An orderly method for resolving trade disputes with the United States was a top Canadian priority in negotiations toward the 1988 Canada-U.S. Free Trade Agreement (CUSFTA), the 1993 North American Free Trade Agreement (NAFTA), and the 2018 Canada-U.S.-Mexico Agreement (CUSMA). The more integrated Canadian and U.S. supply chains became over this period, and the more dependent Canadian exporters were on the U.S. market, the more urgent the perceived need in Ottawa for restraining congressional activism in trade policy through binding treaty-based arbitration.
The state-to-state dispute settlement process in NAFTA was used only a handful of times. This is generally attributed to problems with the dispute panel formation process. Under NAFTA, respondent states could effectively block the establishment of a panel by refusing to pick an arbitrator, as the U.S. did in 1998 when Mexico raised concerns related to sugar exports to the U.S. While NAFTA established a roster of panellists who could be selected by lot—to avoid cases being blocked by one party indefinitely—this roster was never fully staffed.1
Other circumstances probably played a more significant role in the underuse of NAFTA’s state-to-state dispute settlement process. Wide overlap between NAFTA and the “single undertaking” agreements of the better organized and funded World Trade Organization (WTO) drew North American disputes to Geneva rather than Mexico City, Washington or Ottawa. As one paper put it, NAFTA lost its “technical superiority” to the WTO, which was seen as the better venue for “politically weaker parties” such as Canada and Mexico in the North American context.2
Beginning with the Obama administration and continuing under Trump, official U.S. opinion of the WTO dispute process tanked. A February 2020 report of the United States Trade Representative (USTR) pinpointed WTO dispute panel rulings on U.S. trade remedies as a clear case of arbitrators inventing obligations not found in the WTO agreements.3 The Trump administration refused to approve new appointments to the Appellate Body as a way to pressure WTO member countries to reform the dispute settlement system—a policy sustained under the Biden administration.
CUSMA chapter 31: State-to-state dispute resolution
With the WTO Appellate Body held hostage by the U.S, the state-to-state dispute settlement process in Chapter 31 of CUSMA, which is not all that different to the one in NAFTA, is the only option for settling trade disputes within North America. This alone might explain why there have been more state-to-state disputes filed under CUSMA in four years than there were over the nearly three decade lifespan of NAFTA. These cases have targeted policies and measures near and dear to each of the respondent states, creating the potential for political backlash to CUSMA.
There have been five Chapter 31 disputes to date, two threatened cases related to changes to Mexico’s energy policy (shaded in Table 2), and two U.S.-launched reviews of Mexico’s actions in two rapid-response labour mechanism complaints. The five state-to-state disputes include two from the U.S. against Canada’s tariff-rate quota system regulating dairy imports, a joint Canadian-Mexican challenge to how the U.S. calculates North American content in core auto parts (the rules-of-origin case), another joint challenge to U.S. tariffs (since removed) on solar panels and modules, and a U.S. complaint (with Canada as non-disputing participant) against Mexico’s 2023 decree banning genetically modified corn in foods for human consumption.
These cases have covered a lot of treaty ground, with three-person panels asked to review CUSMA language across nine chapters: 2) National Treatment & Market Access for Goods; 3) Agriculture; 4) Rules of Origin; 9) Sanitary & Phytosanitary Standards; 10) Trade Remedies; 14) Investment; 15) Cross-border Trade in Services; 22) State-owned Enterprises & Designated Monopolies; 29) Publication & Administration. Panels have, for the most part, presented their final reports on deadline and with remarkable efficiency. In contrast to the absurdly verbose tomes produced by the WTO Dispute Settlement Body and Appellate Body, CUSMA panel reports have stuck to the 50-page limit.
While many of these cases risk undermining political and public support for the young NAFTA replacement treaty, they may be unlikely to lead to demands in the U.S. for renegotiation of CUSMA Chapter 31. Despite the potential for trade sanctions against states at the end of a failed CUSMA defence, the treaty’s dispute process largely sustains a power-based model of North American integration. The U.S. has not yet adjusted its method for calculating domestic content in core auto parts despite the CUSMA dispute panel finding that this method violates the agreement’s auto rules-of-origin. Yet America’s neighbours seem in no rush to retaliate.
In another sign of U.S. support for the CUSMA dispute process, the Biden administration is angling to replace the more legalistic, appeals-based WTO dispute settlement system with a “single-tier” model along the lines of the one in Chapter 31 of the new NAFTA.4 Still, it’s possible the U.S. would seek changes to a North American dispute settlement process it sees as overreaching. Were Canada and Mexico to impose duties on U.S. imports in response to the automotive rules-of-origin decision, it could provide a potential trigger.
Canadian and U.S. challenges to Mexican energy reforms prioritizing publicly owned electricity would be similarly antagonistic and counterproductive, as North American governments grapple with interventionist forms of economic, environmental and social policy co-operation. Mexico may also respond harshly to a CUSMA panel ruling against its popular February 2023 decree restricting the use of genetically engineered corn in foods for human consumption, which is based on economic, health and environmental grounds, and as a means of preserving Indigenous rights and culture.5
Besides these CUSMA state-to-state disputes, there have been dozens of other treaty-based disputes under other chapters in the agreement. These include the 22 labour disputes lodged under CUSMA’s rapid-response labour mechanism (RRM), a successful labour chapter petition by Mexican migrant workers against gender discrimination in U.S. farm policy, and a slate of Chapter 10 reviews of U.S. trade remedies initiated by Canadian exporters, involving mainly construction materials including pipe and softwood lumber.
In another reminder of the limits of NAFTA and CUSMA to settle long-standing Canadian complaints with U.S. policy, in January 2024 Canada launched a Chapter 10 review of recent duties imposed on Canadian softwood lumber exports.6
Investor-state dispute settlement
On top of these disputes, a large number of “legacy” investor-state disputes settlement (ISDS) cases were launched between July 2020 and May 2023, when this ceased to be an option for Canadian investors in the U.S. and vice versa. These contentious investor lawsuits include a $1.04 billion USD compensation claim against Canada related to a rejected LNG project in Quebec, the highly controversial $15-billion USD suit against the Biden administration’s cancellation of the Keystone XL pipeline expansion, and a dozen or so claims against Mexico related to energy, mining, taxation and public services.7
The removal of ISDS between Canada and the U.S. is undoubtedly a positive feature of the new NAFTA, hailed by Deputy Prime Minister Freeland in 2018 as a key achievement in the CUSMA negotiations. ISDS “has cost Canadian taxpayers more than $300 million in penalties and legal fees,” said Freeland. “ISDS elevates the rights of corporations over those of sovereign governments. In removing it, we have strengthened our government’s right to regulate in the public interest, to protect public health and the environment, for example.”8
However, the continued applicability of ISDS to Mexico, even in a more limited form under Chapter 14 of CUSMA, is a great injustice that should be corrected during the six-year review. Mexico continues to permit ISDS claims involving alleged breaches of the national treatment, most-favoured-nation treatment, and expropriation clauses in CUSMA’s investment chapter. This right is available to U.S. investors holding government contracts in the fossil fuel, telecommunications, power generation, transportation services sectors, or in the management of infrastructure like roads and bridges.
The experience of all three countries under NAFTA’s investor-state dispute settlement regime was pitiable, though Mexico and Canada bore the brunt of costly private arbitral decisions which often second-guessed legitimate public policy measures that were found to violate NAFTA’s broad investor protections. It is highly unfortunate that Canada continues to press for strong investor protections and ISDS provisions in its post-CUSMA trade negotiations with Ecuador, ASEAN and Indonesia. The government appears to be doing this largely on behalf of the influential fossil fuel and mining lobbies, which are responsible for more than 70 per cent of Canadian ISDS cases abroad.9
Still, every effort should be made to revisit the CUSMA investment chapter outcome that leaves North America’s southernmost partner exposed to expensive, unreasonable and unnecessary ISDS claims. There is scant evidence that access to ISDS makes Mexico more attractive to foreign investment.10 On the other hand, there is substantial evidence that investment arbitration poses a barrier to the enactment of responsible environmental measures and the achievement of human rights and Indigenous rights, as documented in a recent United Nations report.11
Recommendations
Canada should press the U.S. and Mexico to strip ISDS out of the agreement for all three countries—or co-operate with U.S. or Mexican proposals to do the same. Canada should further propose to Mexico to disapply the ISDS mechanism of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) for Canadian investors in Mexico and vice versa.
With respect to the CUSMA state-to-state dispute settlement process, as discussed earlier in the section on environment and climate, the CUSMA parties should agree on a climate peace clause that will shield all three countries from state-to-state disputes involving a broad range of measures aimed at lowering greenhouse gas emissions, electrifying transportation networks, and transitioning to a more sustainable economic model.
