This morning, in a major address, Canada's foreign minister Chrystia Freeland laid out the government's objectives for the renegotiation of NAFTA. This is the key passage from her speech:
First, we aim to modernize NAFTA. The agreement is 23 years old. The global, North American, and Canadian economies have been transformed in that time by the technology revolution. NAFTA needs to address this, in a way that ensures we continue to have a vibrant and internationally competitive technology sector and that all sectors of our economy can reap the full benefits of the digital revolution.
Second, NAFTA should be made more progressive. We will be informed here by the ideas in CETA, the most progressive trade deal in history, launched by Conservatives and completed, proudly, by our government.
In particular, we can make NAFTA more progressive first by bringing strong labour safeguards into the core of the agreement; second by integrating enhanced environmental provisions to ensure no NAFTA country weakens environmental protection to attract investment, for example, and that fully supports efforts to address climate change; third by adding a new chapter on gender rights, in keeping with our commitment to gender equality; fourth, in line with our commitment to improving our relationship with Indigenous peoples, by adding an Indigenous chapter; and finally by reforming the Investor-State Dispute Settlement process, to ensure that governments have an unassailable right to regulate in the public interest.
One reason that these progressive elements, particularly on the environment and labour, are so important is that they are how we guarantee that the modernized NAFTA will not only be an exemplary free trade deal, it will also be a fair trade deal. Canadians broadly support free trade. But their enthusiasm wavers when trade agreements put our workers at an unfair disadvantage because of the high standards that we rightly demand. Instead, we must pursue progressive trade agreements that are win-win, helping workers both at home and abroad to enjoy higher wages and better conditions.
Third, this negotiation is a valuable opportunity to make life easier for business people on both sides of the border by cutting red tape and harmonizing regulations. We share this US administration’s desire to liberate our companies from needless bureaucracy, and this negotiation is a welcome chance to act on that goal.
Fourth, Canada will seek a freer market for government procurement, a significant accomplishment in CETA. Local-content provisions for major government contracts are political junk-food, superficially appetizing, but unhealthy in the long run. Procurement liberalization can go hand-in-hand with further regulatory harmonization.
Fifth, we want to make the movement of professionals, which is increasingly critical to companies’ ability to innovate across blended supply chains, easier. NAFTA’s Chapter 16, which addresses temporary entry for businesspeople, should be reviewed and expanded to reflect the needs of our businesses. Here again, CETA provides a model.
Sixth, Canada will uphold and preserve the elements in NAFTA that Canadians deem key to our national interest – including a process to ensure anti-dumping and countervailing duties are only applied fairly when truly warranted; the exception in the agreement to preserve Canadian culture; and Canada’s system of supply management.
It is quite clear from Freeland's remarks that on most points CETA is going to be the beginning point for Canada's negotiating position. This makes sense from several points of view. An integrated market with the United States, Mexico and Europe will be advanced through a NAFTA with similar terms to CETA, and that can only be good for Canada's participation in global supply chains. Also, given the tight time frame for the negotiations, Canada arguably gains momentum, and perhaps something of a first mover advantage, from having fully-developed legal text that it can pull off the shelf, which reflects the policies of the current government.
Civil society will be watching particularly closely how the Trudeau government fulfills its promise of ISDS reform. This is one area where the CETA model may not prove that workable. In CETA, discredited traditional investor-state arbitration was replaced by a judicial system, including a tribunal of first instance as well as an appellate mechanism. This aspect of CETA is not subject to provisional application, and there are legal issues in the EU that remain to be fully decided concerning its consistency with internal EU treaty rules; at the same time, Canada and the EU have now committed themselves to a multilateral initiative for an investment court. But among US officials, there is long-standing widespread resistance to the idea of an investment court replacing arbitration, whether in regional agreements or multilaterally. There is no indication that this is changing with the Trump Administration.
So how to find common ground? Cosmetic changes to the existing ISDS process in NAFTA will only inflame the ire of ISDS's many critics, important constituencies for the progressive Trudeau government. Freeland's red line is clear: "ensure that governments have an unassailable right to regulate in the public interest."
If focusing on the ISDS process results in a stalemate with Mr. Trump's negotiators, an alternative would be to work on trimming the substance of those guarantees to investors in NAFTA that are subject to ISDS. In fact, this could blend nicely with one of the Administration's own NAFTA renegotiation objectives: to ensure that foreign investors in the US are not given better treatment than similar US domestic economic actors. Where investor-state arbitration has been seen as threatening the "right to regulate in the public interest", this has been almost entirely due to broad readings by tribunals of obligations related to fair and equitable treatment, and expropriation. The provisions in question are quite elastic, and have sometimes been interpreted to provide a kind of insurance against regulatory change, where harmful to the foreign investor-even if that change is legitimate, non-discriminatory and in the public interest.
Confining claims in NAFTA ISDS to cases of discrimination, i.e. worse treatment of foreign than similar domestic investors,the standard of National Treatment, would go along way toward achieving Freeland's objective. Adding an exceptions provision modeled on Article XX of the GATT, which explicitly sets out the right to regulate to protect, inter alia, public morals, and human and animal life and health, would further ensure that there is "an unassailable right to regulate in the public interest."
Limiting investor protection to non-discrimination would at the same time assure the Trump Administration objective that the US not be bound to obligations that could result in having to give better treatment to a foreign investor than a like US domestic entity. Non-discrimination means just that: the obligations of each NAFTA party to investors of other parties are limited to equal treatment of domestic investors of the host state and investors of the other parties.
Is there any precedent for leaving out of a trade and investment agreement obligations on fair and equitable treatment and expropriation, which can make states liable even for legitimate non-discriminatory regulatory changes? The recent Japan-EU agreement, the JEEPA, is just such an example-and a relevant one because there also a stand-off exists between the parties about the acceptability of a judicial model of ISDS. Agreeing to disagree on the ISDS process and leaving procedural reform to later negotiations, while removing the jurisdiction of ISDS tribunals to find liability for non-discriminatory regulations in the public interest, may well be an attractive and workable solution in the present political context.
