On January 29, President Donald Trump signed the United States-Mexico-Canada Agreement (USMCA) into law, completing the ratification procedure within the United States. The USMCA is now expected to come into force in the coming months following ratification by Canada, with Mexico having completed its ratification procedure last year. The North American Free Trade Agreement (NAFTA) will terminate on the same date that the USMCA comes into force. Given the much more limited investment protections in the USMCA, many North American investors will lose investment treaty protection for their investments in another North American state. All companies with cross-border business in North America should undertake a full review of the protections applicable to their investments in a post-NAFTA world and take action to ensure continuity of investment protection.

In a previous briefing (available here), we analyzed in detail the substantial changes effected by USMCA to the North American investment arbitration framework. In this briefing, we describe how the USMCA erodes access to investment arbitration for cross-border North American businesses, and provide a list of practical action items that such businesses need to consider ahead of the USMCA’s entry into force.

The status quo: investment treaty protection under NAFTA

NAFTA, which came into force in 1994, provides North American investors with a means of managing the sovereign risk attaching to their investments in another North American country. It provides substantive protections to such investors that limit the right of the host states to take adverse actions—such as outright seizure of an asset or operation, denial or withdrawal of necessary permissions, or changes to the regulatory scheme applicable in a particular sector. These protections are reinforced by a qualifying investor’s right to bring a claim directly against the state hosting its investment through international arbitration. At the time of writing, investors from each of the three signatory states have brought 66 such claims under NAFTA (27 against Canada, 22 against Mexico, and 17 against the U.S.) through which they recovered hundreds of millions of U.S. dollars in compensation for the losses they suffered from such state actions.

Changes to investor-state arbitration under USMCA

After a three-year transitional period following the entry into force of the USMCA, investors will no longer be able to bring new claims for alleged breaches of NAFTA and their ability to bring claims under the USMCA will be much more limited.

First, the USMCA does not allow for any investor-state arbitration initiated by Canadian investors in the U.S. and Mexico, and by U.S. and Mexican investors in Canada. Canadian investors in Mexico and Mexican investors in Canada can still access investment arbitration through the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), which entered into force in December 2018. However, U.S. investors in Canada and Canadian investors in the U.S. will only find recourse in national courts (or through exceptionally rare state-to-state arbitration).

Second, while the USMCA does not completely exclude U.S.-Mexico investment disputes from arbitration, U.S. investors in Mexico and Mexican investors in the U.S. will only have access to investment arbitration under restrictive circumstances.

Most such investors will not be permitted to bring claims in relation to (1) an indirect expropriation or (2) unfair or inequitable treatment—by far the most common types of claims alleged by investors in investor state arbitration. Instead, they will be able to bring claims only for alleged breaches of the national treatment standard, the most-favored nation (MFN) treatment standard and/or the protection against direct expropriation without compensation. Further, in order to bring a claim, investors will first have to pursue a remedy in the respondent’s domestic courts for at least 30 months or until a final decision is rendered—NAFTA requires only a six-month waiting period following the events giving rise to the claim.

As an exception, investors in certain sectors (oil and gas, power generation, telecommunications and transportation) may submit disputes arising from qualifying government contracts to arbitration without the need for prior litigation, and in relation to an alleged breach of any substantive protection in the USMCA (i.e. not limited to national treatment, MFN or direct expropriation). However, investors in these sectors without a qualifying government contract will have the more limited access to investment arbitration described in the previous paragraph.

Conclusion

As explained above, the USMCA will sharply curtail most North American investors’ access to arbitration against the U.S., Mexico or Canada. With that said, such investors do have options to maintain adequate international protection for their investments. Investors in North America should reevaluate their available protections, including by taking the following actions:

• Monitor Canada’s ratification of the USMCA – As noted above, the USMCA will enter into force 90 days after it is ratified by Canada. Investors should monitor the progress of Canada towards ratification in order to respond in a timely fashion. The Canadian government posts regular updates here. 
• Treaty planning – Investors should consider how best to structure new investments (and, if necessary, restructure existing investments) under the USMCA framework in order to maximize treaty protection for those investments. Investors may consider structuring their investments through jurisdictions to obtain adequate investment protection. U.S. investors in Mexico and Mexican investors in the U.S. should additionally consider whether they could enter into qualifying government contracts that would trigger access to arbitration of the full range of USMCA investment protections. 
• Contract planning – Investors should assess the possibility of concluding contracts with the relevant governments that provide for international arbitration of claims concerning the protections in the USMCA. 
• Legacy investments – Investors will have three years following the termination of NAFTA to commence any claims for disputes regarding legacy investments under the NAFTA framework. Host states and foreign investors should assess when an investment can be said to have been made and when a possible investor-state arbitration dispute can be said to have materialized, in order to determine whether a particular claim is covered by NAFTA or will fall under the regime that is foreseen in the USMCA, or potentially both.