Why NAFTA's unloved investor-state dispute chapter may be in trouble

The Canadiangovernment finds itself in an awkward spot when it comes to foreign investment treaties.

Because so much of Canada's trade is withthe United States, it made sense for Canada to use an American model for its approach to investor-state dispute settlement, or ISDS the mechanism foreign companies use to sue states for damages when they believe they've been unjustifiably harmed bygovernment decisions.

U.S. companies may want it, but the Trump administration is no fan of ISDSas it'scurrently set out in Chapter 11 of the North American Free Trade Agreement.

Canadian negotiators must decide whether they're on board with joining the U.S. and Mexico in watering it down.

"Because this is something that [U.S. Trade Representative Robert] Lighthizerhas a personal vendetta against, this is something that everyone has to deal with, not just the United States," said Inu Manak, a Canadian researcher and a visiting scholar at the Cato Institute, a Washington-based think tank that promotes free market views.

Canada has been dealing with populist skepticism about ISDS with the argument that it prioritizes the rights of corporations over sovereign states since long before the current NAFTAtalks launched. One of its majortrade agreements had a near-death experience over it.

The European approach

When Trudeau'sLiberals took power, Canada's efforts to implement the trade deal it negotiated with the European Union had stalled.

The Europeans, following a massive public consultation process, concluded they no longer liked the ISDS provisions they'd agreed on. Thousands of protestors hit thestreets across Europe, warning that their elected governments would no longer befree to makeenvironmental or labour laws without being sued.

Then-international trade minister ChrystiaFreelandopted to shift her positionrather than dig in by endorsinga new European proposal for a multilateral investment court, where permanent judges would arbitrate fights between corporate investors and governments, instead of ad hoc panels of lawyers and academics.

ISDSremainsCanada's approachelsewhere not only in NAFTA, but also in the 12-country Trans-Pacific Partnership all three NAFTApartners signed.

When President Donald Trump took office, the U.S. bailed on the TPP but the TPP's dispute settlement model remains in the text now being ratified by the remaining 11 countries, including Canada.

In the midst of this muddle, Canada launched a public consultation period on Aug. 14 to review all its foreign investment treaties including 34 bilateral investment treaties as well as the investment provisions included in an additional 20 trade agreements. Thelate-October deadline lands after the current Sept. 30 target date for arevised NAFTAtext.

"I think this is a little late in the game to bring this up now," Manak said. "It's super-bizarre."

Need for consistency?

International Trade Diversification Minister Jim Carr toldCBCNews said the consultation amounts to the first "major review" of Canada's investor protection agreements in a decade. "The world has changed dramatically since then."

Several things beyond the NAFTAtalks are driving this consultation, the ministersaid.

"We're looking to reinforce the rules-based system, and that includes reforming the [World Trade Organization]," Carr said. Canada is planninga meeting of like-minded trading partnersincluding the European Union but excluding the U.S. and Chinato discuss options for WTOreform Oct. 24-25in Ottawa.

Some suggest a beefed-up WTOcould protect investors better than all these bilateral and regional agreements, although it's not clear that enough countries want that to make it happen.

"We want to prepare ourselves with the best advice available to take to a very dynamic period," Carrsaid.

Does that mean trying to make Canada's foreign investment agreements more consistent with each other?

"I think there might be a movement towards that," Carr said.

The most common complaint about ISDS is that it allows private investors to punishgovernments for policies that affect the bottom line but also protect the public interest environmental laws, for example. So does the Trudeau government think itscurrent treaties aren't "progressive" enough to fit its agenda?

"I wouldn't want to prejudge what people say," Carrsaid.

Mexico deal previews change

The preliminary trade agreement the U.S. recently reached with Mexico may offer a glimpse of what could happen with NAFTA's Chapter 11.

A U.S. official said the two countries wanted ISDSto be "limited" to cases of expropriation, bias against foreign companiesor failure to treat all trading partners equally.

However, for "companies that have contracts with the government," the official continued, "old-fashioned ISDS" would remain in play for certain sectors: oil and gas, infrastructure, energy generation and telecommunications.

Canada has been the target of more Chapter 11 claims than theother two NAFTA partners. It's lost moreISDScases than the U.S. (which has never lost) or Mexico which is why some find the idea of Canada defending it at the NAFTA table odd.

Longtime opponents of Chapter 11, including the Council of Canadians, cheered the preliminary agreement with Mexico as a signthat ISDScould be weakenedin a renegotiated NAFTA.

But they'd go farther,citing their ownpublic opinion researchthatsuggests a majority want Chapter 11 eliminated.

'Spaghetti bowl of rules'

Manak said that as the U.S. abandons ISDS, Europeans areshaping a new narrative for dispute settlement by appointed judges. Unlike rulings issued by NAFTAISDSpanels, those judges' rulings can be appealed.

Civil societygroups who lobby on sustainable development and labour issues aren't necessarilyfans of the European investor court idea. They argue that, between developed democracies, legal disputesshould be left to domestic courts.

"We still should question whether we need [the European model] at all," Manak said. Investors will face a"spaghetti bowl of rules"if treaties aren't more consistent.

"Canada has been very smart about revisingtreaties based on their experience with arbitrations," said Mona Pinchis-Paulsen, a Canadian investment lawyer conducting post-doctoral researchat New York University.

Pinchis-Paulsendid researchfor a Chapter 11 challenge by anAmerican mining company,Bilcon, after an environmental review blocked its proposal for a quarry in Digby Neck, N.S. Bilconsought $443 million in damages. It won.

Pinchis-Paulsensaid Canada's treaties with China and the EU offer investor-state dispute arbitratorsmuch more guidance than does NAFTA on things like the government's right to regulate.

"It's interesting to see whether they're doing this consultation as a way to legitimize perhaps more detailed rules for the NAFTA," she said. "They probably already know where they want to go."

Regulatory chill?

ISDSdoes seemincompatible with other Trudeau government priorities.

"Indigenous peoples are damaged by investment agreements," said Risa Schwartzan internationallawyer who has researched their impact ontreaty rights enforcement.

Domestic judges in Canada understand how Indigenous peoples are protected by theConstitution, she said. Ad hoc Chapter 11 panels may lack expertise in Indigenous law.

Schwartzworries about regulatory chill. When governments fear being sued under ISDS, do they make different decisions?

Take the Trans Mountain pipeline extension, she said. Was the government's decision to buy the pipeline influenced by fear of an expensive Chapter 11 lawsuit if approval wasn't granted?

Assembly of First Nations National Chief Perry Bellegarde sits on Freeland's NAFTA advisory panel. "You cannot trade what is not yours," he wrote in an op-edin the Toronto Star.Translation:don't ratify agreements that conflict with our treaties.

Negotiators could addan exemption to NAFTA to protect Indigenous rights, Schwartz said.

Or they could justkill Chapter 11 altogether.