While the United States Mexico Canada Agreement (USMCA) is similar to its NAFTA predecessor in many ways, some experts are cheering the removal of a section little-known to the Canadian public — Chapter 11, Section B., or the Investors-State Dispute Settlement (ISDS) mechanism.
Since Canada, the United States and Mexico reached a consensus on an updated free trade agreement on Monday after over a year of negotiations, the focus of the USMCA deal has centered on a couple of things; successions in Canada’s dairy market and Canada’s hamstrung freedom to negotiate a free trade deal with China under new requirements that all signatories be kept up-to-date on trade talks with “non-market” economies.
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Behind the scenes of these major issues however, the Canadian government has been navigating a minefield of arbitration disputes brought against it by mainly American companies under NAFTA’s Chapter 11 — and these claims have cost taxpayers almost one third of a billion dollars.
Since NAFTA’s inception, Canada has spent more than $95 million in legal costs defending itself against investor-state claims and has paid out over $219 million in damages and settlements, according to a report prepared by the Canadian Centre for Policy Alternatives in January 2018.
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Gus Van Harten, a professor at Osgoode Law School and an expert in dispute settlement, is glad to see it go. He told Global News that the removal of ISDS means that “the new NAFTA is way better than the old NAFTA.”
What is ISDS?
The ISDS mechanism allows foreign investors to bypass the domestic courts and sue governments before private international tribunals. It’s historically been used to protect companies who invest in developing countries with potentially corrupt court systems.
The clause was initially added when Mexico joined the agreement to protect and reassure the interests of Canadian and American companies. However, as a result, the clause has largely been used by American companies to sue Canada.
“There were a lot of U.S. companies coming after the Canadian government for a lot of environmental challenges, as well as other challenges in Canada. So it was costing the Canadian government a lot of money to defend against those claims,” explained Walid Hejazi, an economics and policy professor at the University of Toronto’s Rotman School of Management.
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Canada has been sued 41 times under NAFTA’s investment section, more than either the U.S. or Mexico. While more than half of these cases have not been settled yet, of those that have been, Canada has won eight and lost nine.
The legal fees amount to almost $100 million, while settlements and damages have surpassed $200 million and arbitration will continue until outstanding disputes are settled.
Hejazi offered the example of Canada’s environmental policies as a common outlet for American corporate arbitration claims. Because Canadian environmental protection laws are sometimes more stringent than those in the U.S., American corporations would often sue the Canadian government over restrictions posed by these policies, he said.
What does its removal mean for Canada?
When Canada loses or settles one of these disputes, the costs to pay out damages and finance legal fees come out of Canadian taxpayers’ pockets.
“The beneficiaries are big companies with operations abroad, the losers are voters and taxpayers in your own country because they’re the ones who vote for a government that can’t do what it said it would do… and, as taxpayers, we have to cover the costs of awards against them,” Van Harten said.
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Furthermore, Van Harten explained that the fear of an ISDS claim would often make it difficult for decision-makers to follow through on promises to voters.
“Behind the scenes, we’ll be able to pass our own laws and regulations without being afraid of a big U.S. company bringing a multi-billion-dollar claim against us. The Canadian public isn’t aware of it, but behind the scenes, decision-makers are often intimidated because of these legal risks and the financial risks of these claims,” Van Harten explained.
In terms of Canadian sovereignty, Van Harten insisted that Canadian legislators are breathing a sigh of relief.
“In terms of Canada as a whole and our sovereignty, it’s just transformational. It was the No. 1 obstacle to actually calling ourselves an independent country in our entire legal framework, ever since we repatriated the Constitution. It’s as simple as that.”
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