Reviewing the Constitution of ISDS Tribunals, Based on CETA [L2]
To address the issues of unpredictability and inconsistency in ISDS rulings, Canada and the EU agreed to change the traditional rules11The traditional approach consists of each dispute being settled by three panelists, one appointed by the responding government, one by the complaining investor, and the third one by agreement of the two disputing parties or by arbitrators. The CETA approach gives no appointment role to the complaining investor. on tribunals and their constitution in favour of a “roster” approach.22The Canadian Bar Association, “CETA’s New Dispute Settlement Court.” Under CETA, the tribunal will have 15 members (five Canadians, five Europeans, and five third-country nationals) who will be appointed for a five-year term, renewable once. In turn, each dispute will be ruled by a panel composed of three of these appointed public international law experts (one Canadian, one European, and one third-party national), and each will be chosen randomly.
Canada and the EU have also agreed to create a permanent Appellate Tribunal to revise the tribunal’s decisions. If adopted under NAFTA 2.0, this new approach would improve arbitrators’ legitimacy, as they would no longer be appointed by foreign investors but by democratically elected governments. It would also considerably improve the predictability of dispute outcomes, since a permanent Appellate Tribunal would ensure more consistent and coherent decisions by arbitrators.
Combined, clearer definitions and investment principles; long-standing and publicly appointed tribunal members; and a permanent Appellate Tribunal would help avoid situations in which foreign corporations use ISDS tribunals to make unreasonable claims and challenge legitimate regulations.

Labour Rights and Environmental Protection: Raising the Standard [L2]

NAFTA was the first trade agreement to address labour and environmental issues at all. Since then, Canada, the United States, and Mexico have included labour standards and environmental protection in agreements that they have signed with other countries. In a renegotiated NAFTA, the labour and environmental agreements should be updated, based on these more recent trade deals, and incorporated into the main agreement.
The North American Agreement on Labour Cooperation (NAALC) and the North American Agreement on Environmental Cooperation (NAAEC) are the specific side agreements to NAFTA. The Wilson Centre has described these side agreements as “essentially toothless” and argues for incorporating the side agreement on labour into the main agreement, while increasing enforcement mechanisms for both.
NAALC calls for each of the three countries to ensure that it enforces its own labour laws. However, NAFTA countries cannot enforce labour laws on others’ territories, and enforcement is limited to a panel report and development of an action plan to resolve violations. The discrepancy in labour standards among the three NAFTA partners is one of the most common critiques made by opponents in both Canada and the United States.
More recent international agreements offer a model for strengthening labour and environmental standards. By most analyses, the TPP has the most ambitious labour provisions among recent free trade agreements because it requires that all member countries abide by the International Labor Organization Declaration on Fundamental Principles and Rights at Work. Canada has signed agreements on labour cooperation as part of its trade agreements with Chile, Costa Rica, Peru, Colombia, Jordan, Panama, and Honduras, and labour chapters are included in the agreements with the Republic of Korea and the EU. The U.S.–Colombia Trade Promotion Agreement of 2012 is another recent agreement for which workers’ rights were part of the negotiation. Colombia had to strengthen its labour laws before the U.S. would consider the treaty.
As with labour, the TPP negotiations produced a higher standard for environmental commitments than exists in NAFTA. TPP signatories are required to maintain current environmental laws and protect endangered species, based on existing commitments. TPP is the first trade agreement in history that addresses illegal, unregulated, and unreported fishing. Enforcement of violations would be conducted through the same dispute settlement provisions as the rest of TPP.
The Trump administration’s initial approach to environmental issues, as seen in its key appointments and early executive orders, raises doubts about its intentions regarding continent-wide environmental challenges, including climate change. Finding common ground is thus likely to be difficult, and NAFTA renegotiations are probably not the best venue for broader environmental discussions.
However, energy is one interest that is shared by all three NAFTA countries, and energy production and consumption account for two-thirds of global greenhouse gas emissions. The NAAEC side agreement created the Commission for Environmental Cooperation, which offers a forum for all three parties to collaborate on climate change issues. The Washington-based Wilson Center notes that the all three countries’ shared energy interests have already driven cooperation on environmental and climate issues. Last year, Mexico joined existing agreements between Canada and the U.S. to reduce methane emissions. Furthermore, Mexico launched a new environmental regulatory agency in 2015 that has enhanced contact with its U.S. and Canadian counterpart organizations.

Energy Sector: Removing the Proportionality Clause [L2]

Energy commodities (including oil, natural gas, coal, electricity, and refined petroleum products) are a significant component of Canada’s trade, accounting for one-fifth of Canada’s total exports in 2016, with nearly all of them going to the United States. Despite their importance, energy had relatively light treatment in the original NAFTA, with the “proportionality clause” and exemptions related to Mexico’s energy sector being the most substantive elements. However, given that some of these provisions are outdated and the importance of energy policy in addressing climate change, the opportunity to renegotiate NAFTA is timely.
The existing agreement was driven by the principles of self-determination (i.e., respect for the signatories’ constitutions) and the gradual liberalization of energy markets. NAFTA also recognizes the importance of having viable and internationally competitive energy sectors to advance the signatories’ national interests. These are principles that should continue to be the at the centre of North American energy trade and investment. But there are several potential areas for improvement.
NAFTA currently contains a proportionality clause, which stipulates that Canadian energy exports must maintain a consistent export/supply ratio, as determined by a moving average of this ratio over the most recent 36-month period.33See Article 605 of NAFTA in NAFTA Secretariat, Chapter Six: Energy and Basic Petrochemicals . The proportionality clause is only applicable to trade between Canada and the United States. Mexico does not have a similar requirement in NAFTA. Ever since its inception in the Canada–U.S. Free Trade Agreement, the implications of this clause have been widely debated in the context of Canadian energy policy and trade.
Critics of the clause have argued that it may push us to a point where we are unable to meet our own energy needs.44Laxer and Dillon, Over a Barrel . Another concern is that it could impede Canada’s transition to a lower-carbon economy by locking us into meeting U.S. energy needs.55Laxer, ”NAFTA and Proportionality: A Devil’s Bargain”. And, some believe the clause was imposed to ensure unlimited U.S. access to Canadian energy.66Laxer, ”If We’re Renegotiating NAFTA, Let’s Be Ready.”
A more sober and grounded look at the clause suggests that these claims are overblown and unfounded. The clause is likely to have been introduced to restrict the Canadian government’s ability to arbitrarily and unilaterally curtail energy supplies to the U.S., as was the case under Canada’s National Energy Program in the 1980s.77Holden, Canadian Oil Exports to the United States Under NAFTA . As well, the proportionality clause applies to both Canada and the U.S.—that is, it does not apply in only one direction. As such, Canadian energy consumers and end-users may benefit from the clause just as much as their U.S. counterparts.
There is little evidence that the proportionality clause has had an impact on North American energy trade and investments to date. When taken in concert with many of the challenges and changes that the sector is expected to face in the coming years, it is not clear what value the proportionality clause has provided in the past or could in the future. As such, there is little reason for it to be part of NAFTA 2.0.

Conclusion [L2]

The renegotiation of the North American Free Trade Agreement seems inevitable, with formal talks expected to begin in the second half of 2017. NAFTA has been responsible for reshaping much of the Canadian economy since it took effect, and the outcome of the negotiations will affect the prosperity of all Canadians for decades to come.
While this report is comprehensive and covers a broad range of issues related to NAFTA, it could not cover every possible item that might come up during what are likely to be extensive and lengthy negotiations. Issues that we did not cover include Canada’s low duty-free thresholds for international shipments (also known as “de minimis”), restrictions on foreign direct investment and ownership in protected sectors such as telecommunications and air transportation, and technical barriers to trade. Furthermore, the report does not examine the current political or diplomatic relationships among the three countries, nor does it address negotiating tactics that Canada could employ to best advance its interests.
Canada should expect these negotiations to be unlike any other that we have undertaken in recent decades. Since the 1980s, Canada has reached trade deals with the U.S., including the Canada–U.S. Free Trade Agreement, NAFTA, and the Trans-Pacific Partnership. In every case, the U.S. has consistently driven a hard bargain—with Canada and with all its other trading partners. However, there is a notable difference in the upcoming negotiations. While previous administrations arrived at the negotiating table with the goal of achieving agreement, it is unclear whether this is the preferred outcome for the current administration.
Nevertheless, Canada should arrive at the negotiations with a clear philosophy and strategy to build on the benefits of NAFTA and enhance it wherever possible.