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.