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        The U.S.-Canada-Mexico Agreement (USMCA) entered into force on July 1, 2020, replacing the North American Free Trade Agreement (NAFTA) and establishing new rules of the road for trade and investment in the region. Along with including chapters on digital trade, environment, and labour, which did not feature in the original NAFTA, the new accord also features significant changes in relation to investor-state dispute settlement (ISDS). Parties have to a large extent abandoned this controversial mechanism.

        The USMCA will govern a multi-trillion dollar market and is expected to face heavy scrutiny within the three countries, especially during a U.S. election year. ?Known as CUSMA in Canada and T-MEC in Mexico, the new agreement has been mired in debate for both substantive and political reasons since the idea was first floated years ago.

        Indeed, in the months leading up to Donald Trump’s 2016 election win and in the early years of his administration, the U.S. leader repeatedly threatened a NAFTA withdrawal unless he could obtain a “fairer” deal for American workers. This was part of a wider effort to negotiate or renegotiate trade agreements with any country that allegedly did not provide the U.S. with “free, fair, and reciprocal” terms, fuelling tensions with many trading partners, including Canada and Mexico.

        Now that the USMCA has taken effect, we unpack some of the new features of the agreement below and explain why they matter.

        Shipping containers behind a chain-link fence during the day for story about the USMCA
        The USMCA entered into force on July 1, 2020, establishing new rules of the road for trade / iStock


        The USMCA’s investment chapter contains significant modifications from its NAFTA version, known colloquially as “Chapter 11”, which has been heavily used over the past 25 years. While some of the substantive standards have seen changes in the USMCA, due partly to the language in the U.S. Model Bilateral Investment Treaties of 2004 and 2012, the most notable difference is how this new tripartite trade and investment agreement will handle investor-state dispute settlement.

        ISDS is the mechanism that allows foreign investors to file for arbitration against host states, i.e. those countries where they have undertaken those investments, in front of a three-person tribunal. The mechanism has been included in many international investment agreements, as well as trade agreements with investment chapters. However, ISDS has faced sharp scrutiny over the past several years, prompting a strong push for reforming the mechanism or doing away with it entirely.

        For example, one of the primary concerns is what ISDS means for a government’s right to regulate in the public interest and concerns over whether the prospects of an ISDS claim can lead to governments experiencing “regulatory chill”. The hefty legal fees involved in investor-state arbitration, as well as the often massive damages awards that can result from a case, are among ISDS’ many other criticisms.

        According to the United Nations Conference on Trade and Development (UNCTAD), at least 67 ISDS cases have been filed under NAFTA since it took effect 26 years ago. How USMCA might handle ISDS going forward was therefore a major issue for trade and investment watchers in the negotiation process.

        In a landmark shift, ISDS will now no longer apply to Canada under USMCA, and its consent to ISDS for “legacy investment claims” under NAFTA will expire three years after NAFTA’s termination.

        In a landmark shift, ISDS will now no longer apply to Canada under USMCA, and its consent to ISDS for “legacy investment claims” under NAFTA will expire three years after NAFTA’s termination.

        Meanwhile, USMCA Chapter 14 allows for some ISDS but significantly limits the access to US and Mexican investors. Both parties are bound by an annex, which provides for investment arbitration only for claims alleging violations of direct expropriation and non-discrimination, and only in certain conditions and limitations.

        A further annex, also applicable to the U.S. and Mexico, contains a special regime for “Covered Government Contracts” in sectors such as oil and natural gas, power generation, telecommunications, transportation, and infrastructure. Here, investors who are parties to such contracts can bring ISDS claims with respect to other types of violations, such as fair and equitable treatment (FET).



        North America