his first 100 days: things that sound good on the campaign trail don’t always look so good when the legal details are analyzed.