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INTRODUCTION a. Difference between Free Trade Area (FTA), Customs Union, and Common Market i. Free Trade Area (FTA): “A FTA shall be understood to mean a group of two or more customs territories in which the duties and other restrictive regulations of commerce are eliminated on substantially all the trade between the constituent territories in products originating in such territories.” – pg 3 course book ii. Customs Union: Continue to eliminate tariffs and it becomes regional; specific as to what is traded but keeps barriers to those countries not in the agreements 1. “A Customs Union shall be understood to mean the substitution of a single customs territory for two or more customs territories so that duties and other restrictive regulations of commerce are eliminated with respect to substantially all the trade between the constituent territories of the union …. And substantially the same duties and other regulations of commerce are applied by each of the members of the union to the trade of territories not included in the union.” – pg 3 course book iii. Common Market: Free flow of all resources, goods, services, etc. b. GATT i. WTO created in 1994; administers GATT and other free trade agreements ii. GATT 1994 incorporates GATT 1947 and GATS, TRIPS, and settlement of trade disputes through the WTO 1. If a country does NOT follow WTO decision, other country can retaliate with tariffs c. Regional Trade Agreements i. Cannot be anymore restrictive than GATT AND must notify WTO and agreements must allow for substantially free trade in sectors in a reasonable period of time - Reasonable amount of time is usually 10 years ii. Regional trade agreements are NOT necessarily geographically regional (e.g. USA and Israel agreements) d. NOTE - Harmonization: harmonizing laws so they comply with one another, leads to investment being easier, among other things. i. E.g. great lakes charter between USA and Canada ii. NAFTA Article 105 has a statement about harmonizing 1. That is, all states must abide by NAFTA e. Chua’s Article i. Market Dominant Minority: ethnic minority who dominates an industry (more than 50%) ii. Globalization and free trade aggravates the problem of market dominant minorities f. Quebec (pg 23 course book) i. Was interested in breaking away from Canada ii. If Quebec would have succeeded, to join the NAFTA Quebec would have to be voted in
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1. NAFTA Article 2204 (NAFTA Accession clause) g. Notes: i. Dormant Commerce clause of USA Constitution prevents states from passing laws that interfere with interstate commerce ii. Supremacy Clause: federal law supreme to state law. 1. International treaties fit in probably above state law but where exactly they fit in is debated h. Theory behind free trade i. Doctrine of Comparative Advantage (which encourages specialization) – specialize in producing goods country is good at because it will lower prices through trade and all are better off. 1. Others say that comparative advantage leads to countries abandoning self dependence for dependence i. Protectionism of Domestic Industries i. Protectionist measures actually cause more domestic poverty. j. Mexico i. Calvo Clause: anyone in Mexico who has legal problem has to go before the Mexican courts; NOT their home country courts 1. Had to give this up to join NAFTA! 2. NOTE it is still the law for those who did NOT join NAFTA (e.g. other Latin American countries) 3. For the NAFTA parties, the Calvo clause was replaced by dispute resolution clause ii. PEMEX is the state owned oil company of Mexico; CFE administers it iii. Oil reserves are owned by the Mexican government because it is in the Mexican constitution iv. There are, today, some concessions Ks where foreigners can develop certain things and have limited right to natural resources v. Amparo Action: Mexican legal concept 1. It is a constitutional right to Mexicans and others doing business in Mexico that allows them to bring Amparo case dealing with certain issues. IF five issues are decided the same way THEN the decision becomes Mexican constitutional case law. Thus, it is law; Mexican Supreme Court cannot strike it down. Amparo actions are NOT used under NAFTA because NAFTA has dispute resolution chapters. k. NOTE: within NAFTA, CANNOT go below the GATT, but countries can go above it and if conflict arises, NAFTA controls for the USA, Mexico, and Canada l. Dillion Article (OUTLINES WTO AND GATT REALLY WELL) i. Remedies under DSB of WTO 1. Consultation – NOT necessarily required under the WTO 2. Panel phase 3. Appellate body ii. General Council runs the show of the WTO iii. WTO has DSB 1. Made up of members of the general council
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2. Also does binding arbitration a. Note the difference between mediation (decision is NOT binding on the parties) and arbitration (decision IS binding on the parties and decisions are confidential UNLESS parties agree to release the decisions) iv. WTO allows for negotiations and consultations 1. Is consultation mandatory? a. NO CLEAR Answer; but most parties will want to go through consultation v. WTO uses consensus voting, but it can, under certain circumstances, use other voting methods (e.g. 2/3 majority) vi. Countries that have signed on to the New York convention (which USA, Canada, and Mexico are part of) have to follow arbitration decision vii. Binding arbitration under the WTO, parties must agree which procedures apply 1. If parties do NOT like decisions of the DSB panel under the WTO, then they can appeal to the Appellate Body (AB) a. NOTE that a AB does NOT exist under NAFTA; thus, there are no appeals or appellate body, BUT there are specific reasons a country can bring up, that is “extraordinary reasons” (see ECC) and get review of NAFTA panel’s decision m. Vienna Convention on the Law of Treaties i. Vienna Convention – used to interpret treaties; used by WTO and NAFTA panels ii. Takes us back to customary international law and tells us how to interpret treaties; it is very formalistic iii. Treaties needs to be interpreted in good faith; in light of treaties objective and purpose; interpreted terms while consider other agreements and preambles of treaties (that is other relevant international law) n. Some Specific GATT Provisions are Incorporated into NAFTA 1. NAFTA Article 103(2) provides that if there is an inconsistency between NAFTA and another agreement (e.g. GATT), NAFTA prevails to the extent of the inconsistency, UNLESS otherwise provided. 2. NOTE that Customary International Law (“Law of Nations”) is incorporated into GATT AND is part of NAFTA ii. GATT Article 3 deals with what to do about domestic regulations 1. NAFTA Article 301 incorporates GATT Article 3 (the GATT national treatment provision) 2. “Like products” – looks to see if products are “substitutable” iii. GATT Article 20 – general exception – allows countries to protect certain things that fall under article 20 o. Parts of CFTA (Canada USA Free Trade Agreement) is incorporated into NAFTA
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i. Solely in NAFTA are competition and antitrust policies; labor side agreement, environmental side agreement, private investments and telecom are only in NAFTA. p. Notes: the National Treatment concept in NAFTA applies equally to goods, services, technology and investment. NAFTA ARTICLES UNDER CHAPTERS 1 AND 3 a. NAFTA Article 105 requires Canada, Mexico, and the USA to ensure that all necessary measures are taken by provincial and state governments to ensure compliance with NAFTA. Provinces and states are exempt from some provisions of NAFTA, such as government procurement. b. Article 302 – deals with eliminating tariffs; prohibits all parties from increasing tariffs or establishing new tariffs on North American goods. c. Article 303: i. “Drawbacks” have been eliminated; Mexico gave up duty waivers for items imported from non-NAFTA sources that are used to manufacture goods for export to the USA and Canada; outlawed tariff rebates. RULES OF ORIGIN NAFTA CHAPTER 4 a. NOTE - Production includes assembly AND disassembly; thus, each considered when trying to figure out rule of origin. b. Article 401 – Originating Goods 1. Note that Article 415 has the definition of originating goods ii. Non-originating goods are subject to the normal MFN tariffs of Canada, Mexico, and the USA. iii. Article 401(a) – deals with agricultural goods; animals, fruits, produce, etc, that are “wholly or entirely produced in territory of the party”: this phrase is defined in Article 415 iv. Article 401(b) – deals with some materials in product that are nonoriginating; If you have a tariff shift, then a good can meet rule of origins under this article. v. Article 401(c) – deals with things produced from originating material from the territory. 1. NOTE that 401(a) and (c) both deal with goods with nonoriginating materials. vi. Article 401(d) – tells about tariffs shifts and RVC (regional value content) c. Annex 401 of NAFTA - applies for harmonized tariff system; has special rules d. Tariff Shift Rules i. A good may qualify as an originating good only when each nonoriginating material used to produce the good undergoes an applicable “change in tariff classification” as a result of production in one or more of the NAFTA countries. e. Article 402 - Value-Content Rules i. Where a non-originating part or parts do NOT qualify as originating goods under the change in tariff classification test, the product can still be treated as originating in NAFTA IF it meets the required Regional Value-Content Test. (RVC)
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ii. RVC rules require a percentage of the value of the good to be North American. A good will qualify as an originating good IF the assembly of such parts and components within NAFTA accounts for 60% of the value of the finished product OR 50% of the net cost of the product. iii. Under Article 402, the RVC can be calculated by either the TransactionValue Method OR the Net-Cost Method. A manufacturer may choose whichever on is most advantageous. 1. The Transaction-Value Method (TVM) a. The Transaction Value Method generally means the price actually paid or payable for the good. The Transaction Value Method calculated regional content by (1) subtracting the price paid for the NON-NAFTA-origin materials used in the production of the good from the price charged the consumer for the finished good AND (2) dividing that figure by the price charged the consumer. IF the product contains MORE THAN 60% regional value content (RVC), it qualifies as an originating good. In short, the assembly of parts and components within the NAFTA zone MUST account for AT LEAST 60% of the value of the finished product. b. FORMULA: c. (Price charged - Price paid NON-NAFTA material) x 100 Price charged for good 2. Net-Cost Method (NCM) a. The Net-Cost Method is based on the TOTAL COST of the good MINUS sales promotion, marketing, after-sales service, royalties, shipping, packaging, and non-allowable interest costs. The Net-Cost Method calculates RVC by SUBTRACTING the price paid for NON-NAFTA-origin materials from the NET COST to the producer of the good AND DIVIDING that figure by the NET COST to the producer. IF the product contains MORE THAN 50% RVC, it will qualify as an originating good. b. FORMULA for determining the RVC of a product using the Net Cost Method: i. RVC = NC – VNM x 100 NC ii. Where VNM = Value of Non-Originating Materials 3. MUST USE NET COST WHEN THE GOOD IS SOLD BY THE PRODUCER TO A “RELATED PERSON”. Note that under Article 402(5)(c) “related person” is DEFINED IN ARTICLE 415. SEE THE ARTICLE FOR SPECIFICS!!! f. Article 403 – Automotive Goods i. Special rules for calculating the RVC if it is an automotive good. The rule requires the automobile to consist of 62.5% of local content coming from
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the NAFTA territories in order to get duty free treatment within the NAFTA territory. See the article g. Article 404 - Accumulation Method i. A producer can accumulate the value of the originating material in the non-originating finished goods. h. Article 405 - De Minimus Rule i. IF non-originating material is less than 7% then the good can meet the Rule of Origins test. That is, provides that 7% or less of the value of the finished product may be composed of NON-NAFTA-originating components which do NOT meet the tariff shift requirement. i. Wright Article pp. 82-82 (Rule of Origin) i. Example: 1. Company A has unfinished rings imported from Japan under the tariff heading 8482.99.11 and manufactures into finished rings in Canada under tariff heading 8482.99.11. a. There is NO change in tariff heading so Article 401(b) does NOT apply 2. Company B buys from Company A and Company B makes ball bearing rings which are under the tariff heading 8482.10. 3. Company B sells this to Company C who is “related person” 4. Because of Article 402(c), Company C uses Net Cost Method. a. Which ends up at 46% and thus good is NOT originating b. So, company C can try to use the accumulation method and when it does it works – good is originating. j. TEXTILES and APPAREL SPECIAL RULES OF ORIGNIN i. “Yarn Forward” Rule for textiles: 1. Must use North American SPUN yarn; (yarn must be SPUN in North America; it does NOT have to be from North America); AND 2. To make North American fabrics (Production in the USA); AND 3. Cut and sewn into clothing in the USA. a. NOTE - Silk, linen, and other fabrics that are scarce in North America are excepted from the yarn forward rule, BUT these fabrics MUST be cut and sewn in North America. k. ELECTRONICS SPECIAL RULES OF ORIGIN i. For electronics, screens over 14 inches must contain a North Americanmade picture tube. NAFATA CHAPTER 5 – CUSTOMS PROCEDURES a. NAFTA Article 501 – Certificate of Origin i. Exporter or producer of the good fills out the certificate of origin and must keep the documents for 5 years. NOTE that exporter must give importer copy of certificate of origin in case of inspection. ii. Verification proceedings (SEE PG 86-87) – USA customs office favored method of conducting a NAFTA verification is a visit to the offices of the foreign exporter and/or the producer.
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b. Article 509 – a company can get an advance ruling on a good that is binding on the customs authorities later. c. Article 510 – if there is a problem with a document, a party can appeal to have it reviewed to see if there was a mistake CANADAIAN CULTURAL EXCEPTION a. SEE PG 154 FOR CFTA (CANADA-USA FTA) THAT GOVERNS USACANADA ISSUE OF CULTURAL EXCEPTIONS b. NAFTA Article 2107 defines Cultural Industries – persons engaged in print, film, music, radio, and TV. SEE THE ARTICLE FOR EXACT COVERAGE. i. Deals with persons engaged in those industries that are EXCEPTED ii. CFTA does NOT apply to USA-MEXICO trade relations. iii. Note: NAFTA refers to PERSONS; CFTA refers to ENTERPRISES iv. Cultural Transmissions Theory (see pg. 163 of course book) v. Canadian Cultural exception under NAFTA allows for NOT following GATT article 3 for certain things, BUT it is very tricky how to frame it; Canadian cultural exception also allowed because of GATT Article 20(f) and (a). vi. Arguably Canadian Cultural exception could fall under GATT article 20 dealing with public morals (note that public morals is difficult to define so that is why it is uncertain if Canadian cultural exception fits in) vii. Canadian Cultural exception – Canada CANNOT bring case under CFTA (Canada USA FTA) because there is NO panel. So if a Party thinks something does NOT fall under the Canadian Cultural Exception, then the Party can retaliate against Canada (there is NO panel) c. Split Run Magazine case i. WTO looks to see if products are directly competitive or substitutable when determining like products; also WTO looks to end users (the market) ii. AB did NOT use “aims and effects” test RATHER AB used new criteria based on Japan Malt Beverages case. SRM MEASURES NAFTA CHAPTER 9 - SEE PG 119 of course book a. SRMs can be a non-tariff trade barrier; SRMs can be established by business or the government b. SRMs are put into place to protect human health, plant life, etc. SRMs are usually a public health related regulation; SRM does envelope the issue of transportation services. c. Standards, under Chapter 9, are defined as providing: a document, approved by a recognized body, that provides for common and repeated use, rules, guidelines, or characteristics for products, or related processes and production methods, or for services or related operating methods with which compliance is not mandatory…including terminology, symbols, packaging, marking or labeling requirements as they apply to a product, process, or production or operating method." This is the important part of the term "standards." Under the NAFTA, standards by definition are not mandatory, and are most frequently set by private standardizing bodies. d. NOTE that Article 105 says that State and Provincial Governments and Governments have to comply with NAFTA, BUT Chapter 9 does NOT follow
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Article 105 (SEE Article 902); thus, gives States and Provincial Governments more leeway, BUT asks that governments implement measures so States and Provincial governments follow Articles 904-908. e. Articles i. Article 901 - makes it clear that the federal government can always mandate compliance by sub-federal governments and nongovernmental organizations (NGOs). ii. Article 903 does NOT incorporate GATT TBT; rather it affirms it. 1. Thus, academics say that it leads to parties NOT bring a TBT claim with respect to SRM in NAFTA, BUT can bring a claim under the GATT 2. Also CANNOT bring Chapter 20 panel for violation of Chapter 9 iii. Article 904 - In the NAFTA SRM agreement, the explicit issue of sovereignty is addressed at the beginning in Article 904, which establishes the right of each Party to adopt, maintain, or apply any SRM related to the protection of human, animal, or plant life or health, the environment, or consumers, and any measure to ensure its enforcement and implementation, including the right to prohibit imports. 1. Article 904(2) “legitimate objective” is defined in Article 915 prove “legitimate objective” by (1) fundamental climatic or geographical factors; (2) technological or infrastructural factors; OR (3) scientific justification. Because risk assessment is NOT required; legitimate objective of SRM does NOT need to be based on science. a. “Legitimate objective” - Does NOT include protection of domestic production. 2. Article 904(3) has provision that incorporates GATT Article 3 National Treatment and MFN into chapter 9 iv. Article 905(2): Presumption of conformity to international standards v. Article 906: Compatibility and Equivalence - allows parties to prove equivalence of regulation SPS MEAUSRES NAFTA CHAPTERS 7 a. Sanitary and Phytosanitary measures together they protect plants and animals i. SPS measures deal with food and water; etc. b. SPS measure can act as a Non-Tariff Trade barrier (TBT) c. Chapter 7 requires Risk Assessment which is science based d. Article 710 does NOT incorporate GATT Article 3 and GATT Article 20(b) i. Thus, does NOT refer to MFN and National treatment; See Article 710 e. Article 712(4) bars arbitrary or unjustifiable SPS discrimination between “like goods” where “identical or similar conditions” prevail. f. Article 714: allows parties to prove equivalence of regulation. g. Article 723(6) – Party asserting that a SPS measure of another Party is inconsistent with Chapter 7 has Burden of Proof of establishing the inconsistency. h. What ELEMENTS do we look at to see if SPS or SRMs are valid? i. Science – heavily used and looked at in SPS
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1. “Appropriate level of protection” test under chapter 7 DOES deal with science (based on science) 2. “Legitimate objective” in Article 915 does NOT deal with science a. Legitimate objectives defined does NOT include protection of domestic production 3. Arguably Chapter 7 test of “appropriate level of protection” is MORE stringent than the “legitimate objective” test of Chapter 9 because “appropriate level of protection” needs to be based on science. 4. Risk Assessment – Article 907 NOT mandatory BUT in Article 715 it IS mandatory a. NOT mandatory under Article 907 because SRMs are NOT usually created by Governments; RATHER most SRMs come from business and trade associations i. SPS – Mandatory ii. SRMs - Optional b. Risk assessment - is an exercise that combines available data on a substance's potency in causing adverse health effects with information about likely human exposure, and through the use of plausible assumptions, it generates an estimate of human health risk. c. Conversely, Risk management is the process by which a protective agency decides what action to take in the face of such estimates. Ideally the action is based on such factors as the goals of public health and environmental protection, relevant legislation, legal precedent, and application of social, economic, and political values. Pure policy choices are supposedly confined to the second place, risk management. At this stage, science may be relevant for such tasks as evaluating technical options. Risk management decisions, however, also engage other considerations, most notably social values. ii. Role of GATT obligations 1. SEE NAFTA ARTICLES 712 (NO GATT Article 3 and NO GATT Article 20(b)) AND 904 iii. Precautionary Principle 1. SEE NAFTA ARTICLES 715 AND 907 2. Article 715 and 907 both allow for Precautionary Principlecounsels government authorities to err on the side of environmental protection in formulating public policy in contexts characterized by conditions of scientific uncertainty. iv. Conformity Assessment 1. SEE NAFTA ARTICLES 714 AND 715 AND 906 a. allows parties to prove equivalence of regulation 2. Determination of conformity under chapter 9: it comes up when seeing if regulations are the same. Comes up with standards and
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measures. There should be process in place to see if regulations are similar and therefore conform. 3. Testing and approval procedures are subject to minimum procedural requirements. The licensing of product testing in the other countries must be on terms that are NO less favorable than applied domestically. VIII. NAFTA CHAPTER 6 ENERGY AND BASIC PETROCHEMICALS a. In Mexico, there is PEMEX which is state owned Monopoly regulated by CRE. b. Mexico in 1930’s expropriated the land and the oil industries i. There was dispute between Mexico and USA over the payment owed for the stuff taken. The point is that if there is expropriation there must be compensation 1. NAFTA Article 1110 says that if there is expropriation there must be compensation ii. Calvo Doctrine gave it up so could have Article 1110, had said have to litigate claims in Mexico iii. Natural gas is the market most open in Mexico c. Annex 602.3 (There are reservations for Mexico here with regard to national resources and energy) i. The most important reservation in NAFTA's chapter on energy is Annex 602.3, which provides that: The Mexican State reserves to itself the following strategic activities and investment in such activities: (a) exploration and exploitation of crude oil and natural gas; refining or processing of crude oil and natural gas; and production of artificial gas, basic petrochemicals and their feedstocks; and pipelines; and (b) foreign trade; transportation, storage and distribution, up to and including first hand sales of the following goods: crude oil; natural and artificial gas; goods covered by this Chapter obtained from the refining or processing of crude oil and natural gas; and basic petrochemicals. ii. Private investment is NOT permitted in the activities in which reservations apply. d. Article 606 i. The parties recognize that energy regulatory measures are subject to the disciplines of (a) national treatment, as provided in Article 301; (b) import and export restrictions, as provided in Article 603; and (c) export taxes, as provided in Article 604. IX. NAFTA CHAPTER 12 – CROSS-BOARDER TRADE IN SERVICES a. Chapter 12 applies to laws and regulations affecting the provision of services across NAFTA boarders. This includes measures affecting the production, distribution, marketing, sale and delivery of a service, as well as those related to the purchase or use of a service. Chapter 12 does NOT require parties to provide individuals from other NAFTA countries access to their labor market. b. NAFTA Chapter 12 does NOT list services i. The NAFTA approach to services is referred to as a “negative list” approach. If a sector is NOT excluded OR made subject to a reservation, then the sector comes within the NAFTA rules.
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ii. Some financial services are excluded from the general services chapter, but are included in special, separate chapters. 1. Chapter 14 covers Banking although it is a service iii. Legal services, architecture, doctors, etc. is covered by Chapter 12 1. License and certification reciprocity: country does NOT adopt standards of other country, but it allows parties with equivalent standards to be recognized 2. License and Certification is closely linked with immigration c. Chapter 12 Articles i. Article 1201 scope generally tells which services are covered 1. 1201(2) tells some of those services NOT covered ii. Article 1202 provides for National Treatment iii. Article 1203 provides for MFN iv. Article 1204 requires best of either MFN OR National treatment 1. NOTE that Chapter 16 relates to Chapter 12 in that Chapter 16 deals with temporary entry for business persons v. Article 1205 is VERY IMPORTANT because NO party can require other party to maintain office in country where they provide services vi. Article 1210(3) allows for reciprocity vii. Article 1211 deals with denial of benefits 1. A party may deny the benefits of chapter 12 to service providers of another NAFTA country where the party establishes that the service is being provided by an enterprise owned or controlled by nationals of a non-party with which it does NOT have diplomatic relations OR to which it is applying economic sanctions. viii. Article 1212: addresses matters related to cross-boarder land transportation services. Each party is to establish contact points to provide information published by that party pertaining to several areas including safety requirements and taxation. d. Problem with legal services and lawyers i. Have residency issues regarding residency requirements 1. This is where immigration law comes in ii. Different legal systems 1. This leads to different practice skills iii. Citizenship requirement has been eliminated in Mexico and in the USA, BUT USA States have residency requirements e. Foreign Legal Consultant (FLC) Requirements: i. 5 of 7 years of practice (some states say 3 of 5) ii. Only can counsel on home country law and international law iii. Specific requirements for disclosure – Lawyer tells he is NOT licensed to practice in the state iv. Pay fees v. Get license vi. In some states, the FLC must have insurance vii. Have to follow ethical rules of the state
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f. FLC accord - trying to resolve problems with FLC requirements and things they can do g. Notes: i. Risk of loss assessment: allocates the risk of loss; decides who bears the risk; something is negotiated; if NOT stated, the risk falls to the BUYER as a default rules 1. Risk of loss assessment DIFFERS from a warranty because a warranty goes to DUTY under a K; seller warranties the product is good ii. Bill of lading: inventory of what is shipped; it is a list; basically represents the goods themselves; when it gets to buyer’s bank, the buyer has to pay even if the goods have NOT been delivered. iii. INCOTERMS of the ICC (International Chamber of Commerce) – INCOTERMS are terms that deal with allocation of risk; they were created by the ICC 1. NOTE that FOB is in the INCOTERMS iv. DDP: Delivery Duty Paid - used for international transactions. v. See handout for FOB and CIF terms and their duties and rights h. Chapter 20 Trucking Services Case i. USA violated 1202, panel never really specifically said who was in like circumstances BUT found that USA in violation because of “blanket refusal”. 1. The issue of defining “in like circumstances’ is still in debate under 1202 and in chapter 11. ii. Chapter 11 investment issue in trucking services case 1. Note chapter 11 applies to “measures” 2. Go to 1139 for definitions of “investor” (includes beneficiary of trust and shareholders) and “investment” (note: in some circumstances does not include debt securities or bonds see the provision for important specifics) because relevant to 1102; must go to 201 to get definition of “enterprise” because it is relevant to 1102. 3. Panel say non-compliance with NAFTA is a disguised trade restriction. So not complying with NAFTA leads to violation of chapter 11. a. Prof. says: Case set precedent that IF a Party does NOT comply with NAFTA, THEN that Party has violated chapter 11 and 12 even when there is NO harm in fact. 4. USA was not even looking at Mexican applications and this was the problem. i. Department of Transportation v. Public Citizen (Supreme Court case pg 261) i. Petition for judicial review. The cause of action was FMCSA passed regulations so to comply with president Bush’s lifting of moratorium of Mexican trucking. Teamsters said that FMCSA had not properly reviewed Mexican trucking in light of CAA (clean air act) and NEPA
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ii. Had standing to sue because if Mexicans trucks came in they would be harmed. iii. Relevant to this case because FMCSA is passing regulations and there was no conformity assessment. iv. Truckers trying to force the EPA to make conformity assessment to show Mexican regulations not similar and also to buy some time before the moratorium is lifted v. S. Ct. said that argument of truckers was bad because only the president can lift moratorium so FMCSA had no authority to prevent Mexican trucks from coming to USA. vi. S. Ct. Holding: where an agency has no ability to prevent a certain effect due to its limited statutory authority over the relevant actions, the agency cannot be considered a legally relevant "cause" of the effect. Hence, under NEPA and the implementing CEQ regulations, the agency need not consider these effects in its EA when determining whether its action is a "major Federal action." Because the President, not FMCSA, could authorize (or not authorize) cross-border operations from Mexican motor carriers, and because FMCSA has no discretion to prevent the entry of Mexican trucks, its EA did not need to consider the environmental effects arising from the entry. vii. Profs point is SRM (standard related measures) issues are intrinsically linked to the S. Ct. case. j. Other services covered by NAFTA: i. Chapter 14 financial services ii. Chapter 13 Telecommunication: 1302(1) ensures movement of information across boarders but there may be issue with Canadian cultural exception. Nothing should impeded it unless … (see exception 1302(5)) NAFTA CHAPTER 11 - INVESTMENTS a. Chapter 11 is private investor to government disputes. b. Chapter 11 deals questions of foreign investment under NAFTA. i. Chapter 11 is ad hoc arbitration using ICSID or additional facility rules and enforced by NY convention. ii. IF Canada and Mexico are in a dispute they have to use UNCITRAL rules; cannot use ICSID because neither is a member, BUT recall that if USA is a party against either Canada or Mexico then since USA is a member of ICSID then can use additional facilities rules. c. We have a chapter protecting Foreign Investment because Parties want reassurance that their nationals and their country’s foreign investment will be protected. d. So need some element of legitimacy in the context of foreign trade and foreign investment: what are the elements of legitimacy? i. State government guaranteeing predictability 1. Need to have predictability in the investment realm so that business people know what will happen in the future. ii. Determinacy and coherence (Both are the foundation of a predictable regime.)
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1. Related to predictability. There must be coherency in domestic legal framework so others know how you will act in the future in a particular situation, and determinacy related to what processes you have in place, which have to be clear, and indicate in what you will do. iii. Transparency (note that this is also a goal of NAFTA) e. SECTION A – INVESTMENT (investment rules) i. Foreign Investment (generally): the definition is in Article 1139: need to be clear what is and what is not an investment. If not an investor then that person has no standing to bring a claim 1. Under the treaty, an investor of a NAFTA party is defined to include "a NAFTA party or state enterprise thereof, or a national or an enterprise of such party, that seeks to make, is making or has made an investment." An enterprise of a NAFTA party includes all forms of business entities "constituted or organized" under the laws of that NAFTA party. The provisions of the Investment Chapter cover not only investors from a NAFTA party, but also investors with substantial business activities in NAFTA states. Investment is defined to include ownership and all interests in an enterprise, such as certain loans to an enterprise and equity and debt security of an enterprise. Investment covers interests that entitle an owner to share in income or profits of the enterprise, assets of the enterprise on dissolution, real estate, and tangible or intangible property, including intellectual property. a. Equity capital is covered under NAFTA and any interest and dividends that come from those investments are covered under NAFTA. 2. What is NOT an investment? a. Any claims that arise out of Ks. ii. There are 2 schemes of foreign investment rules which must be addressed. First, Chapter 11 allows each country to pass its own foreign investment law. Thus, the first thing a panel will look to in a dispute is the foreign investments laws and regulations of a NAFTA party. Second, it will look to NAFTA’s rules. iii. Chapter 11 provisions apply to States/Provinces as well as the National government. iv. Also relevant is: Mexican Investment Law on pg 597 in document supplement v. Prohibition of Performance Requirements 1. NAFTA prohibits the imposition of performance requirements "in connection with the establishment, acquisition, expansion, management, conduct or operation of an investment of an investor of a Party or a nonparty in its territory." The list of performance requirements includes export performance, domestic content, domestic sourcing, trade balancing, product mandating, and technology transfer requirements. In addition to prohibiting these
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requirements, NAFTA prohibits a party from conditioning receipt of incentives in connection with an investment in its territory by requiring the investors of a NAFTA party or a nonparty to (1) give preference to domestic sourcing, (2) achieve a certain level of domestic content, or (3) achieve a certain trade balance by restricting domestic sales to some proportion of exports or foreign exchange earnings. NAFTA allows the NAFTA states, however, to condition the receipt of investment incentives on the location of production facilities, employment, employee training, or expansion of facilities in the NAFTA territory. f. ARTICLES: i. Article 1102: National Treatment – requiring treatment to another party “no less favorable than that it accords” to the Party’s own investors. 1. Under NAFTA Article 1102 National Treatment, you have to go back to GATT Article 3. Note: intent is NOT usually a focus of “like products”. 2. 1102(4): a prohibition against a minimum level of domestic equity is included in the national treatment provision. ii. Article 1103: requires MFN status to investments and investors. 1. National treatment and MFN principles apply to all measures relating to the "establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments." iii. Article 1104: provides that a NAFTA party must accord the better of either National Treatment OR Most Favored Nation treatment. iv. Article 1105: States the requirement that the treatment of investors of another party meet a minimum standard, incorporating a rule of “international law, including fair and equitable treatment and full protection and security”. 1. International Law: the law of treaties, and other things some convention points out as deserving of a look at. 2. Customary International Law: goes back to when nation states act in International community; it is tied into coherency and determinacy. It is basically the common law of the nations; called sometimes “law of nations”; it is recognized by the USA S. Ct., thus it is US law. It is flexible. 3. Define “fair and equitable treatment”. It is defined in terms of Customary International Law. The standard is “egregious”. Treatment that is “egregious” violates “fair and equitable treatment”. Another important implication of the standard is that foreign investors should not, in comparison with nationals, be put at a competitive disadvantage in obtaining permits or authorizations necessary to conduct business operations in the state concerned. 4. Minimum Standard of Treatment in Accordance with International Law (pg 523 documents supplement)
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a. Article 1105(1) prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to investments of investor of another party. b. The concepts of “fair and equitable treatment” and “full protection and security” do NOT require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens. c. A determination that there has been a breach of another provision of the NAFTA, or of a separate international agreement, does NOT establish that there has been a breach of Article 1105(1). 5. The only binding interpretation of Chapter 11 stated that the concepts of “fair and equitable treatment” and “full protection and security” do NOT require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens. v. Article 1106 1. Article 1106(1): a. Cannot have export performance levels b. Cannot have domestic content requirement c. Cannot require trade balancing d. Cannot have a volume of imports set; thus no quotas (1106(d)) e. Cannot restrict sales to the volume of the imports (1106(e)) f. Cannot require transfer of technology (1106(f)) i. Yet there are some exceptions, see the article provisions. g. Cannot have exclusive supplier requirements 2. Article 1106(2): a. Differentiating from SRMs (standard related measures) 3. Article 1106(3) a. Deals with advantages that local governments may give businesses (e.g. tax breaks). Cannot condition the receipt of the advantage on the factors discussed above in 1106(a). See the actual text of Article. 4. Article 1106(4) a. Says can conditions receipt of an advantage on, among other things, training of employees, providing a service, expansion of existing facilities or carrying out R&D. b. E.g. Canada giving Toyota a break in health insurance because Canada has national health insurance. E.g. Give tax break if come and do cancer research. 5. Article 1106(6)
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a. Contemplates SPS measure, environmental measure, and measures related to natural resources. 6. S.D. Myers v. Canada – the Tribunal held that UNLESS a measure was expressly prohibited under Article 1106 it was NOT actionable as a performance requirement. vi. Article 1107 1. Article 1107(1) - Deals with management and control. Says that NO party can require senior managers be of that country; CANNOT tell party how many senior officers have to be nationals. 2. Article 1107(2) – There may be a local requirement that a majority of the Board of Directors (or a board committee) be nationals or residents, as long as the investor is NOT therefore impaired in controlling the investment. vii. Article 1109 1. One of the most important provisions because allows for investors to get profits sent to their home country; allows for easy flow of profits and capital. 2. Article 1109(2): tells that transfers must be made in a freely usable currency and specifies how to determine the exchange rate. 3. Article 1109(3): essentially says that foreign investor can do want they want with their money 4. Article 1109(4): Contemplates laws dealing with bankruptcy, trading, etc. viii. Article 1110: deals with expropriation and with actions tantamount to nationalization or expropriation 1. Can nationalize and expropriate for these reasons and have to do these things (see the actual article 1(a)-(d) deal with what must be done if going to expropriate): Public purpose, have to be fair and equitable, and have to give money damages for it. Compensation should be paid in G7 currency. Compensation should be paid without delay and fully realizable. Problem arises with developing countries and Mexico because they have volatile currencies. a. “Tantamount to nationalization and expropriation” has caused much litigation and lawyers have argued that regulatory measure that have negative effects on investment are “Tantamount to nationalization and expropriation” b. See USA Chile FTA pg 534 of docs supplement because tells what expropriation is BUT only applies to the USA Chile FTA. c. Need to understand what is expropriation and this can be done by looking at the USA-Chile FTA. d. Also, there is no real clear easy way to distinguish between expropriation and nationalization. 2. Article 1110 of the NAFTA Investment Chapter provides for the protection of foreign investments against nationalization,
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expropriation, and other forms of interference that are "tantamount to nationalization or expropriation." The Article covers direct, indirect, and "creeping expropriation." In accordance with traditional principles of international law, the Article provides that investments may not be expropriated except: for a public purpose; on a nondiscriminatory basis; in accordance with due process of law; and upon payment of compensation as specified in the Article. 3. NAFTA provides that adequate compensation is a condition for lawful expropriation or nationalization and that compensation must be paid without delay, equal to the fair market value of the investment immediately before the expropriation took place, including interest from the date of expropriation, and be fully realizable. The compensation must also be fully transferable, as provided by the transfer article. 4. The combination of "fair market value in freely transferable dollars" provides the foreign investor the highest value for the expropriated property. ix. Article 1113: A NAFTA Party may deny benefits under Chapter 11 under certain circumstances. 1. 1113(1) - A Party may deny the benefits of this Chapter to an investor of another Party that is an enterprise of such Party and to investments of such investor if investors of a Non-Party own or control the enterprise and the denying Party (a) does NOT maintain diplomatic relations with the Non-Party (e.g.: Cuba). x. Article 1114(1) 1. It is specific to environmental measures. It says that nothing in Chapter 11 can prevent a party from adopting, maintaining, or enforcing any measure otherwise consistent with Chapter 11 that the party considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns. g. SECTION B OF CHAPTER 11 – DISPUTE SETTELMENT i. Chapter 11 has NO applicability to disputes between foreign investors and nationals of the host country, although such disputes may be subject to commercial arbitration. ii. What is unique is that a private investor can sue the government in order to get compensation for the government not following provisions under chapter 11. iii. Under this section Mexico gave up Calvo Doctrine for ONLY investments. Under NAFTA Chapter 11 an investor in Mexico may NOT submit a claim for breach of obligations by the Mexican government or state enterprises both to arbitration and to the national courts or administrative agencies. iv. ARTICLES 1. Article 1116 tells when can bring a claim
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2. 3.
4.
5.
a. 1116(2) says the SOL is 3 years from the “date on which the investor first acquired, or should have acquired, knowledge of the alleged breach”. We don’t know if it is actual knowledge BUT Prof. thinks it is. The problem arises in the “creeping” expropriation (where the government actions over time are challenged as being equivalent to a taking) scenario. In short, difficult to assess the date of the breach when creeping appropriation has occurred. i. Remember: chapter 20 deals with interpretation of provisions. Thus, a dichotomy can arise. For example, if there is interpretation issue in HFCS case under chapter 11, it may need to be addressed under chapter 20 proceeding if there is an issue of interpretation. Article 1118 says that parties should first try to settle through consultation. NOTE that this is NOT mandatory. Article 1120: says claim for arbitration can be brought under ICSID a. Canada and Mexico are NOT party to ICSID BUT are members of ICSID Additional Facility Rules, and thus those rules can be applied. Articles 1123 and 1124: deals with appointment of arbitrators. a. Article 1123 i. Countries are allowed to have 3 arbitrators on a panel ii. 1 chosen by Government, 1 chosen by the investor, and 1 decided by an agreement. 1. If no agreement, then secretary if ICSID chooses 3rd arbiter. iii. Once investor submits a claim, and it is found to be valid, the other country must have some kind of response. b. Article 1124(3): provides that the Secretary General shall appoint the presiding arbitrator from the roster of presiding arbitrators. The presiding arbitrator shall NOT be a national of the disputing party OR a national of the party of the disputing investor. Article 1128 allows on written notice to disputing parties, a party can make submission to tribunal on issue of interpretation. a. Note: pg 522 of document supplement provides interpretations to chapter 11. i. Section A: Access to documents – as long as parties agree they can publicize the rulings and awards. There is no general duty of confidentiality.
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1. Under 2(b)(i-iii) are exceptions to releasing the documents. 6. Articles 1130 – 1131 a. Applicable law is terms of NAFTA agreement, and use International Law to interpret these agreements. b. Tribunal avoids general interpretations. 7. Article 1131: a. So under US-Mexico or US-Canada dispute UNITRAL or ICSID additional facilities could apply. b. Blanket Prior Consent Rule: i. Parties are consenting to everything – once submit claim to arbitration they also submit it to UNCITRAL or ICSID Additional Facility Rules and thus each party has submitted to the rules. 8. Article 1133 deals with experts submitting expert reports. 9. Article 1134: deals with measures to protect parties rights. 10. Article 1135 deals with damages: can only be restitution or restoration of the property. There can be NO punitive damages. 11. Article 1136 a. 1136(1): An award made by a tribunal shall have NO binding force EXCEPT between the disputing parties and in respect of the particular case. b. 1136(3): Arbitral decisions are NOT immediately final; article 1136(3) explicitly contemplates the possibility of requests for revision or annulment. v. It is required that an outside party’s court hear the case under arbitration. E.g. in MetalClad, a dispute between USA and Mexico heard in Canada. vi. If one does not comply with the arbitral award to the complaining investor, the investor’s government can bring the matter to government-togovernment dispute settlement under chapter 20, charging that the failure to abide by the award is inconsistent with the offending government’s obligations under the NAFTA. vii. Are franchises an investment under NAFTA chapter 11? 1. Franchises is an enterprise; it also an interest in an enterprise (parent gets royalties and increases their presentation), and also under (h) interest arising from capital. Thus, you would want to advise client to invest a good amount of capital. a. Note: If there is a problem with franchise agreement (e.g. breach of K) it would NOT be covered under NAFTA. h. S.D. Meyers v. Canada (pg 357 of course book) i. Myer’s says that the Canadian measure violates 1102, 1105, 1106, and 1110. ii. Article 1102 Findings: 1. Prof. says case important because: The Tribunal looks at the public policy behind measures even if measure treats “like products” in different ways – “The Tribunal considers that the interpretation of
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the phrase "in like circumstances" in Article 1102 must take into account the general principles that emerge from the legal context of the NAFTA, including both its concern with the environment and the need to avoid trade distortions that are not justified by environmental concerns. The assessment of "like circumstances" must also take into account circumstances that would justify governmental regulations that treat them differently in order to protect the public interest. The concept of "like circumstances" invites an examination of whether a non-national investor complaining of less favorable treatment is in the same "sector" as the national investor. The Tribunal takes the view that the word "sector" has a wide connotation that includes the concepts of "economic sector" and "business sector." 2. Also, the emphasis in 1102 is the effect (or practical impact) -- The Tribunal takes the view that, in assessing whether a measure is contrary to a national treatment norm, the following factors should be taken into account: a. Whether the practical effect of the measure is to create a disproportionate benefit for nationals over non-nationals; b. Whether the measure, on its face, appears to favor its nationals over non-nationals who are protected by the relevant treaty. 3. Intent is important, but protectionist intent is NOT necessarily decisive on its own. The existence of intent to favor nationals over non-nationals would not give rise to a breach of Chapter 1102 of the NAFTA if the measure in question were to produce no adverse effect on the non-national complainant. The word "treatment" suggests that practical impact is required to produce a breach of Article 1102, not merely a motive or intent that is in violation of Chapter 11. iii. Article 1105 Findings 1. Article 1105(1) expresses an overall concept. The words of the Article must be read as a whole. The phrases . . . fair and equitable treatment . . . and . . . full protection and security . . . cannot be read in isolation. They must be read in conjunction with the introductory phrase . . . treatment in accordance with international law. 2. The Tribunal considers that a breach of Article 1105 occurs ONLY when it is shown that an investor has been treated in such an unjust or arbitrary manner that the treatment rises to the level that is unacceptable from the international perspective. That determination must be made in the light of the high measure of deference that international law generally extends to the right of domestic authorities to regulate matters within their own borders. The determination must also take into account any specific rules of international law that are applicable to the case.
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3. The fact that a host Party has breached a rule of international law that is specifically designed to protect investors will tend to weigh heavily in favor of finding a breach of Article 1105. iv. Article 1110 1. NAFTA article 1110 analysis does not really change. 2. In general, the term "expropriation" carries with it the connotation of a "taking" by a governmental-type authority of a person's "property" with a view to transferring ownership of that property to another person, usually the authority that exercised its de jure or de facto power to do the "taking." 3. The general body of precedent usually does not treat regulatory action as amounting to expropriation. Regulatory conduct by public authorities is unlikely to be the subject of legitimate complaint under Article 1110 of the NAFTA, although the Tribunal does not rule out that possibility. 4. The primary meaning of the word "tantamount" given by the Oxford English Dictionary is "equivalent." Both words require a tribunal to look at the substance of what has occurred and not only at form. 5. The Tribunal agrees with the conclusion in the Interim Award of the Pope & Talbot Arbitral Tribunal that something that is "equivalent" to something else cannot logically encompass more. In common with the Pope & Talbot Tribunal, this Tribunal considers that the drafters of the NAFTA intended the word "tantamount" to embrace the concept of so-called "creeping expropriation," rather than to expand the internationally accepted scope of the term expropriation. a. Note: So, the Pope and Talbot test is still in place. i. HFCS Case i. GATT Article 3 is one of main things involved in the HFCS case. ii. 3 important issues: 1. Article 1102 “in like circumstances” a. Claim under Article 1102: So 1102 argument is that sugar and HFCS are two products in the same industry and same substitutable products and are “in like circumstances” so should be treated the same. i. When addressing this issue the Mexican’s may divide the issue in that say that sugar is a Mexican investment and HFCS is a USA investment. Thus, sugar not the same as HFCS and HFCS is not a product produced in Mexico. One analysis will focus on the product/investment itself (like Japan alcoholic beverages); and other analysis is look at the intent of the measure and whether it had a protectionist effect and whether it has a beneficial effect (like in Malt beverages case).
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2. Claim under article 1110: Expropriation Argument under Article 1110 which deals with expropriation. a. What is an expropriation under article 1110? Are lost profits and loss of competitive edge enough to amount to expropriation? How do we know it is just the tax causing loss of sales? Have they lost beneficial use of investment or is it just more expensive? Is an investment becoming more expensive something that falls under 1110; where do we draw the line? 3. Argument under 1106: is the tax a performance requirement. a. Under 1106(3) there is argument that the tax is inappropriate because the benefits are contingent upon using sugar instead of HFCS. Prof. says: Problem is that it is skeptical of whether the tax is a performance requirement. j. MetalClad Case i. Article 1105: Fair and equitable treatment 1. Note that section 105 says that parties shall ensure that all measures are taken to give effect to the provisions in NAFTA. Under 102 the objectives of this agreement are to eliminate barriers in trade, etc. and 105 says that governments will take all necessary measures to comply with NAFTA. Article 105 imposes a duty on Federal government to ensure local governments comply NAFTA 2. “The conduct of an organ of a State, of a territorial government entity or of an entity empowered to exercise elements of the Governmental authority, such organ having acted in that capacity, shall be considered as an act of the State under international law even if, in the particular case, the organ exceeded its competence according to internal law or contravened instructions concerning its activity”. (Yearbook of the International Law Commission, 1975, vol. ii, p.61). ii. Article 1105 is an absolute rule; you do not compare people or parties. Just look to see if a person/investor was treated unfairly. iii. The issue of transparency comes into play. The court found that there was a duty of transparency that was imposed on 1105. The municipality processes were found to non-transparent. 1. The B.C. Ct. found that the arbitral body overstepped its bounds by imposing transparency on 1105. iv. Under NAFTA under 1105 the responsibility is on federal government to make sure state and provincial and municipal governments adhere to NAFTA. v. Panel said transparency is not to be inferred under 1105; it is NOT an element of national treatment. It is only an objective. 1. It is hard to define what transparency is; if it was an element it would put a huge burden on trade and governments that in order to treat a foreigner in same way as domestic products/producers all those policies would have to be transparent. As said, this would be a huge burden.
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vi. In MetalClad they found a violation of 1105 and 1110. 1. Because of 1105 violation, there was 1110 expropriation. In short, 1105 violation was indirect expropriation and thus it was one event in leading to the expropriation ending in the ecological decree’s means of expropriating the land. a. 1105 violations were essentially a “covert or incidental interference” (this is the standard and Prof. says this is a low standard) with the investor’s investment. 2. This case has a lot of implication for sovereignty, and placed a very low threshold for indirect expropriation. 3. Mexico permitted and tolerated the municipality and the municipality’s conduct was a violation of 1105 and was an indirect expropriation. The effect of the sloppiness at municipality level was expropriation. 4. Damages can include going concern value, interest in time to resolve this issue, value of the investment. k. MetalClad case in B.C. Ct. i. Looked to Customary Law and said 1105 does NOT carry a transparency requirement with respect to the parties. ii. B.C. Ct. disconnected transparency from 1105; and disconnected 1105 from 1110. iii. Found there was no expropriation PRIOR to the ecological decree BUT said the ecological decree was an expropriation. l. Pope & Talbot case (one of the lead cases on expropriation) i. Under 1102 arguments: 1. Canada distinguishes between de facto and de jure discriminatory measure and in the context of the discriminatory effect you must look to whether the measure disproportionately disadvantages foreign investors and domestic investors in like circumstances. The emphasis is on the effect of the discriminatory measure. Thus, Canada argues that the disproportionate advantage test should be applied. (See pg 17 of case marked as 1). 2. Tribunal dose not like it. Tribunal says that if you have a smaller part of the market then it automatically puts you into this disadvantaged category and thus this is too artificial. 3. So, the Tribunal does NOT use the disproportionate advantage test. RATHER it focuses on the “in like circumstances” and comes up with some kind of balancing test and they have a totality of the circumstances view of the case. 4. The tribunal looks to the intent of the measure and sees if the measure unduly undermines the investment objectives of NAFTA with respect liberalizing investments. (See pg 36 of case marked as 1). ii. ANALYSIS 1. So Professor says the analysis went something like this:
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a. Are the investors in like circumstances? And does the measure discriminate domestic and foreign investors in like circumstances? b. If it does, then it is in violation of 1102 only if there is no rational basis for the policy as determined by on its face is discriminatory and does it unduly undermine liberalization of investment objectives under NAFTA. 2. Pope and Talbot denies Canada’s test but does create a test linked to policy; the test is linked to rational basis a. The measure will stand (that is found not to be discriminatory) if in line with governmental policy, which means (1) it has not to be facially discrimination AND (2) must be in line with objective of NAFTA of liberalizing investment. m. Pope & Talbot case (second part re: 1105, 1106, and 1110) i. Claim under NAFTA Article 1110 1. Panel agrees that access to a market is a property interest subject to protection under Article 1110. 2. Case not only concerned with measure but also how the measure is implemented. It seems that the implementation of the measure is sometimes found to be in violation of NAFTA 3. Prof.: case important because: a. Panel says that market access is a property right b. Acknowledges creeping expropriation; it is not in article 1110 but has been referred to in Iran-US case. i. See pg 37 of case for test of expropriation: 1. Substantial interference test: whether the interference is sufficiently restrictive to support conclusions that the property has been “taken” from the owner. This is the standard/test used today. 2. Note “substantial” is looked at in terms of how much control the investor has lost. 3. Creeping expropriation was accepted and is now part of NAFTA Article 1110. ii. Claim in Pope, investor argues under NAFTA Article 1106 (performance requirements) 1. Panel finds Canada measure is an advantage that is linked to domestic content to keeping the softwood lumber in Canada. So there is a preference to just keeping the goods in Canada. In essence, Canada is giving competitive edge to Canadian softwood lumber producers/investors. Canada is creating a competitive advantage to Canadian softwood investors/producers. iii. ***Note when determining “like products” under GATT the most important consideration may be whether the goods are substitutable; difference in physical characteristics are not necessarily dispositive of
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XI.
whether the products are not like. Under NAFTA another criteria is used and is more important to the panel. NAFTA CHAPTER 19 – REVIEW AND DISPUTE SETTLEMENT IN ANTIDUMPING AND COUNTERVAILING DUTY MATTERS a. Introduction i. Chapter 19 is very limited in scope, applying ONLY to unfair trade (dumping and countervailing duty) actions ii. Chapter 19 operates using comparators - it has phrase “like or directly competitive products” iii. Chapter 19 defers to domestic law. Chapter 19 does not make decision of substantive law; rather Chapter 19 panel just reviews the decision of a regulatory agency - Chapter 19 panel is just a panel of review. iv. The standard of review is domestic law; information used is the information given by the parties or the best information available, the panel will not request more information and the panel does not make decision of substantive law. v. Dispute resolution under NAFTA chapter 19, unlike Chapter 20, begins with a request for an arbitral panel. No prior consultations are necessary because Chapter 19 cases are in essence appeals of prior rulings by a government agency that dumping has occurred and has injured a domestic industry. vi. Benefits of Chapter 19 1. It is a quick process 2. Bringing an antidumping case can act as a trade barrier; it can buy time so the government can do something. b. What a Chapter 19 bi-national panel does i. First, the bi-national panel replaces national judicial review with binational panel review. ii. Second, it determines whether or not the party’s administering agency made its determination “in accordance with the antidumping or countervailing duty law of the importing party”. The bi-national panel MUST follow the “general legal principles” that a court in the importing party would apply in reviewing the administering authority’s determination. The bi-national panel is limited in what it may do. It may NOT write a new determination (i.e. reverse the Authority’s decision), BUT either remand a decision for action NOT inconsistent with the panel’s determination, OR uphold the determination. The action of the panel may NOT be appealed in a party’s courts, BUT may be reviewed in the “Extraordinary Challenge Committee” procedure (this procedure is very limited). iii. The role of the bi-national panel is to determine whether the investigating authority has properly applied those portions of its antidumping or countervailing duty laws relating to material injury determinations. This finding by the bi-national panel MUST be “based solely on the record created during the administrative process and on the standard of review and the general legal principles that would apply in that country’s courts.
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iv. Does chapter 19 have to defer to the WTO? 1. Note well that a Chapter 19 panel MAY defer to WTO decisions if it wants. Note also that WTO/GATT defers to domestic authority that came up with the determination of injury. c. Code of Conduct i. There is a code of conduct – principle of the code is that the person must disclose interests that may create an appearance of impropriety or an apprehension of bias. (SEE supplement pg 422) ii. Panelists have to send letter to secretariat in order to disclose interests. iii. There is an ongoing duty to disclose things as they come up. iv. The Code of Conduct applies specifically to members and former members of panels established to review antidumping and countervailing duty determinations under Article 1904 OR Article 2008. Assistants and staff members of covered individuals are also bound by certain obligations. v. Test for Appearance of Impropriety or Appearance of Bias 1. The governing principle of the Code of Conduct is that a candidate under consideration for service on a panel or committee or a member of a panel or committee MUST disclose the existence of any interest, relationship or matter that is likely to affect the candidate’s or member’s independence or impartiality or that might reasonably create an appearance of impropriety or an apprehension of bias. An appearance of impropriety or an apprehension of bias is created WHERE a reasonable person, with knowledge of all the relevant circumstances that a reasonable inquiry would disclose, would conclude that a candidate’s or member’s ability to carry out the duties with integrity, impartiality, and competence is impaired. The test is drawn from the “reasonable person” or “objective observer” test enunciated in the Code of Conduct for United States Judges. d. Articles i. Selection of Chapter 19 Panelists – Article 1901 1. Chapter 19 panels consist of 5 panelists who are drawn from a preformed roster of a minimum of 25 judges, former judges, and lawyers from each NAFTA party. Within 30 days of a panel request, the involved NAFTA parties each select 2 panelists and, within 25 days thereafter, agree on the selection of the 5th panelist. In practice the 5th panelist rotates by nationality. a. Under Chapter 19 the parties begin by selecting 4 panelists and then they agree upon the 5th panelist. The chair of the Chapter 19 panel is selected by the panelists, NOT the parties. b. Panelists need to be judges. 2. ANNEX 1901.2 tells which people can be on the panel. The panelists have to be of good character; have to be a citizen of one the 3 parties; and have to be knowledgeable on trade law.
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3. Note that in the chapter 19 panel, the 5th panelist, which is the chairman, is selected last. Different from chapter 20 because the chair is selected first under chapter 20. If there is no agreement on the chairperson of the chapter 19 panel, then the chairperson is decided by drawing lots. ii. Article 1903 allows to bring statutory trade law 1. Important because can review determinations by domestic courts, and also review trade laws. 2. “Like products” language really comes in here iii. Article 1904: Provides that a panel must apply the applicable standard of review, the antidumping duty law, and the general legal principles that a court of the importing party would apply to a review of the final determination. The term "antidumping duty law" includes legislative histories, administrative practices, and judicial precedents, all concepts that have a rich application in common law. 1. Article 1904(1) tells that party shall replace judicial review of final antidumping duty determinations with bi-national panel review a. Just looks at what the agency looked at and checks to see if they examined information accurately. So the panel does NOT really look into the substantive parts of the decision. 2. Article 1904(3) - Chapter 19 panel convenes and applies the standard of review set out in ANNEX 1911 (use standard of review of domestic country) AND the general legal principles that a domestic court of the importing party (which is domestic law and international law) otherwise would apply to the review of a final determination of the competent investigating authority. In short, domestic law of the importing party AND international law apply. 3. Article 1904(11) – A party cannot appeal a panel decision to the domestic courts. 4. Article 1904(13): allows Party to avail itself to ECC (extraordinary challenge committee) when certain factors are met (e.g. gross misconduct; see ECC below) iv. Article 1905 1. deals with safeguard measures (section 201 type measures) a. If can prove have real safeguard measure, then can suspend certain things. So party can implement safeguard measure then allows them to investigate if antidumping has occurred i. Prof.: says article here to allow Mexico to harmonize their duty laws. b. Article 1905 provides that if a party's laws prevent a panel from being established, or have the effect of rendering its decisions nonbinding, or if these laws fail to provide a meaningful opportunity for judicial review, and a special committee agrees that one of these situations exists, the complaining party may suspend operation of the bi-national
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panel system, or suspend equivalent benefits to the other party. This is, of course, a remedy reminiscent of GATT. Article 1905 goes on to provide that when and if the problem is eliminated, any suspension of operation of the bi-national panel system would be terminated. This snapback provision, while potentially draconian in its impact, is an effective and fair method for ensuring that Chapter 19 continues to operate as the Parties anticipated it would. v. Article 1906 states that Chapter 19 shall ONLY apply prospectively to final determinations made after the entry into force of the agreement. e. U.S. Trade Act of 1974 (SEE FLOW CHART) i. Initiate a section 301 action – go to trade commission and show “substantial injury” or “threat of serious injury” 1. “Serious Injury” – means a significant overall impairment in the position of a domestic industry 2. “Threat of Serious Injury” – means serious injury that is clearly imminent. ii. Sec. 301(a)(1) Mandatory Action by US Trade Representative: if he determines that rights of the U.S. under trade law are denied, etc. 1. Unjustifiable acts and burdens deal with MFN treatment. 2. Was revised after NAFTA so have Sec. 301.2 iii. (c) this is not withstanding other trade agreements iv. (b) discretionary action: unreasonable or discriminatory has not be really defined 1. Unfair and inequitable a. i.e. denying workers’ rights 2. Easier to participate in reciprocity v. Sec. 302 any interested person: workers, firms, users of products vi. Sec. 303 When it is brought, you enter into consultation (mandatory) vii. Sec. 304 Requires transparency f. How To Initiate an Anti-Dumping Complaint Under USA i. DOC (Department of Commerce) 1. DOC is responsible for the dumping margin determination. It ascertains whether subject merchandise is sold in the USA at Less Than Fair Value. Have to bring petition to the Department of Commerce (DOC) that has reasonable basis to show that dumping is occurring. There must be at least 50% of industry support to bring the action (and does not have to be same industry, e.g. tomatoes and peaches could come together). a. Substantial threat, some sort of dumping i. If no, then dismissed ii. ITC (International Trade Commission) 1. Preliminary injury determination (reasonable indication of injury) – has to be on basis that the goods are being sold at below fair
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market value. ITC determines whether subject merchandise materially injures or threatens to injure a USA industry. a. Needs to see if there’s substantial injury b. Use comparison. 2. Final injury determination; if yes, then goes to DOC for Dumping order iii. THEN, back to DOC where they decide preliminary determination of dumping: a. There are verifications b. Briefs given c. Can have public hearings d. There is an estimate of the duties owed by importers and this must be posted in a bond and the imports are limited. e. Final determination i. If find no dumping, the case is eliminated 2. If dumping found, then issues dumping order. iv. DOC Final determination 1. If find no dumping, the case is eliminated 2. There is also a final determination of injury by the ITC. If ITC finds injury then goes back to DOC who executes Dumping Order. g. Extraordinary Challenge Committees (ECC) i. NAFTA allows a limited right of appeal to the ECC that reviews certain Panel decisions. However, appeals are only permitted when: (1) there has been gross misconduct, bias, serious conflict of interest, or other material misconduct on the part of a panelist; (2) there has been a serious departure from a fundamental rule of procedure; or (3) a Panel manifestly exceeds its powers, authority or jurisdiction, for example, by failing to apply the appropriate standard of judicial review. It must also be established that the action materially affected the Panel's decision, and that the decision threatens the integrity of the Bi-national Panel review process. ii. Each NAFTA country selects five sitting or retired judges as potential ECC members. From this roster, the two opposing countries in a dispute pick a committee of three. After each country selects one member, the two countries draw lots to determine which side gets to choose the third member. iii. The ECC either affirms the Panel decision or vacates it for remand to a new Panel. The ECC's rulings are binding with respect to the matter and the parties involved. As is the case for the Bi-national Panels, Chapter 19 of NAFTA expressly prohibits any Party to the Agreement from establishing legislatively a procedure to challenge ECC determinations in their respective court systems. 1. Under NAFTA Article 1904(13)(iii), an Extraordinary Challenge Committee can now vacate or remand a panel opinion if it finds that the panel "failed to apply the appropriate standard of review."
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XII.
iv. An Extraordinary Challenge Committee under NAFTA is explicitly authorized to examine a panel's analysis of substantive law and underlying facts. NAFTA CHAPTER 20 a. Chapter 20 constructs a three-stage dispute resolution process involving: (1) consultations, (2) a meeting of the Commission, and (3) nonbinding arbitration. b. Chapter 20 is the process for settling disputes for nearly all areas EXCEPT principally subsidy and dumping issues (chapter 19), and investment conflicts (chapter 11). c. Chapter 20 panel interprets the NAFTA treaty; Chapter 20 does NOT use ICSID rules because chapter 20 deals with questions of interpretation. d. Remember Chapter 20 is government to government. Remember New York Convention says arbitration awards are binding. This is embodied in US law in Federal Arbitration Act. e. Big difference between chapter 20 and chapter 19 is the selection of the panel. i. Chapter 20 involves the so-called “reverse selection” process in the sense that the parties select the chair of the panel first and then the four remaining panelists. RECALL that the selection process is different under Chapter 19. f. Selection of Chapter 20 Panelists: The arbitral panel process contemplates the use of a standing roster limited to thirty persons designated by the NAFTA Parties, with experience in "law, international trade, other matters covered by this Agreement or the resolution of disputes arising under international trade agreements" who are independent of the governments and comply with an applicable code of conduct (No conflicts of interest allowed for the panelists). Thus, the panelists need not be lawyers, and presumably, the "independent of the governments" requirement means that they cannot be government employees. Where there are no more than two disputing Parties, a group of five arbitrators will be chosen, normally from the roster. Interestingly, in a unique "reverse selection process," one Party chooses the two national arbitrators of the other Party. For example, in the Dairy Product Export Subsidies case, the United States selected the two Canadian panelists from a list of candidates offered by Canada, and Canada selected the American panelists from a list of candidates offered by the United States. The two governments choose the chairperson of the panel by agreement (Panel Chair is selected first and is chosen by mutual agreement); if there is no agreement, a Party chosen by lot selects the chair of the panel, who may not be a citizen of the disputing Parties. Thus, in the normally contemplated situation - and in fact in the two cases that have reached arbitration under Chapter 20 - the panels consist of two nationals from each of the disputing Parties, and a chairperson from a neutral country. Where all three NAFTA Parties are involved in the proceeding, the chairperson will be chosen in the same manner, but the Party complained against chooses two panelists, one national each from the complaining Parties, and the complaining Parties will choose two panelists who are nationals of the party complained against. g. ARTICLES
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i. Article 2004: dispute settlement under chapter 20 applies to disputes between parties regarding the interpretation or application of NAFTA OR whenever a Party considers that an actual or proposed measure of another Party is or would be inconsistent with the obligations of this agreement OR cause nullification or impairment in the sense of Annex 2004. ii. Article 2005: The NAFTA provisions which govern NAFTA and GATT dispute settlement procedures are in the seven-part Article 2005. The basic premise of this article is that disputes may be settled in either forum at the discretion of the complaining party. Exceptions for qualifications to complaining party discretion in choosing the forum are the subject of 3 sections of the article. First, before one NAFTA party initiates a proceeding in the WTO against a second NAFTA party, where the action COULD ALSO be brought under the NAFTA dispute resolution procedures, the initiating party MUST notify the third NAFTA party of its intention. Thus, a compliant by Canada against the USA must be preceded by notification to Mexico by Canada. If the third Party, in this case Mexico, would also like to be a complaining party, BUT would prefer that the matter be settled under NAFTA dispute settlement procedures, it MUST consult with the original complaining party and, UNLESS that original complaining party is successful in convincing the third party that the WTO is the better forum, the matter will “normally be settled under the NAFTA. In 3 cases the responding party may cause a matter to be held exclusively under the NAFTA. First, in any action where the responding party claims the matter is subject to NAFTA Article 104 (“Relation to Environmental and Conservation Agreements”); Second, where the responding party claims the matter is subject to Section B of NAFTA Chapter 7 (“Sanitary and Phytosanitary Measures”); and Third, where the responding party claims the matter is subject to NAFTA Chapter 9 (“SRMs”). 1. 2005(6) - once forum is selected, the party CANNOT take the dispute to another forum. Thus, if dispute is heard at WTO, then CANNOT have a chapter 20 panel hear dispute. BUT NOTE in HFCS, Mexico (complaining party) requested a chapter 20 panel and USA took it to GATT. THUS, Mexico could still have a chapter 20 panel after the dispute heard by GATT. iii. Article 2006: mandates that a country requesting Chapter 20 consultations shall deliver a written request to its own section of the NAFTA Secretariat. NO mandatory consultation stage BUT CANNOT get there without consultation. So there MUST be consultation before parties can go to an arbitration panel. iv. Article 2007: Commission convenes 1. Once a proceeding has been initiated under Article 2007 in NAFTA, the WTO is no longer available as a forum. Similarly, EXCEPT for the exceptions noted above, once a proceeding has been initiated under the WTO, that forum is exclusive. v. Article 2008: Request for an Arbitral Panel
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1. Allows request for arbitral panel. 2. 2008(4) – If a third party does NOT join as a complaining party in accordance with paragraph 3, it normally shall refrain thereafter from initiating or continuing: … (b) a dispute settlement proceeding in the GATT on grounds that are substantially equivalent to those available to that party under this agreement, regarding the same matter in the absence of a significant change in economic or commercial circumstances. vi. Articles 2009 – 2010 state the qualifications that are required for a person to serve as a Chapter 20 panelist. vii. Article 2011: Panel Selection - provides for one panel selection process where there are two disputing parties and another process where there are more than 2 disputing parties. When there are ONLY 2 disputing parties, the Article states that the chair of the panel is selected first; the chair is usually not from the disputing party. Then, select other panel members by having one party select two citizens from the other disputing party and vice versa. 1. Preemptory challenges are allowed and they are not limited. viii. Article 2013: Third Party Participation – Party that is NOT disputing Party can attend hearings, and make oral and written submissions to the panel and receive submissions from disputing parties. ix. Article 2014: Panel can hear experts x. Article 2016: Panels issues initial report. xi. Article 2017: after initial report, the panel renders a Final Report. 1. Panel can have separate opinions. xii. Article 2018: Implementation of Final Report – deals with implementation of Final Report. xiii. Article 2019: Non-Implementation - Suspension of Benefits 1. 2019(1) - If Parties do NOT reach mutually satisfactory resolution to dispute after the panel’s ruling, the complaining party can suspend benefits in the same sector or similar sector as that affected by the measure the panel found to be inconsistent. 2. 2019(2) - A Party can suspend benefits in another sector if it is not practical or effective to suspend benefits in the same or similar sector. 3. 2019(3) – used to determine whether the level of benefits suspended by a Party pursuant to paragraph 1 is excessive. xiv. Article 2022 - private parties in NAFTA territories are encouraged to arbitrate their commercial disputes. There is a committee that helps with this. h. Helms-Burton Act i. Prohibits importation of any products from Cuba into the USA. ii. LIBERTAD Act prohibits the importation into the USA of any product that is made or derived in whole or in part of any article which is the growth, produce, or manufacture of Cuba.
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iii. The LIBERTAD Act states that NAFTA Article 309(3) grants the USA authority to ensure that Cuban products or goods made from Cuban materials are NOT brought into the USA from Canada or Mexico. Article 309(3) states that the NAFTA allows a boycott by a Party that prohibits the use of another Party’s territory to circumvent the boycott. BUT Article 309(3) refers to “goods” and does NOT include the reference to “parts” contained in the LIBERTAD Act section 110(a)(3). Thus, maybe parts from Cuba can come into the USA under de minimus rule. iv. The Act has provisions restricting travel (that is, applies to travelers) and facilitating lawsuits against foreign companies that invested in Cuba. v. In the rule of origin context the Helms-Burton act could cause problems because Mexico and Canada do not have similar laws, and Canada and Mexico use materials from Cuba in their products. vi. The principle argument Mexico and Canada would make is that the Helms-Burton Act has an extraterritorial effect beyond that which is permitted under International law. vii. Note that issues related to dealing with Cuba may fall under chapter 11 because Article 1113(1) states that a NAFTA Party can deny benefits of Chapter 11 when investors of a Non-Party own or control the enterprise and the denying Party (a) does NOT maintain diplomatic relations with the Non-Party (note – USA has no diplomatic relations with Cuba). XIII. NAFTA Chapter 21 a. Chapter 21 contains exceptions to compliance with NAFTA. b. Some tax schemes are exempted. c. Canadian Cultural industries are excepted as discussed in class. d. Article 2102 – national security exception i. Allows a Party to enact laws for national security reasons. The party enacting the laws decides what actions “it considers necessary”. XIV. NAFTA Labor Side Agreement (NALC) a. Establishes for the parties a general obligation to maintain high labor standards. The parties are also obligated to promote compliance with and to effectively enforce their labor laws (Can only enforce up to the Party’s own domestic laws). b. The agreement makes clear that each party is entitled to adopt and maintain its own labor laws and standards. c. NAALC (North American Commission for Labor Cooperation) has a Council of Ministers and a Secretariat. In sharp contrast with the NAEC (Environmental agreement), the Labor Secretariat CANNOT review individual or organizational complaints concerning effective labor law enforcement. The labor Secretariat and Council are reduced to monitoring, study and report. d. Individual and organizational submissions about labor law, its administration or labor market conditions in a member state can be filed with National Administrative Offices (NAO) in each country. i. NAO is the main organization, each country has one, and NAO is a subdepartment of each country’s labor department ii. All submissions MUST allege a failure to enforce national labor law in another member state.
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iii. The 3 NAOs consult on another, but whether to review and report is a matter of discretion for the NAO receiving the complaint. There are NO structured complain and response procedures (as in the Environmental agreement). e. Any NAFTA member at any time can request ministerial consultations on all labor principles. IF consultations fail, a 3 person Evaluation Committee of Experts (ECE) can be created in most trade-related instances, BUT NOT if the issues concern collective bargaining, strikes or union organizing. f. ECE reports focus on comparative assessments of “patterns and practice” of NAFTA nations on mutually recognized labor laws. g. Persistent patterns of failure to enforce occupational health and safety, child labor or minimum wage laws can be arbitrated and awards enforced by monetary penalties. h. What is covered by the NALC? (pp 396-397 of supplement) i. Occupational Health and safety ii. Equal pay for men and women iii. Labor rights to organize iv. The right to strike v. Forced labor vi. Employment standards vii. Collective Bargaining viii. Child labor ix. Worker’s compensation x. Employment discrimination xi. Migrant Workers NAFTA Environmental Side Agreement (NAEC) (357 in supplement) a. NAEC Article 1 lists objectives. b. NAEC Article 2 states the Parties commitments c. NAEC Article 3: each country can develop its own standards of enforcement and laws. d. The supplemental agreement principally obligates the NAFTA parties to maintain high levels of environmental protection and to implement and enforce their environmental laws through the use of a variety of measures. i. NAEC focuses on the enforcement of the individual environmental protection standards of each nation. e. Under the agreement, implementation and enforcement measures must permit access to courts and administrative proceedings to compel compliance, provide remedies, and be transparent. f. Private parties, including interest groups, have a right to initiate proceedings before the Secretariat, alleging that a party is failing to effectively enforce its (domestic) environmental laws. g. NAFTA forces disputes about environmental standards into NAFTA dispute settlement under Chapter 20. Notably, such issues, if taken to the WTO by the complainant, can be brought back to NAFTA Chapter 20 by the respondent. h. The NAEC established the Commission for Environmental Cooperation (CEC). i. NAEC Article 9: Council Structure and Procedures
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j. k.
l.
m. n.
o.
i. The Commission’s Council of Ministers is composed of cabinet-level officers from each member state. NAEC Article 11: The Commission’s Secretariat investigates, reviews and reports with recommendations to the Council on environmental matters. The NAEC established 5 environmental dispute settlement mechanisms. i. The Secretariat may report on almost any environmental matter. ii. The Secretariat may develop factual records in trade-related law enforcement disputes. iii. The Council of Ministers can release that record to the public. iv. IF there is a persistent pattern of failure to enforce environmental law, the Council will mediate and conciliate. v. IF such efforts fail (mediation and consultation), the Council can send the matter to arbitration and awards can be enforced by monetary penalties. 1. Thus, the process is: (1) consultation stage, (2) then complaint goes to Commission, and (3) then complaint goes to arbitration. Environmental Arbitrations i. Environmental specialists will be the arbitrators chosen from a roster of 45 persons previously selected by consensus. The arbitration panel consists of 5 members, with the chair chosen first by consensus or lot. ii. Each nation then chooses 2 arbitrators from the opposite side. This “reverse selection” process is the same as in Chapter 20. Thereafter, the arbitration process is similar to that under Chapter 20. iii. If the NAEC arbitration panel finds a persistent pattern, the parties may agree on a mutually satisfactory “action plan” (enforcement is recommended to government to comply with their laws). If not, the panel is authorized to establish a plan. The panel may impose monetary penalties for failure to implement an action plan. IF the penalty is NOT paid, the complaining party may raise tariffs sufficiently to collect the monetary penalty. Guidelines for submissions on enforcement matters under Articles 14 and 15 of the NAEC – pg. 383 of supplement. NAEC Article 45: Definitions i. The definition of Environmental law is problematic ii. Exception: natural resources are exempted from the environmental side agreement under NAEC Article 45(2)(b). NOTE: The primary difference between the Labor and Environmental side agreements is that under the Labor agreement private parties do NOT have a right to petition the Secretariat for the preparation of a factual report as they do under the Environmental agreement.
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