After long months of uncertainty with respect to the survival of the North American Free Trade Agreement (NAFTA) in general – and its investment chapter in particular – and more recently regarding Canada's continued participation in any updated agreement, Mexico, the United States and Canada finally on Sept. 30, 2018, reached a new trilateral agreement named the United States-Mexico-Canada Agreement (USMCA). However, it leaves Canada out of the new Investor-State Dispute Settlement (ISDS) mechanisms1 agreed to on a bilateral basis between Mexico and the United States.
This new agreement is a win for Mexico, who as net importer of Foreign Direct Investment (FDI) managed to include an ISDS mechanism despite strong resistance from the U.S. administration. As a net importer of FDI, it was crucial for Mexico to maintain at least some reduced protection for U.S. companies investing in Mexico.2
The new investment chapter agreed to between the U.S. and Mexico modernizes NAFTA's Chapter 11 and brings it somewhat in line with other recent trade agreements signed by Mexico, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), although it contains particular provisions that differ from those in other agreements.
The key features of the new investment chapter of the USMCA of most interest to U.S. investors in Mexico are the following:3
The investment chapter of the USMCA is certainly good news for U.S. investors in Mexico as the more likely alternative seemed to be a complete loss of investment protection with the possible negative effects on investment flows this could have caused for Mexico. However, the new protections offered to most U.S. investors under the USMCA (those related with a covered government contract to a lesser extent) are much more limited than the ones provided by NAFTA Chapter 11.
Both U.S. and Canadian investors in Mexico are well advised to be aware of the three-year period following the entry into force of the USMCA during which time they will still be able to file claims under NAFTA Chapter 11. In parallel and afterward, Canadian investors could recur to the CPTPP ISDS to file disputes against Mexico once it enters into force.
Clients seeking more information or assistance on how the USMCA will impact them may contact the authors or a member of Holland & Knight's International Trade Group.
2 Earlier this year, in the context of uncertainty with regard to the survival of ISDS in a new NAFTA deal, Mexico joined the ICSID Convention, sending a positive signal to foreign investors.(See Holland & Knight alert, "ICSID Convention Now in Force in Mexico," August 27, 2018).
3 The ISDS chapter has never been formally used by Mexican investors against the U.S. under the ICSID Convention Rules (The ICSID website reports only seven cases in total against the U.S., six of which were brought by Canadian claimants). Meanwhile, U.S. investors have brought 13 cases against Mexico (out of 21 total ICSID claims).
4 Mexican Constitution Article 27 (VI), states that: "... The price fixed as indemnification for the expropriated property shall be based on its registered value, as it appears in the records of the cadastral bureau or tax collection office, regardless of whether such value was reported by the owner, or tacitly accepted by him, for having paid his taxes according to such base. Only the increased or decreased value of said private property due to any improvements or to any deterioration occurring after the tax appraisal base was set, shall be the portion of its value subject to the assessment of experts and to judicial resolution. The same provision shall apply to any objects whose value is not fixed in tax collection offices." Meanwhile Article 14.8 (2) of the USMCA, states that compensation for expropriation or nationalization, directly or indirectly, should "..(a) be paid without delay; (b) be equivalent to the fair market value of the expropriated investment immediately before the expropriation took place (the date of expropriation); (c) not reflect any change in value occurring because the intended expropriation had become known earlier; and (d) be fully realizable and freely transferable."
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.
Please note that email communications to the firm through this website do not create an attorney-client relationship between you and the firm. Do not send any privileged or confidential information to the firm through this website. Click "accept" below to confirm that you have read and understand this notice.