*Karl P. Sauvant, PhD*
*Resident Senior Fellow*
*Columbia Center on Sustainable Investment*
Columbia Law School - The Earth Institute, Columbia University
435 West 116th St., Rm. JGH 825, New York, NY 10027
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"Towards an Indicative List of FDI Sustainability Characteristics", “The
Importance of Negotiating Good Contracts", "A New Challenge for Emerging
Markets: the Need to Develop an Outward FDI Policy”, "China Moves the G20
toward an International Investment Framework and Investment Facilitation", "The
Rise of Self-judging Essential Security Interest Clauses in IIAs", "Can
Host Countries have Legitimate Expectations?", "The Next Step in
Governance: The Need for Global Micro-regulatory Frameworks", and "The
Evolving International Investment Law and Policy Regime: Ways Forward" *are*
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*Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues
No. 211  October 23, 2017
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Matthew Schroth ([log in to unmask])
*NAFTA 2.0:  a way forward for the investment chapter*
* <#m_8806473878251558140__edn1>
Mélida Hodgson** <#m_8806473878251558140__edn2>

As the fractious NAFTA negotiations hurtle forward, it is clear that the
negotiations are not about investment protections—or, more specifically,
investor-state dispute settlement (ISDS). Nevertheless, the Office of the
US Trade Representative (USTR), having still not tabled proposed text at
the fourth round of negotiations,[1] <#m_8806473878251558140__edn3> created
some consternation in late August by floating an “opt-in” model for ISDS.[2]
<#m_8806473878251558140__edn4> Arguably, the US floated this proposal as a
way to improve its negotiating position on issues that this renegotiation *is
*really about for the Trump Administration, namely a revision of automotive
rules of origin and more favorable agriculture, supply chain, digital
commerce, and sugar provisions.

The outcry from the US business community to the proposal was swift,
threatening to withhold support for the deal before Congress.[3]
<#m_8806473878251558140__edn5> On the other hand, there is bipartisan
support for eliminating the NAFTA investment chapter.

On the theory that the Trump Administration will not deny the business
community ISDS, there is room to bridge the gap by modernizing the chapter.
Below are some ideas as to how that can be achieved. These ideas are
consistent with the one overarching goal expressed for the investment
chapter by the US before the modernization negotiations began – “no greater
substantive rights” for foreign investors – which has been the guiding
principle since the George W. Bush Administration’s free trade agreement
negotiations. The proposal is essentially an enhanced Trans-Pacific
Partnership (TPP).[4] <#m_8806473878251558140__edn6> Any comparison of the
NAFTA and TPP investment chapters leads to the conclusion that the latter
is a substantial improvement over the former from the government’s
perspective, and at least offers clarity for investors.

Accordingly, USTR could start by replacing the NAFTA text with the TPP
text, incorporating improvements such as:

   - modern expropriation provisions that constrain findings of indirect
   expropriation in the context of regulations concerning public health and
   safety and the environment;
   - a minimum-standard-of-treatment/fair-and-equitable-treatment provision
   that does not cover investors’ expectations;
   - guidance on the concept of the “in like circumstances” required for a
   violation of the national-treatment and most-favored-nation provisions;
   - the circumscription of MST and expropriation claims related to
   - procedures to dispose of frivolous claims at an early stage, on an
   expedited basis;
   - provisions related to the governing law and Free Trade Commission
   - exceptions that preserve financial and prudential regulatory space,
   including through the limitation of certain (i.e., debt restructuring)
   claims; and
   - significant transparency provisions (e.g., non-disputing party and *amicus
   curiae* submissions, publication of pleadings and awards, open hearings).
   [5] <#m_8806473878251558140__edn7>

But civil society groups felt TPP was not sufficiently protective of
sovereign interests.  So how can the NAFTA investment chapter be an
enhanced TPP?

Let us start by imagining that an administration embarking on a grand
infrastructure initiative would want to avoid all claims related to
subsidies, not just minimum-standard-of-treatment and expropriation claims.
In addition, although generally opposed to environmental regulation, this
administration would presumably want to preserve its sovereign discretion
with respect to health and public welfare policy, as well as the
environment. One way to do this would be to strengthen regulatory
discretion by excluding regulatory claims from ISDS, or requiring that any
such claims be subject to the same restrictions placed on claims based on
tax measures.[6] <#m_8806473878251558140__edn8> Other provisions that could
appease skeptics would:

   - prohibit the importation of substantive and procedural obligations of
   other agreements through the operation of the most-favored-nation provision;
   [7] <#m_8806473878251558140__edn9>
   - a right to counter claims for states;
   - require the bifurcation of damages claims;
   - adopt a code of conduct for ISDS that applies to arbitrators and
   counsel (this is not novel—NAFTA already has a code of conduct for other
   types of arbitral proceedings);
   - complete the roster of arbitrators foreseen in NAFTA (Art. 1124.4);
   - require that challenges to arbitrators be decided by an administering
   institution without suspension of the proceedings;
   - require disclosure of third-party funding arrangements; and
   - require the negotiation of an appellate mechanism.

Certainly, these further enhancements will not satisfy those opposed to any
investment protections or ISDS.  But it is arguably a fairer balancing of
national interests. Because, while the NAFTA modernization is “not about”
the investment chapter, the opt-in proposal reveals the chapter’s

* <#m_8806473878251558140__ednref1> *The Columbia FDI Perspectives are a
forum for public debate. The views expressed by the author(s) do not
reflect the opinions of CCSI or Columbia University or our partners and
supporters.* *Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed
** <#m_8806473878251558140__ednref2> Mélida Hodgson ([log in to unmask])
is a partner in Foley Hoag LLP’s International Litigation and Arbitration
Department in New York, and a former Associate General Counsel at USTR,
having participated in the latter capacity in the interpretation of NAFTA
in 2001 and having been the attorney responsible for the revision of the
2004 US Model BIT and the US Model FTA investment provisions, as well as
various negotiations from 2001-2005. The author is grateful to James
Mendenhall, Hugo Perezcano Diaz and Todd Weiler for their helpful peer
reviews. The author would also like to thank Elizabeth Baltzan for her
helpful comments.
[1] <#m_8806473878251558140__ednref3> It is rumored that, at the third
round in mid-September 2017, Canada tabled a “EU-Canada Comprehensive
Economic and Trade Agreement (CETA) light” investment chapter, but details
are scarce.
[2] <#m_8806473878251558140__ednref4> This is not as radical as some may
think: there is no ISDS in the Australia FTA (2005). But that was a new
agreement.  *See*
[3] <#m_8806473878251558140__ednref5> Letter from the National Association
of Manufacturers, the Business Roundtable and the U.S. Chamber of Commerce,
Aug. 23, 2017, at (Association CEO Letter on ISDS in NAFTA).
[4] <#m_8806473878251558140__ednref6> TPP’s investment provisions were
acceptable to Canada, México and the US business community.  Although it
was largely not acceptable to those opposed to investment protections
(particularly ISDS), to the extent the Trump Administration can get
concessions on the issues that the renegotiation is really about, opponents
may have to live with ISDS.
[5] <#m_8806473878251558140__ednref7>  *See*
(Chapter 9).
[6] <#m_8806473878251558140__ednref8> *See, e.g.* the Korea-United States
Free Trade Agreement, Art. 23.3 (Exceptions-Taxation), at
[7] <#m_8806473878251558140__ednref9> Similar to CETA Art. 8.7.4.
*The material in this Perspective may be reprinted if accompanied by the
following acknowledgment: “Mélida Hodgson, ‘NAFTA 2.0:  a way forward for
the investment chapter,’ Columbia FDI Perspectives, No. 211, October 23,
2017. Reprinted with permission from the Columbia Center on Sustainable
Investment (***
A copy should kindly be sent to the Columbia Center on Sustainable
Investment at **[log in to unmask]* <[log in to unmask]>*. *

For further information, including information regarding submission to the
*Perspectives*, please contact: Columbia Center on Sustainable Investment,
Matthew Schroth, [log in to unmask]

   - No. 210, Karl P. Sauvant, “The importance of negotiating good
   contracts,” October 9, 2017.
   - No. 209, Catharine Titi, “A stronger role for the European Parliament
   in the design of the EU’s investment policy as a legitimacy safeguard,”
   September 25, 207.
   - No. 208, Lisa Sachs, Jeffrey Sachs and Nathan Lobel, “Corporations
   need to look beyond profits,” September 11, 2017.

*All previous FDI Perspectives are available at *
*. *

*Other relevant CCSI news and announcements*

   - *On October 26, 2017*, CCSI, the Columbia International Arbitration
   Association (CIAA), and Columbia Law School’s Human Rights Institute (HRI),
   will co-host a talk with *Juan Pablo Bohoslavsky* (United Nations
   Independent Expert on Debt and Human Rights) and *Edward Guntrip* (Lecturer
   in Law, University of Sussex), on "Investment Arbitration for Debt
   Disputes: Undermining Human Rights Compliance?," co-sponsored by Sussex Law
   School/University of Sussex and Sussex Centre for Human Rights
Research. *Please
   see our website here
   for more details, including link to webcast. No registration necessary.*
   - *On October 30-November 3, 2017*, CCSI, White & Case, and the EU
   Delegation to the UN will host three distinguished guests from the Court of
   Justice of the European Union— *Judge Ian Forrester, Advocate General
   Nils Wahl, *and *Director of Communications William Valasidis *–for a
   week of discussions on matters of anti-trust, investment, trade, legal
   challenges in the EU, and other timely developments in EU and International
   Law. *Please see our website here
   for more details. *
   - *On October 31, 2017*, CCSI and the Columbia International Arbitration
   Association (CIAA) will co-host a talk with *Jan Dalhuisen *at Columbia
   Law School, during which he will discuss the complex role of international
   arbitrators in international commercial and investor-state dispute
   settlement. *Please see our website here
   for more details. No registration necessary.*
   - CCSI is announcing a *Call for Papers* for the edition of the *Yearbook
   on International Investment Law and Policy
   2017. Submissions will be accepted on a rolling basis until February 1,
   2018. *Please see details here

Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
Ph: (212) 854-0689
Fax: (212) 854-7946
*Copyright © 2017 Columbia Center on Sustainable Investment (CCSI), All
rights reserved.*
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