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*Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues
No. 269  January 13, 2020
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Alexa Busser ([log in to unmask])
*The US-Mexico-Canada Agreement: the new gold standard to enforce
investment treaty protection?*
* <#m_6687159095456215904__edn1>
Orlando F. Cabrera C. ** <#m_6687159095456215904__edn2>

On November 30, 2018, the US, Mexico and Canada signed an agreement that,
if approved, will replace the North America Free Trade Agreement (NAFTA):
the United States-Mexico-Canada Agreement
(USMCA). USMCA was negotiated under circumstances different from NAFTA. The
US stood by its “America first” policy, among other protectionist policies.
This ran counter to NAFTA-era neoliberal policies and previous US
presidents’ efforts, since World War II, to establish international trade
rules, arguing that they would bring stability to the world economy.[1]

The US proposal was to let parties unilaterally decide whether or not to
opt in to the investor-state dispute settlement (ISDS) mechanism, and the
US made it clear that it would not opt in. Canada’s preference was a more
progressive ISDS mechanism akin to that of the EU-Canada Comprehensive
Economic and Trade Agreement (CETA). For Mexico, dispute-resolution
mechanisms had an essential role; Mexico wanted to retain provisions that
contribute to investment transactions. The end result was a limited
bilateral ISDS mechanism between the US and Mexico, which Canada did not
join. Still, under the USMCA, Canada will have access to the state-to-state
dispute settlement, to resolve investment disputes arising out of Chapter

Chapter 14’s uniqueness rests on the claims covered by the bilateral
(Mexico-US) ISDS mechanism for two distinct categories of investments.
First, general investors can claim breaches only to national treatment,
most-favored-nation treatment (only at investment’s post-establishment
phase) and direct expropriation. Second, the “Covered Government Contracts”
provisions allow investors that have concluded governmental contracts and
related activities in oil and gas, power generation, public
telecommunications, public transportation, and certain public
infrastructure to claim breaches to the above three standards (even during
the investment’s establishment phase) plus the minimum standard of
treatment (including fair and equitable treatment and full protection and
security), transfers, performance requirements, senior management, and
indirect expropriation.

Under Covered Government Contracts, Mexico and the US allow claims to all
the standard protections in the sectors in which treaty breaches are most
frequent. In 2018, ICSID reported that the largest shares of claims
involved investments in oil, gas and mining (24%); electric power and other
energy (17%); construction (8%); and water, sanitation and flood protection
(5%). Altogether, these sectors represented 54% of all cases registered
under the ICSID Convention and Additional Facility Rules.[2]
<#m_6687159095456215904__edn4> The Mexican experience is similar: 40% of
the investment arbitration cases against Mexico dealt with investments
under Covered Government Contracts.[3] <#m_6687159095456215904__edn5>
Interestingly, Mexico and the US left out mining, even though, from 1999 to
2016, FDI by US investors in Mexican mining amounted to US$6.8 billion.[4]
<#m_6687159095456215904__edn6> Instead, they preferred to cover energy and
telecommunications, where US investors channeled, respectively, US$4.6 and
US$5.9 billion.

Conversely, the US and Mexico decided, through the general investment
section, to allow narrower enforcement of protections to the largest FDI
flows from the US to Mexico. Between 1999 and 2016, manufacturing accounted
for 49% of US FDI inflows.

In the current investment arbitration crisis, USMCA presents a new gold
standard to enforce investment protection. First, under general investment,
USMCA reduces states’ risk exposure by precluding investors’ access to ISDS
for claims of alleged breaches to indirect expropriation and fair and
equitable treatment standards, and national treatment and
most-favored-nation standards at the investment’s pre-establishment phase.
Governments concerned with regulatory chill and the exercise of police
powers should adopt the USMCA model, as it reduces the risk of ISDS claims
related to the regulation of health, national security,[5]
<#m_6687159095456215904__edn7> morals, and the environment. Philip Morris,
which questioned the “plain packaging” and “single presentation” policies
adopted by Australia
and Uruguay
would have had no grounds to advance a claim under USMCA. Also, with the
Covered Government Contracts, governments will continue protecting the most
sensitive sectors in which ISDS cases frequently arise.

A government willing to adopt the USMCA model should identify the sectors
that, based on the relevance of investment flows and frequency of
investment-treaty breaches, require the broadest protection, ponder the
risks associated with these sectors and opt to protect the latter by
bearing these risks. For instance, Colombia’s highest 2018 inward FDI
shares were in oil, financial services and mining. It should consider
protecting the oil and mining sectors under Covered Government Contracts,
and subject other industries (such as financial services, agriculture,
manufacturing, and construction) to the general investments.[6]
<#m_6687159095456215904__edn8> Governments should not fear that this
results in lower investment flows, as the link between investment
agreements and FDI flows remains tenuous.[7] <#m_6687159095456215904__edn9>

* <#m_6687159095456215904__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 or the author’s law firm. Columbia FDI Perspectives (ISSN
2158-3579) is a peer-reviewed series.*
** <#m_6687159095456215904__ednref2> Orlando F. Cabrera C. (
[log in to unmask]) is a Fellow of the Chartered Institute of
Arbitrators (CIArb) and Associate at Hogan Lovells, Mexico. The author is
grateful to Vernon MacKay, Mélida Hodgson and an anonymous reviewer for
their helpful peer reviews.
[1] <#m_6687159095456215904__ednref3> John Micklethwait, et al, *Trump
Threatens to Pull U.S. Out of WTO If It Doesn’t ‘Shape Up’*, Bloomberg
[2] <#m_6687159095456215904__ednref4> ICSID, *The ICSID
Caseload-Statistics, Issue 2018-2*, (2018)
[3] <#m_6687159095456215904__ednref5> UNCTAD, *Investment Dispute
Settlement Navigator *(Jan. 6, 2019)
[4] <#m_6687159095456215904__ednref6> Secretaría de Economía, “Inversión
directa de Estados Unidos hacia México,” February 2017
pp. 26 *et seq.*.
[5] <#m_6687159095456215904__ednref7> USMCA Art. 32.2 secures policy
flexibility regarding national security through a general exception that
applies to the whole treaty.
[6] <#m_6687159095456215904__ednref8> Banco de la República de
Colombia, *Flujos
de inversión directa–balanza de pagos, *2018
[7] <#m_6687159095456215904__ednref9> Although Brazil is not a party to any
treaty with ISDS, it leads in attracting foreign investment in Latin
America. By contrast, Mexico is a signatory to 31 investment agreements,
and it lags far behind.
*The material in this Perspective may be reprinted if accompanied by the
following acknowledgment: “Orlando F. Cabrera C., ‘The US-Mexico-Canada
Agreement: the new gold standard to enforce investment treaty protection?,’
Columbia FDI Perspectives, January 13, 2020 . 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,
Alexa Busser, [log in to unmask]

*Most recent Columbia FDI Perspectives*

   - No. 268, Xavier M. Forneris, ‘Political risk: Not just the investor’s
   affair,’ December 30, 2019
   - No. 267, Maria Laura Marceddu, ‘Another brick in the wall: the
   EU-India investment-facilitation mechanism,’ December 16, 2019
   - No. 266, George A. Bermann and John P. Gaffney, ‘Intra-EU investment
   protection in a post-Achmea world,’ December 2, 2019

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

*Other relevant CCSI news and announcements*

   - *CCSI announces a call for papers for the Global Research Alliance for
   Sustainable Finance and Investment (GRASFI) 3rd Annual Conference*,
   hosted by CCSI on September 10-11, 2020. The deadline for paper submission
   is February 28, 2020. Themes for papers include climate-related risks and
   finance, the role of the state (e.g., central banks, development banks, and
   regulators) in advancing sustainable finance, and social and human rights
   dimensions of sustainable finance, among others. A full list of themes,
   further information about the conference and submission details can be
   found on our website
   - *CCSI is pleased to announce a call for papers for the 2019 edition of
   the Yearbook on International Investment Law and Policy*, published by
   Oxford University Press (OUP). The *Yearbook* monitors current
   developments in international investment law and policy. Original
   contributions to be considered for publication in the *Yearbook* are
   accepted on a rolling basis until February 2, 2020; more information
   including submission details is available on our website
   - *CCSI is hiring an Economics and Policy Researcher* to help develop
   and execute the Center’s applied research agenda on energy, extractive
   industries and sustainable development. Specifically, the incumbent will
   lead research on the economic and policy frameworks shaping investments in
   oil, mining and gas globally, and their impacts on sustainable development,
   as well as on implications for investment of the energy transition. For
   more details and qualifications, please see our website
   - *Applications are now open *for CCSI's June 2020* Executive Training
   on Extractive Industries and Sustainable Development
   Training on Sustainable Investments in Agriculture,
   *and *Executive Training on Investment Treaties and Arbitration for
   Government Officials
   more information about the courses, and to access the applications, please
   click on the links above.*

Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
Ph: (212) 854-0689 <%28212%29%20854-0689>
Fax: (212) 854-7946 <%28212%29%20854-7946>
*Copyright © 2020 Columbia Center on Sustainable Investment (CCSI), All
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*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
| p: (212) 854 0689 | cell: (646) 724 5600 e: [log in to unmask]
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