Canada, Mexico tell U.S. on NAFTA investor state protection: Get in, or get out

Canada and Mexico could sign a side-letter or annex to cover their co-operation on the subject in the agreement. (Shutterstock)

MONTREAL— Canada and Mexico are applying pressure on the United States to decide whether it wants to be part of NAFTA’s investor-state dispute mechanism, threatening to sideline it unless it commits to participating fully.

Multiple sources say the conversation came to a head this week over how to settle disagreements between states and corporations, with the two countries refusing to let the U.S. rewrite the rules for Chapter 11 if it can’t commit to being part of it.

The Trump administration wants the right to opt out of Chapter 11’s binding dispute resolution panels, because it views them as an invasion of sovereignty and an incentive for companies to outsource to Mexico by guaranteeing them a forum to sue for unfair treatment.

“We basically said to them, ‘If you want to opt out, that’s fine you’re gone,”’ said an official with knowledge of the talks who described the American reaction.

“You can imagine that the U.S. negotiators didn’t like it.”

The source was one of several who agreed to discuss the issue on the condition of anonymity because of the sensitivity of the talks.

A series of options are beginning to crystallize behind closed doors, including:

Canada and Mexico could sign a side-letter or annex to cover their co-operation on the subject in the agreement.

Canada and Mexico could abandon Chapter 11’s dispute resolution section altogether and rely on other forums, including using the dispute resolution provisions of the revamped Trans-Pacific Partnership that both countries signed this past week.

Along with auto content and a possible sunset clause, the dispute settlement process is one of three contentious areas where Canada and Mexico have tabled creative proposals at this week’s talks to counter what were seen as untenable American ideas.

The success or failure of those efforts won’t be known until Monday, when U.S. trade czar Robert Lighthizer pronounces on those efforts at a joint news conference with Foreign Affairs Minister Chrystia Freeland and Mexican Economy Secretary Ildefonso Guajardo.

Last Tuesday, as the talks opened in earnest, Canada’s chief negotiator Steve Verheul asked his American counterpart John Melle whether the U.S. had changed its position on making Chapter 11 voluntary.

No, Melle replied and, according to multiple sources, he stressed that the U.S. would not participate.

According to one of the Canadians, their message to Melle was: “You leave us no choice but to seek other arrangements in order to provide protection for investors.”

Dave Reichert, the Republican chairman of a powerful U.S. congressional trade committee, said Sunday that after speaking with Lighthizer he believes the matter is still up for discussion.

“They’re still in negotiations,” said Reichert. “The optimistic thing is they’re still at the table, discussing possible solutions.”

Another source, aware of the content of the talks, said Canada doesn’t like the U.S. answer and is considering the possibility that one section of Chapter 11 will simply be left out of the agreement, allowing negotiators to move on to other issues.

Canada and Mexico have tabled different proposals but none have gained traction, the source said.

Canada modelled its proposal on what it negotiated with the European Union in its Comprehensive Economic and Trade Agreement, or CETA.

The CETA model established a new “investment court system” that would be public, and use professional and independent judges, moving away from the traditional temporary tribunal process.

The Mexican proposal is closer to the current dispute resolution model, the source said.

One source said the Americans have said they may want to opt back into Chapter 11, but the source said as far as Mexico is concerned, “once you’re out, you’re out.”

Trade lawyer Mark Warner said he believes Canada’s position is a ploy to divert attention from a larger, related priority: saving Chapter 19, which lays out the appeal process for anti-dumping and countervailing duties.

The U.S. wants to scrap Chapter 19, but it is sacrosanct to Canada.

“It’s an attempt to put the cat among the pigeons,” Warner said.

Chapter 11 isn’t as critically important as some believe, Warner said, because Canada and Mexico will already have investor-state protections in TPP. In addition, Warner pointed to the World Bank’s International Centre for Settlement of Investment Disputes.

But he said American business might get nervous about losing legal rights other countries have, and raise its voice against the U.S. proposals.

That appears to be a distinct possibility.

Neil Herrington, vice-president of the U.S. Chamber of Commerce, said in an interview that the investor-state protections are critical to American businesses.

One of the non-American officials at the talks appeared to invite them to raise their concerns.

“Well,” he said, “U.S. stakeholders should talk to their government.”