Foreign Investor Protection Under NAFTA Chapter 11

Publication Date: September 2003

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Trade

Type:

Abstract:

Chapter 11 of the North American Free Trade Agreement (NAFTA) affords various protections to investors of one signatory nation having investments in the territory of another. Such foreign-investor protections exist in the large majority of modern bilateral investment treaties, but NAFTA is different. NAFTA is apparently the only instance where such protections, including a mechanism for resolving investor-state disputes by binding arbitration, have been made available for use against the United States by countries (Mexico and Canada) that invest heavily in the U.S. NAFTA, that is, has created not only the legal possibility of investor claims against the United States, but the actual occurrence of them as well.

The "actual occurrence" of several multi-million-dollar arbitration claims against the U.S. under Chapter 11 has sparked a lively debate as to the precise content of the substantive obligations it imposes on the NAFTA parties ? and as to whether the claims of foreign investors might chill enforcement of legitimate government regulation in the public interest. While the U.S. has won each of the three finally decided arbitrations to date, one could argue that the hour is still early. In response to such concerns, the Bipartisan Trade Promotion Authority Act of 2002 instructs U.S. negotiators of future trade agreements to ensure that foreign investors in this country receive "no greater substantive rights" than U.S. investors under U.S. law. The Act does not apply to NAFTA.

Part I of the report summarizes the arbitration procedure used when an investor from one NAFTA party believes that another NAFTA party (or one of its political subdivisions) has breached an obligation under Chapter 11, and the investor suffered loss as a result.

Part II examines one of the two most-debated Chapter 11 obligations imposed on the parties: the "fair and equitable treatment" of foreign investors. An important clarification of this phrase came in 2001, when the Free Trade Commission established under NAFTA declared that fair and equitable treatment creates no freestanding standard, but refers only to existing customary international law establishing minimum standards of treatment for aliens. However, customary international law offers few clear principles.

Part III treats the other widely debated Chapter 11 provision, on indirect expropriation. A claim of indirect expropriation is made when an investor believes that his/her investment in another NAFTA country has been so severely regulated as to have been effectively expropriated. Such claims have long been recognized in international law; the importance of NAFTA is that it has given rise to a significant number of them, including, for the first time, several against the United States. As with fair and equitable treatment, the meaning of indirect expropriation is uncertain, owing to scarce precedent, though it is clear the impact must be substantial.

Finally, Part IV describes the roughly 20 claims filed so far under NAFTA Chapter 11, including the six against the U.S.