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*Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues
No. 281  June 29, 2020
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Alexa Busser ([log in to unmask])
*Is USMCA really “the new gold standard” of investment protection?*
* <#m_7547073953816058888__edn1>
Giorgio Sacerdoti** <#m_7547073953816058888__edn2>

In his January 2020 *Perspective*
Orlando F. Cabrera C. submitted that the new investment protection regime
established by the US and Mexico under the United States–Mexico–Canada
Agreement (USMCA) represents “a new gold standard to enforce investment
protection” that other countries should consider following.

I disagree for two reasons. The first relates to the political genesis of
the new discipline. The second is due to its content, both substantively
(level of protection granted) and procedurally (instances in which recourse
to direct arbitration against the host country is open).

In both respects, Chapter 14 of UMSCA reduces drastically (and in my view
erratically) the protection afforded to investors compared to NAFTA Chapter
11. Direct arbitration is restricted to US-Mexico relations, in practice in
favor of US nationals investing in Mexico. Moreover, it is fully available
for breaches of all of the substantive standards provided in the treaty
only to investors having entered “covered governmental contracts” with
either host country. Canada opted out from this mechanism altogether, as
advocated by its civil society in light of the many cases in which US
investors had successfully challenged Canadian restrictive measures under
NAFTA, mainly enacted by provinces.

Chapter 14 is the result of a novel development. The more limited
protection compared to NAFTA does not reflect acceptance of the persistent
criticism of the investment regime, specifically investor-state dispute
settlement (ISDS), expressed by certain developing countries circles (and
UNCTAD), civil society (the “no-globals”) and some think-tanks in the
north. The origin is the Trump administration’s novel theory that
international treaty protection granted to US investors abroad encourages
the delocalization of US companies to the detriment of US workers, and
hence is incompatible with its “America First” policy.

In this political context, Canada found no resistance from the US in
removing ISDS. As to Mexico, the NAFTA-level procedural protections for US
investors (i.e., full ISDS) have been maintained only for the big business
sectors that advocated it most energetically, had the best political
connections and are least affected by the “American-jobs-first” policy
because of their capital-intensive character.

Cabrera describes well the two distinct protection regimes established
under USMCA: “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 … plus
the minimum standard of treatment …, transfers, performance requirements,
senior management, and indirect expropriation.” Based on the statistics he
provides, the most protected investments appear to be the most
capital-intensive and environment-unfriendly sectors (oil and gas). The
least protected is manufacturing, which is the most labor-intensive and
hence the most important to fight poverty, unemployment and workers’
exploitation in a developing country such as Mexico. As reported by
Cabrera, “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.”

It is difficult to understand how such a “double-standard” regime, based on
purely political choices rather than a rational social-economic evaluation
of the benefits of FDI protection, can be considered a “gold standard.”

In relation to the substantive standards of national treatment,
most-favored-nation treatment and treatment according to the minimum
standard of international law (which includes, under Article 14.6,
fair-and-equitable treatment and full protection and security), there has
been nominally no substantial innovation compared to the definition of
these protections in NAFTA in 1994. However, as mentioned above, USMCA
grants full access to direct arbitration in Mexico-US relations only to
investors that have concluded “Covered Government Contracts” in certain
sectors. Other, “normal” or “general” investors can resort to arbitration
only in cases of alleged breach of the national or most-favored-nation
treatment obligations, i.e., in case of discrimination.[1]
<#m_7547073953816058888__edn3> The rationale for affording effective
protection on a discriminatory basis, depending on the mega-sector
involved, is difficult to understand.[2] <#m_7547073953816058888__edn4>

Where, then, to search for a “gold standard” in recent international
investment agreements for how foreign investors should be treated,
balancing their protection with host countries’ legitimate interests? It
seems that the most innovate substantive standard is found in the detailed
and restrictive definition (compared to the open-ended definition of
“traditional” BITs) of fair-and-equitable treatment in Article 8.10.2 of
the EU-Canada EU-Canada Comprehensive Economic and Trade Agreement (CETA)
Moreover, in both CETA and the recent EU-Mexico FTA
(and to respond to criticisms addressed to ISDS), investor-State
arbitration has been replaced by a permanent Court System. Thus, not even
Mexico has followed UMSCA’s foreign investment protection regime.

* <#m_7547073953816058888__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_7547073953816058888__ednref2> Giorgio Sacerdoti (
[log in to unmask]) is an emeritus professor of international
law at Bocconi University, Milan, Italy. The author wishes to thank Armand
de Mestral, Hugo Perezcano and Stephen Schwebel for their helpful peer
[1] <#m_7547073953816058888__ednref3> *See* Annex 14-D (Mexico-US
Investment Disputes), and Annex 14-E (Mexico-US Investment Disputes Related
to Covered Government Contracts)
State-to-state panels under Chapter 31
are not competent to deal with disputes arising under Chapter 14 (see
Article 31(2)(c)).
[2] <#m_7547073953816058888__ednref4> In contrast, the reasons for the
tobacco industry’s exclusion from ISDS in the Comprehensive and Progressive
Agreement for Trans-Pacific Partnership are obvious.
*The material in this Perspective may be reprinted if accompanied by the
following acknowledgment: “Giorgio Sacerdoti, ‘Is USMCA really “the new
gold standard” of investment protection?,’ Columbia FDI Perspectives, June
29, 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. 280, Catharine Titi, ‘The nationality of the international judge:
   Policy options for the Multilateral Investment Court,’ June 15, 2020
   - No. 279, Hania Kronfol, ‘Leveraging corporate tax incentives to
   attract FDI: design and implementation considerations,’ June 1, 2020
   - No. 278, Karl P. Sauvant, ‘A G20 Facility to rekindle FDI flows,’ May
   18, 2020

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

*Other relevant CCSI news and announcements*

   - *July 13-24, 2020:* CCSI will be offering a *condensed online* Executive
   Training on Investment Treaties and Arbitration
   lieu of an in-person training, that will be available *free of charge to
   government officials.* Applications from government officials are still
   being accepted here
   - *September 8-11, 2020:* CCSI will host the Global Research Alliance
   for Sustainable Finance and Investment 3rd Annual Conference
   - CCSI and partners call for ISDS moratorium during COVID-19 crisis and
   who are interested in adding their names to this sign-on can express their
   interest in doing so 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 © 2020 Columbia Center on Sustainable Investment (CCSI), All
rights reserved.*
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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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