Northamericanfreetrade Agreement (1992) : Frederickmabbott

NorthAmericanFreeTrade
Agreement(1992)
FrederickMAbbott
Contenttype: Product: MaxPlanck

EncyclopediaEntries EncyclopediaofPublic
Articlelastupdated: June InternationalLaw[MPEPIL]
2014
Subject(s):
Regional organizations — NAFTA (North American Free Trade Agreement) —

Political violence — Regional co-operation
Published under the auspices of the Max Planck Foundation for
International Peace and the Rule of Law under the direction of
Rüdiger Wolfrum.
From: Oxford Public International Law (http://opil.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved.
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Florida State University; date: 02 October 2015
A. Introduction
1 The North American Free Trade Agreement (‘NAFTA’)
establishes a free trade area comprised of the territories of
Canada, Mexico, and the US. The NAFTA entered into force on 1
January 1994. As between Canada and the US, it is the
successor to the Canada-US Free Trade Agreement (‘CUSFTA’) that
entered into force on 1 January 1989, which is suspended so
long as the NAFTA remains in effect. Negotiation of the
NAFTA was initiated during the US presidency of George HW Bushat
the suggestion of President Carlos Salinas of Mexico. This was
during a period in which Mexico was undergoing a transition
from State ownership to private ownership of key industries,
as well as more generallyopening the economyto imports and
foreigninvestment.From the standpoint of the Mexican government, the
NAFTA was an important element in a broader transition from a
closed to an open market economy. The US had long
sought to establish more favourable investment and trading terms with
Mexico, and the proposal for a free trade agreement was
consistent with expressed US interests. Two-way trade between Canada and
the US far exceeded trade between Canada and Mexico, and the
CUSFTA already promised to liberalize trade between Canada and its
major trading partner. Nonetheless, Canada’s participation in the negotiations
allowed it to revisit some important subject-matter and to
otherwise remain engaged in a broader US plan for an
eventual hemispheric Free Trade Area of the Americas(FTAA) (which
ultimately did not materialize).
B. Background
2 The political underpinnings of the NAFTA are significantly different than
those of the European Union (‘EU’), and the differences are
reflected in the characteristics of the institutions and terms of
these two prominent regional arrangements. The project for European
integration was initiated following World War II. In addition to
promoting the rapid rebuilding and integration of European
economies, the architects of European integration sought to
establish a framework for political cooperation that would reduce
prospects for future regional conflict. The Treaty of Rome (Treaty
Establishing the European Economic Community [signed 25 March
1957, entered into force 1
January 1958] 294 UNTS 17) placed significant legislative power in
the hands of the Council of Ministers, and created a permanent
judicial institution, the European Court of Justice, with substantial
powers in relation to Member States (European [Economic] Community;
European Union, Court of Justice and General Court). The Treaty of
Rome embodied the idea of free movement of persons throughout
the Community, and established a common commercial policy. These
key features of the European Economic Community were
intended to bring the people of Europe closer together economically and
politically.
3 The prospect of enhanced political integration did not motivate any

of the NAFTA parties. There was no internal or external pressure for
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a framework to prevent future military conflict. At that time, there
was no significant political constituency in the US that
sought to facilitate free movement of Mexican nationals. To the
contrary, one of the political ‘selling points’ of the NAFTA was
that, by helping to stimulate economic development in
Mexico, it would reduce pressures for northward migration. As a
consequence of this overall political dynamic, and taking into account
constitutional concerns that might have arisen in all of the
States Parties from a ‘deeper’ integration proposal, the decision-making
institutions of the NAFTA are weak and relativelynonintrusive—an
analogy might be drawn to the initial post-World War II attitude of
Great Britain toward the European Community project, and to
Britain’s first preference for a regional European trading arrangement
that did not include a significant level of political integration
(European Free Trade Association [EFTA]). The Agreement liberalizes
trade in services and addresses in a limited way the
movement of professional service providers, but it does not
provide for the free movement of persons among the territories of
the States Parties.
4 There was significant political opposition in the US to the

negotiation of the NAFTA, particularly from organized labour and
environmental groups. Labour unions argued that further opening the US market to
exports from Mexico would encourage US businesses to relocate
manufacturing plants and jobs in Mexico to take advantage of
lower labour costs and weaker regulation. Environmental groups argued along the
same lines, but emphasized that weak Mexican environmental standards
and enforcement would effectively turn that country into a
haven for engaging in environmentally unsound manufacturing practices,
which would in turn create pressure to ‘ratchet down’ US
environmental protections to equalize the playing field. Labour unions
found an unlikely ally in a wealthy Texas entrepreneur, Ross
Perot, who as a ‘third-party’ candidate for the US presidency
in 1992 based his campaign on the loss of domesticjobs
that would result from the NAFTA. The votes that Ross Perot
garneredin the November 1992 presidential election arguably influenced the
outcome of the Bush–Clinton contest. Perot’s campaign certainly increased the
general public’s attentionto the NAFTA. It is fair to say that
no US trade initiative before or after has generated the level of
domesticpolitical attentionas was manifest during the NAFTA debate. By the
time the Uruguay Round results were brought before the
US Congress in 1994, the country had fairly well exhausted its
interest in trade policy, and the World Trade Organization (WTO)
congressional approval process generated far less public interest.
5 President William Jefferson (‘Bill’) Clinton entered office subsequent to the

signing of the NAFTA by the parties on 17 December
1992, but prior to US congressional approval of the NAFTA. His
Democratic Party was traditionally supported by labour unions, and was
friendlierto environmental protection interests than the Republican opposition.
Labour unions and environmentalists largely opposed the NAFTA that had
been drafted by the GHW Bush Administration, placing the newly elected
President Clinton in the awkwardposition of relying on Republican
congressional support for approval of the agreement, while also
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needing to attract at least a modest Democratic constituency. To
accomplish this, the Clinton administration negotiated two ‘side
agreements’ to the NAFTA. These are the North American
Agreement on Environmental Cooperation (1993) (‘NAAEC’) and the
North American Agreement on Labor Co-operation (1993) (‘NAALC’).
As the Republicans would not support strong environmental and
labour protections, the side agreements were essentially ‘soft’. Yet
their conclusion was enough to satisfy a sufficientnumber of
Democratic congressional representatives so as to permit approval of the
NAFTA. Immediately prior to the congressional vote there was considerable
uncertainty as to whether the NAFTA would be approved by the
US House of Representatives, but in November 1993 the
agreement was in fact approved by a comfortable margin
(234:200 votes in the House of Representatives and 61:38 votes in
the traditionally more free-trade supportive Senate).
6 The NAFTA follows the customary ‘free trade area’ agreement

model described in Art. XXIV General Agreement on Tariffs and
Trade (1947 and 1994) (‘GATT’). The NAFTA is structured to reduce
or eliminate tariffs and quotas on trade in goods between the
Parties. The NAFTA extends to liberalization of trade in services, as now
covered by Art. V General Agreement on Trade in Services
(1994) (‘GATS’). In addition, the NAFTA provides for liberalization of
restrictions on foreign direct investment, and establishes protection
from nationalization or expropriation. The NAFTA is thus broader in
terms of regulating economic activity than the classical ‘free
trade area’ agreement as described in the GATT 1947 (Free
Trade Areas).
C. Content and Purpose of the Agreement

7 In a ‘free trade area’ the members reduce or eliminate
tariffs and quotas as between themselves,but do not establish a
common outer tariff wall. This is the structureof the NAFTA, in
which tariffs and quotas are effectively eliminated for trade in
goods between the three States Parties. However, each State Party maintains
its own schedule of tariffs applicable to goods from third
countries, so that the tariff rate applicable to an imported
product may differ depending on whether the importing country is
Canada, Mexico, or the US. In order to avoid tariff rate
‘shopping’ by exporters to the NAFTA countries, the
agreement establishes complex rules of origin that limit tariff-free
transit among the NAFTA Parties to goods that originate within the
territory of the NAFTA, or which undergo a specified level of
‘transformation’ within the NAFTA territory. The level of regional
transformation that would be required to qualify for tariff-free
transit was one of the most controversial subjects of the NAFTA
negotiations, particularly as this affected the automotive, textiles, and
computer sectors. The NAFTA includes both general rules regarding
‘regional transformation’—which involves movement among specified tariff schedule
headings (and subheadings)—and rules applicable to specific sectors. For
an automobile to qualify as a regionally transformed
good, 65% of the content of the automobile, including the
labour component, must have been produced within a NAFTA party.
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This represented an increase from the 50% level for automobiles
under the CUSFTA, and this increase was the subject of considerable
concern in Japan. It is interesting to note that Japanese
manufacturers substantially increased their direct investment in automobile
manufacturing plants in the NAFTA territory, particularly in the US,
followingentry into force of the NAFTA.
8 Tariffs and quotas among the three NAFTA parties were scheduled for
elimination immediately, and over 5, 10, and 15-year time frames. The
vast preponderance of tariff reduction would be completed by the
10th year. In fact, the States Parties implemented several rounds of
accelerated tariff reductions. Tariff and quota reduction with respect to
agricultural products was essentially subject to bilateral agreement between the
States Parties. Most of the products for which the 15year time
tariff reduction period applied were in the agriculture sector. As
between the US and Mexico a complete programme of
tariff and quota elimination in the agricultural sector has
been implemented. The US and Canada preserved their CUSFTA
agriculture commitments, continuing to reserve in the NAFTA a
few agricultural products against tariff elimination, and Canada continues
to apply some tariff rate quotas, particularly on US dairy and
poultry products. Part of the NAFTA process for eliminating
restrictions in the agricultural sector involved the ‘tariffication’ of
quotas, which involves converting the trade effect of quantitative
limitations on agricultural imports into tariff rates. In some
cases the result takes the form of ‘tariff-rate quotas’ that
increase once a certain quantity of goods has crossed the border. The
1994 GATT Uruguay Round Agreement on Agriculture similarly provided for
tariffication of quotas (WTO Agreement on Agriculture [signed 15
April 1994, entered into force 1 January 1995] 1867 UNTS 410). That
certain agricultural tariffs would require a relativelylong phase-out is
logical because such tariffs—particularly those that were converted
from restrictive quotas—would be higher than for other products,
and also because certain parts of the agricultural sector involve
politically sensitive producing regions and groups. There have been a
few serious disputes regarding implementation of the tariff elimination
commitments in the agricultural sector (see North American Free
Trade Agreement, Dispute Settlement). However, in the final
analysis, the NAFTA provided for nearly complete elimination of tariffs and
quotas on trade between the parties by the end of the 15-
year reduction period, and this has been carried out.
9 The NAFTA imposed significant limitations on duty drawback or

remission schemes between the parties, which had already been eliminated
between Canada and the US in the CUSFTA. This would effectively
eliminate most of the trade-rule incentives attached to
Mexico’s well-known Maquiladora programme. Under that programme, importation
into designated areas of Mexico of parts or components for the
purpose of local assemblyand export (usually to the US) would
qualify for refund or drawback of tariffs otherwise paid to
Mexico. US exports of parts or components to Mexico also
enjoyed preferential treatment upon re-entry into the US. The
benefits of the Maquiladora programme also were enjoyed by European
and Japaneseexporters of parts and components intended for assemblyin
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Mexico and export to the US. Given that US exporters
would enjoy duty-free export and import for NAFTA-origin goods, only
European, Japanese, and other third country users of Maquiladora
facilities would suffer from the NAFTA’s elimination of this duty
drawback scheme. This helps to explain why both the European
Union and Japan were anxious to conclude free trade agreements with
Mexico followingentry into force of the NAFTA. With new free trade
areas, exporters from these countries would also enjoy duty-free
importation into Mexico. 10 The NAFTA broadly liberalizes
trade in services (Chapter 12) among the parties and their nationals by
incorporating a general rule of ‘national treatment’ (NationalTreatment,
Principle). However, the NAFTA also permits the parties to maintain
exceptions from national treatment by listing regulatory restrictions in
annexes to the agreement. When the NAFTA was concluded, the
StatesParties agreed that sub-federal units, ie, states and provinces,
could retain nonconforming measures pending adoption of annexed lists of such
nonconforming measures. Subsequently, by agreement of the trade
ministers, the States Parties dispensed with the inclusion of
annexed lists of non-conforming sub-federal measures, allowing them to
remain in effect. The NAFTA excludes a few important sectors from
services liberalization coverage, including air and maritimetransport, and
basic voice telecommunications. Telecommunications service liberalization was
subsequently agreed to under the WTO GATS system. Cross-border
trucking services were scheduled to be liberalized over a six-year
period. However, public safety and labour concerns in the US
blocked the later stages of implementation of trucking liberalization.
Mexico initiated a NAFTA Chapter 20 dispute settlement proceeding
against the US because of the latter’s failure to implement the
crossborder trucking agreement, and was largely successful (Cross-Border
Trucking Services USA-MEX1998-2008-01). In 2009, Mexico imposed retaliatory
tariffs on US goods followingfailure by the United States to
implement the recommendations of the dispute settlement panel. On
6 July 2011, the United States and Mexico adopted a
Memorandum of Understanding further to which the United States has
implemented a three-year Cross-Border Trucking Pilot Program through
which a number of Mexico-based trucking companies have been
authorized to transport goods into the United States. It is
intended that the authorization program operatedby the US Department
of Transportation will be made permanent once satisfactory compliance
by Mexican trucking companies with the requirements of the pilot
program has been verified. Mexico has withdrawn its retaliatory tariffs.
11 The NAFTA liberalization of telecommunications (Chapter 13) and

financial services (Chapter
14) are addressed by rules complementary to the general chapter on
services. Althoughthe NAFTA did not open the basic voice telephone
market, it did open the value-added services market. Chapter 13
includes rules on non-discriminatory access to telecommunications
transport networks. The financial services chapter included limitations on
foreign banking penetration of the Mexican market during a 10-year
transition period, subject to certain limited extensions. The financial
services chapter includes rules regarding the types of juridical entities that
may be established by foreign owners (eg, branch banking is limited).
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12 Nationals of third countries may take advantage of the
services liberalization rules of theNAFTA provided that they establish a
commercial presencewithin the NAFTA territory. From a practical standpoint,
the services market of the NAFTA is open to nationalsand
enterprises of third countries. This is consistent with Art. V.6
GATS.
13 Investment liberalization (Chapter 11) is accomplished through the

adoption of a ‘nationaltreatment’ standard. Investorsand investments
of NAFTA party nationalsare to be treated the same way as
investorsand investments of ‘local’ nationals. As with the
services liberalization, the NAFTA investmentchapter includes annexed exceptions
from national treatment which the States Parties are permitted to
maintain. The NAFTA investment chapter essentially provides the
customary international law standard of protection against nationalization or
expropriation. What is added, in particular, is a third-party
dispute settlement mechanism, using either the facilities of the
International Centre for Settlement of Investment Disputes (ICSID) or the
United Nations Commission on International Trade Law (UNCITRAL) arbitration
rules, for disputes between private investorsof a State Party and a host
government. Several such proceedings have been conducted. It may
be briefly noted here that Chapter 11 investor-State dispute settlement
has addressed issues that may not have been contemplated by
NAFTA’s trade negotiators such as whether US courts meet international
standards of due process, or the manner in which US
States regulate the environment. This has led to some discussion of
limiting the scope of Chapter 11 dispute settlement. Third country
nationalsmay take advantage of the NAFTA investment chapter
rules, assuming they are doing business within the NAFTA territory.
14 The NAFTA includes Chapter 17 on intellectual property (‘IP’). This

chapter was negotiated contemporaneously with the WTO Agreement on
Trade-Related Aspects of Intellectual Property Rights (1994) (‘TRIPS’) and for
the most part incorporates the same terms. There are, however,
some material differences. The NAFTA includes a provision(Arts 1711 (5) and
1711 (6)) regarding the protection of regulatory data submitted
in connection with the approval of pharmaceutical and agricultural
chemical products that is more restrictive than the equivalent
provisionin the TRIPS Agreement (Art. 39 (3)). The NAFTA provision
effectively requires the grant of marketing exclusivity for a
reasonable period, normally five years. In addition, the NAFTA IP
chapter obligated Mexico to provide ‘pipeline’protection for
pharmaceutical patents previously granted in the US or Canada with
respect to products not previously placed on the market in
Mexico (Art. 1709 (4)). This ‘pipeline’ provisionapplied only to patents
granted in the Parties and was one of the factors that induced
TRIPS negotiators from third countries to insist upon a
most-favoured-nation undertaking in the TRIPS Agreement (Most-Favoured-
Nation Clause). Canada effectively agreed to eliminate its ‘license of
right’ system of compulsory licenses for pharmaceuticals as a
consequence of the NAFTA IP chapter, although it was equally
under pressure to do so in the TRIPS negotiations. In the
audio-visual services sector, Mexico made a number of reservations regarding
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market access, such as requiringthat a certain percentage television
broadcast time be reserved for Mexican nationals.
15 The NAFTA rules on antidumping (‘AD’) and countervailing duties

(‘CVD’) require the parties to comply with their own domesticlegislation
on these subjects. The question whether a party, in fact, has properly
applied its own AD/CVD law is subject to dispute settlement
under Chapter 19 (see below para. 20).
D. Institutional Structure and Domestic Implementation

16 The main decision-making institution of the NAFTA is the Free
Trade Commission (‘FTC’) comprised of the trade ministersof the
respective parties. The FTC is required to meet at least
annually. The FTC has rather limited powers which extend to overseeing
implementation of the agreement, appointing dispute settlement panels and
making recommendations to the States Parties. The FTC may negotiate
conditions of accession with third countries, but it is
not authorized to adopt accession agreements. The trade minister of
a country typically has some significant authority to make adjustments
to trade policy execution, and the three NAFTA party trade
ministers acting together,on the basis of their inherent authority,
have some significant governance power that is more or less
independent of NAFTA provisions.
17 The NAFTA establishes a Secretariat, but this is merely a

clearinghouse for information. The power and authorityof the
NAFTA decision-making institutions is not in any measure comparable
to the power and authorityof the decision-making institutions of the
European Union. The NAFTA FTC does not have the authorityto
adopt ‘secondary legislation’ on behalf of the parties, as do
the EU Council and Parliament. There is no NAFTA institution
comparable to the European Commission with a charter to
implement and to enforce the agreement. While there is a
NAFTA dispute settlement mechanism, it is not in the nature of
the European Court of Justice with the power to issue
rulings directly in the law of the States Parties, except in the
limited case of antidumping and countervailing duty determinations. The
relative lack of power and authorityplaced in the central NAFTA
institutions consciously reflects that none of the NAFTA parties was
seeking ‘deep integration’ of political and social institutions on the
North American continent.
18 The NAFTA does not provide for a common external trade policy
among the States Parties. Each remains free to conduct its own
foreign trade policy, provided that the policy does not violate the
terms of the NAFTA. Since adoption of the NAFTA, the US has
negotiated a substantial number of free trade agreements with
other countries, including, for example,Jordan, Australia, Singapore,
Chile, Morocco, South Korea and Central America (Central America-Dominican
Republic-United
States Free Trade Agreement). Mexico has concluded a wide-ranging free
trade agreement with the European Union (European Union–Mexico Free
Trade Agreement [signed 23 March 2000, entered into force 1 July
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2000] [2000] OJ L276/45), and free trade agreements with
other countries, including, for example,Japan. Canada has negotiated a
number of bilateral free trade agreements, including with Colombia,
EFTA, Panama and Peru.
19 The NAFTA includes a panel dispute settlement mechanism (Chapter 20)

for intergovernmental disputes under the agreement. A NAFTA Chapter 20
dispute settlement panel makes a determination and recommendation to the
FTC regarding the subject matter of the dispute. The States
Parties should endeavour to resolve the matter based on the
panel findings. The party whose measures are inconsistent with the
agreement is expectedto bring its measures into compliance. If
it does not do so, the complaining party is entitled to
withdraw equivalent concessions. There is no appellate mechanism
in Chapter 20 dispute settlement.
20 The NAFTA contains a separate dispute settlement mechanism (Chapter 19)

for antidumping and countervailing duty claims (this mechanism is also
described in the NAFTA Dispute Settlement). Panels under this
mechanism make determinations regarding whether a State Party has
properly applied its AD/CVD laws. The decisionsof the NAFTA Chapter 19
panels are binding on the administrative authorities of the country
making the determination. They are subject to a limited extraordinary
challenge based on allegations of misconduct of the
panellists. The Chapter 19 dispute settlement mechanism has
been fairly heavily used.
21 As noted earlier, there are two side agreements to the

NAFTA; these are the NAAEC and the NAALC. Each of these
agreements includes a statement of principles regarding the
policies the parties should follow in the respective areas of
governance, though the respective principles are not established as
binding norms. Each side agreement establishes a governing
body (the NAAEC Commission on Environmental Cooperation and the
NAALC Commission for Labor Cooperation) that plays principally an
advisory role. Neither has the authorityto adopt legislation for the
parties. Each of the side agreements contains its own dispute settlement
mechanism, though these are rather limited affairs.
22 When it adopted the NAFTA Implementation Act, the US Congress

expresslydenied selfexecuting or direct effect of the agreement in
US law. The agreement is precluded from having direct
effect in Canada as a matter of constitutional interpretation. It
appears that direct application of the NAFTA is permitted as a
matter of Mexican constitutional law (as noted in a Chapter 19
panel report).
E. Concluding Assessment
23 The rapid increase over the past decade of imports into the
US from China, and the outsourcing of US jobs to India, has
shifted the focus of the US public away from the NAFTA and
toward Asia.
Mexico is grappling with internal issues that likewise divert attention
from external trade.
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Nonetheless, the NAFTA remains the subject of some political controversy as
labour unions in the US continue to stand in opposition, and
some NGOs assert that the NAFTA has harmed the interests of
Mexico’s less affluent farm operators. Yet regardless of the
changeable political environment, the geographical proximity of the
NAFTA parties and the substantial cross-border movement of
persons between them virtually assure that this legal framework for
trade relations will remain important. As some of China’s advantages as
a low-cost manufacturing platform recede, and with some escalation in
geopolitical tensions, it will not be surprising if US-based
multinational enterprises redirect some of their production activity into
the NAFTA region.
Select Bibliography
GC Hufbauer and JJ Schott NAFTA: An Assessment (Institutefor
International Economics Washington DC 1993).
FM Abbott Law and Policy of Regional Integration: The NAFTA

and Western Hemispheric Integration in the World Trade Organization
System (Nijhoff Dordrecht 1995).
FM Abbott ‘The North American Integration Regime and its
Implications for the World Trading System’ in JHH Weiler (ed)
The EU, the WTO and the NAFTA (OUP Oxford 2000) 169–99.
D Markell and J Knox (eds) GreeningNAFTA: The North
American Commission for Environmental Cooperation (Stanford
University Press Stanford 2003).
DLederman WF Maloney and L Serven Lessons from NAFTA for
Latin America and the Caribbean (World Bank Washington DC 2004).
GC Hufbauer and JJ Schott NAFTA Revisited: Achievements and
Challenges (Institutefor International Economics Washington DC 2005).
S Zahniser NAFTA at 13: Implementation Nears Completion (United States
Economic Research Service Washington DC 2007).
Public Citizen NAFTA’s Broken Promises 2011: Outcomes of the North
American Free Trade Agreement (Public Citizen Washington DC 2011).
J Fritelli ‘Status of Mexican Trucks in the United States: Frequently
Asked Questions’ (3 January 2014) Congressional ResearchService
Doc No 7-5700 <fas.org/sgp/crs/misc/R41821.pdf> (14 July 2014).
Select Documents
Canada–United States Free Trade Agreement (CUSFTA)(signed 4 October
1988, entered into force 2 January 1989) (1988) 27 ILM 281.
North American Agreement on Environmental Cooperation (adopted8–
14 September 1993; entered into force 1 January 1994) (1993) 32
ILM 1480.
North American Agreement on Labor Cooperation (adopted8–14
September 1993, entered into force 1 January 1994) (1993) 32
ILM 1499.
North American Free Trade Agreement (adopted17 December
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Agreement,DisputeSettlement
FrederickMAbbott

Articlelastupdated: July InternationalLaw[MPEPIL]
2014
Subject(s):
Regional organizations — Political violence — NAFTA (North American Free

Trade Agreement) — Arbitration — Good offices
Rüdiger Wolfrum.
Subscriber:
A. The Dispute Settlement Mechanisms
1 The North American Free Trade Agreement (1992) (‘NAFTA’)
incorporates three distinct dispute settlement mechanisms within the
main text of the agreement, and several additional
mechanisms in its supplementary agreements.
1. NAFTA Chapter 20
2 The principal dispute settlement mechanism is established by
Chapter 20 of the NAFTA. This mechanism permits each of the
States Parties—ie Canada, Mexico, and the US—to bring a claim against
another regarding interpretation and application of the agreement.
This mechanism is not open to private party claimants. Chapter 20
dispute settlement is in the nature of traditional ad hoc
international arbitration.
3 With respect to subject matter that is covered both by the

NAFTA and the World Trade Organization (WTO) agreements, the
complaining party generallyhas the option to decide the dispute
settlement forum in which it will initiate its complaint.
Once the selection of forum has been made by the complaining
party, that forum is the exclusive one for resolution of the
dispute (Art. 2005 (6) NAFTA). That is not true, however, in
relation to complaints under Section B Chapter Seven (Sanitary and
Phytosanitary Measures) or Chapter Nine (Standards-Related Measures):
(a) concerning a measure adopted or maintained by a

Party to protect its human,animal or plant life or
health, or to protect its environment, and
(b) that raises factual issues concerning the environment, health,

safety orconservation, including directly related scientific matters. ( Art.
2005 (4) NAFTA )
4 In such cases, the complained-against party may demand that a

complaint be pursued underNAFTA Chapter 20. The right to
require that dispute settlement with respect to environment, health, and
safety matters be decided under Chapter 20 reflects that different rules with
respect to dispute settlement may be prescribed by NAFTA and
the WTO agreements. Most specifically, the NAFTA Chapters on
sanitary and phytosanitary measures and technical standards expressly
place on the complaining party the burden of proving that a
complained-against measure is inconsistent with the agreement. While this
may be consistent with present jurisprudence of the WTO
Appellate Body, it was not clear at the time NAFTA was
negotiated what the WTO rule would be, nor how that rule
wouldbe interpreted (see also International Courts and Tribunals,
Rules and Practice Directions [ECJ, GC, ECtHR, IACtHR, ICSID, ITLOS, WTO
Panels and Appellate Body]).
5 It is evident that there exists the possibility for conflicting

decisionsby the WTO DisputeSettlement Body and NAFTA panels.
Conflict may arise with respect to the same disputed subjectmatter. The
WTO Understanding on Rules and Procedures Governing the
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Settlement of Disputes of 15 April 1994 (in WTO, The Results of
the Uruguay Round of Multilateral Trade Negotiations: The Legal
Texts [GATT Secretariat Geneva 1994] 354–79) does include a forum
selection provision comparable to that of NAFTA Chapter 20. WTO
rules do not prevent a NAFTA party from initiating a disputeat the
WTO notwithstanding that it initiated, or completed, one under
Chapter 20. From a substantive standpoint, there is no specific rule
mandating that NAFTA panels follow WTO dispute settlement precedent.
Nonetheless, NAFTA dispute settlement decisionsso far reflect considerable
attention to WTO jurisprudence and efforts to achieve consistency. The
WTO Appellate Body is not bound to follow NAFTA dispute
settlement decisions, and so far the Appellate Body has
not been of a mind to incorporate regional dispute settlement
jurisprudence—NAFTA or otherwise—into its decision-making. In any
event, as of June 2014 there is no serious manifestation of
problems arising from the complementary dispute settlement systems of
the NAFTA and WTO, but of course this does not assure that such
problems will not eventually arise.
6 The NAFTA generallypermits each party to maintain its antidumping and

countervailing duty rules, and subjects the application of those
rules to review under Chapter 19 (discussed below). Nonetheless,
these rules do not preclude a NAFTA party from challenging the
WTO-consistency of antidumping or countervailing duty measures of
other parties.
7 Chapter 20 provides for an initial period of consultation during

which the parties are encouraged to find an amicable solution to the
subject-matter of the dispute. If consultations do not resolve the
matter, either party may request a meeting of the Free Trade
Commission for the purpose of engaging its good offices to
encourage an amicable settlement. If neither consultations nor the
good offices of the Commission are successful, the complaining
party may seek establishment of a disputesettlement panel.
8 Five panellists are selected, preferably from a roster of 30

panellists to be agreed by consensusof the parties. As of
June 2014 this roster had not been agreed upon. The parties
should endeavour to agree upon the presidingpanellist. In the absence of
agreement one of the parties selected by lot appoints the presiding
panellist, who may not be a national of that party. Because the
parties have not established an agreed-upon roster of panellists,
the establishment of panels has been substantially delayed by negotiation
of the five-member panels. Chapter 20 permits the parties to agree
upon specific terms of reference for a dispute, but it also
provides standard terms of reference.
9 Chapter 20 panels are directed to make findings and recommendations to

the disputingparties.A party which is found to have acted inconsistently
with the agreement is encouraged to bring its measures into
conformity with the agreement. Chapter 20 decisionsare not
directly enforceable in the law of the parties. If a complained-
against party fails to bring its measures into conformity, the
complaining party may withdraw trade concessions equivalent to the
level of impairment. A panel may be requested and
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convened to determine whether the level of suspension of
concessions is ‘manifestly excessive’.
10 There is no appeal mechanism in the Chapter 20 arrangement.

A party which considers that adecision has been wrongly
taken against it may refuse to implement it, leaving the
other party to withdraw concessions.
11 As of June 2014, only three panel decisionshad been rendered

under the Chapter 20procedure (see para. 23 below).
12 The ad hoc nature of Chapter 20 proceedings and the

absence of direct enforceability ofdecisions ameliorate potential constitutional
and political concerns in the parties about potential loss of sovereignty
by the national courts. Art. III US Constitution provides that the
judicial power of the US will be vested in the Supreme Court and
in such inferior courts as the Congress may establish. This
Constitutional provision, as well as a provisiongiving the
Senate right to approve certain federal appointments by the President,
has been argued in treaty approval debates, and in the courts, to
preclude reliance upon foreign judicial or arbitral bodies for the resolution
of disputes involving the federal government. AlthoughUS courts have
never determined such reliance to contravene the Constitution, and such
claims have been brought based upon the NAFTA, the absence of
direct enforceability helps to avoid some difficult legal and political
issues.
2. NAFTA Chapter 19
13 In Chapter 19, the NAFTA establishes a distinct dispute settlement
system for complaints involving antidumping (‘AD’) and countervailing duty
(‘CVD’) measures. The substantive rules of the NAFTA with respect to
AD/CVD, also found in Chapter 19, require only that the parties
properly apply their own national rules in AD/CVD proceedings. However,
Chapter 19 requires each party to authorize binational review under
Chapter 19 as an alternative to judicial review of AD/CVD
administrative determinations that would otherwise be available to an
involved party, or to an involved private party. In this system, a
party may bring a claim alleging that the complainedagainst
party failed to properly apply its own AD/CVD laws in a
particular case. States Parties must authorize private parties that were
involved in the underlying national AD/CVD proceeding to require that
the government initiate a Chapter 19 claim. Once the proceeding
is initiated—whether on demand of an involved private party or not
—a private party involved in the underlying national proceeding is
entitled to appear and be represented by counsel before the
Chapter 19 panel. As of June 2014, more than 50 Chapter 19
decisionshad been rendered.
14 Unlike the results of NAFTA Chapter 20 dispute settlement proceedings,

decisionsof fivemember Chapter 19 panels are directly enforceable as
against the administrative authorities which render the initial decision.
Therefore, if a national administrative authorityin a party is
found to have improperly applied its national rules, the panel may
direct the administrative authorityto revise its decision or undertake
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further proceedings consistent with the panel report. It is
possible that the revised national administrative decision will be subject to
further review by the Chapter 19 panel.
15 Also unlike Chapter 20, Chapter 19 establishes a mechanism for

appeal of panel decisions, butonly on very limited grounds. A
party must allege:
(a)
(i) a member of the panel was guilty of gross

misconduct, bias, or a seriousconflict of interest,
or otherwise materially violated the rules of
conduct,
(ii) the panel seriously departedfrom a fundamental rule of

procedure, or
(iii) the panel manifestly exceeded its powers, authorityor

jurisdiction set outin this Article, for example by
failing to apply the appropriate standard of review,
and
(b) any of the actions set out in subparagraph

(a) has materially affected the panel’s decision and
threatens the integrity of the binational panel
review process. ( Art. 1904.13 NAFTA )
16 The so-called ‘extraordinary challenge procedure’ is heard by a

panel of three members of an‘extraordinary challenge committee’
selected from a roster of 15 judges or former judges from the
federal level of each party—five such roster members coming
from each party. This committee roster has been established. Although
several extraordinary challenge procedures have been initiated, none has
resulted in a finding against the panel; although in one such
challenge the panel was found to have exceeded its
authorityin a way that materially affected its decision, but did
not threaten the integrity of the binational panel review process
(Pure Magnesium from Canada).
3. NAFTA Chapter 11
17 The third, and so far the most controversial of the
NAFTA dispute settlement mechanisms, is the Chapter 11 investor-to-
State mechanism (Investment Disputes). Pursuant to Chapter 11, a
private investor from a party is permitted to forgo national
court challenge of an alleged expropriation or unlawful taking of
an investment in another party (ie diversity of nationality) and
to initiate a claim against the host government at the
International Centre for Settlement of Investment Disputes (ICSID)
(including under the Additional Facility) or under the rules of
the United Nations Commission on International Trade Law (UNCITRAL).
There is no requirement to exhaust local remedies(Local Remedies,
Exhaustion of). However, when an investor initiates a Chapter 11
proceeding, it must waive its right to further proceedings in
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the national courts, except for limited circumstances, such as petition for
injunction.
18 The law of unintended consequences has operatedin respect to

Chapter 11. Trade negotiatorsfor the US considered the Chapter 11
investor-to-State dispute settlement procedure as a means to provide
security for US investorsconcerned about the legal infrastructure in
Mexico. What these negotiators did not foresee was that private investors
from Canada and Mexico would use the procedure to challenge the
integrity of US legislative and judicial processes with respect to
matters such as changes in environmental legislation or due
process in State judicial proceedings. According to the US Department
of State, as of June 2014, 17 Chapter 11 claims have
been brought against the United States, 14 against Canada and 13
against Mexico (Foreign Affairs and International Trade Canada shows a larger
number of claims initiated against Canada: 11 completed, 9 current or
intent to initiate received,and 15 inactive or withdrawn; the
Mexican Ministry of Economy[as of June 2014] shows 14 completed,
6 current or intent to initiate received, and 5 inactive cases
against Mexico). Non-Governmental Organizations (‘NGOs’) representing environmental
interests have been particularly critical of a threat that they
allege the Chapter 11 system poses to legitimate government
regulatory interests. NGOs are not alone in criticizing Chapter 11.
State, provincial, and municipal governments in the three
parties have been subject to challenge through the Chapter 11 process, and
have expressed concerns to their respective federal authorities. The
three NAFTA governments have evidenced interest in finding a
mechanism to limit the scope of Chapter 11 proceedings, but so
far—as of June 2014 —they have not taken significant action. An
interpretation was adopted by the Free Trade Commission in
2001 which clarified the standards of public international law to
be applied in proceedings, but this was not a material
change.
B. The North American Agreement on Environmental

Cooperation and the North American Agreement on Labor
Cooperation
19 In addition to the settlement mechanisms established under the
main text of the NAFTA, the Supplemental Agreements on the
Environment and Labor each include dispute settlement mechanisms
(Environmental Dispute Settlement; Labour Law, International).
20 Pursuant to the North American Agreement on Environmental

Cooperation (1993) (‘NAAEC’), each party has an obligation to
effectively enforce its own environmental laws. The NAAEC authorizes a
party to initiate a proceeding against another party on grounds that
the latter has persistently failed to effectively enforce its own
environmental laws. Under this procedure the NAAEC Council, by a
two-thirds vote, may decide that a panel of five expert
arbitrators, to be drawn from a roster of 45 candidates
selected by consensus, will be established to decide a
dispute. The panel will examine allegations concerning a persistent
pattern of failure to enforce environmental laws and, upon a
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finding of violation,the panel’s recommendation ‘normally shall be that
the party complained against adopt and implement an action plan
sufficientto remedy the pattern of nonenforcement’ (Art. 31 (2) (c)
NAAEC). If the parties are unable to agree on an action
plan, and if the panel finds that the losing party’s proposed
plan is inadequate, a plan may be imposed by the panel.
If a party is found by a panel to have failed to
implement the approved action plan, then the panel shall
impose a monetary penalty against that party. The maximum
amount of potential monetary penalty is.007% of the total trade
between the parties during the most recent year for which data is
available. The monetary policy is to be paid into a
fund to ‘be expended at the direction of the Council to
improve or enhance the environment or environmental law enforcement
in the party complained against, consistent with its law’ (Annex 34
Art. 3 NAAEC). As of June 2014, this procedure has so
far not been invoked by any party.
21 In addition to the foregoing dispute settlement procedure, the

NAAEC incorporates amechanism pursuant to which a non-governmental
organization or other person may request the Secretariat to prepare a
‘factual record’ regarding an allegation that a party is
failing to effectively enforceits environmental law. Upon an affirmative
recommendation from the Secretariat, the Council, by a two-thirds
majority vote, may instruct the Secretariat to prepare a factual
record on the matter. Upon a further two-thirds majority vote, the
Council may direct the Secretariat to make the factual record
public. There is no legally enforceable consequence to the
preparation and publication of the factual record. However, it
might be used to exert political pressure,or as evidence in a
national administrative or court proceeding aimed at correcting the
deficiencies. As of June 2014, 22 factual records had been made
public, and there were five active submissions pending.
22 The North American Agreement on Labor Cooperation (1993)

(‘NAALC’) requires each party to effectively enforce its own labour law.
Like the NAAEC, it provides a dispute settlement mechanism with
respect to an allegation that a party has persistently
failed to effectively enforce its labour law.
However, there is an additional hurdle under the NAALC before a
dispute settlement panel. First, an Evaluation Committee of Experts
must be convened to prepare a report concerning the
allegations. That report will ordinarily be made public. Following
preparation of the report, a party may request that a
panel be established to decide whether another party has persistently
failed to enforce its labour law. The panel procedure and
remediesare essentially equivalent to those under the NAAEC.
Unlike the NAAEC, there is no mechanism under the NAALC for
private parties to petition the Secretariat to prepare a factual
record. However, private parties may make submissions to National
Administrative Offices (‘NAOs’) that may prepare and make public reports that
form the basis for consultations with other parties. According to the
US Department of Labor, as of June 2014, 38 submissions
had been filed under the NAALC.
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C. Observation and Conclusion
23 NAFTA Chapter 20 dispute settlement has played a very
limited role in implementation of the agreement. The major dispute in
which it was invoked, the case of Cross-Border Trucking Services, does
not stand as a model for effective dispute settlement. That
decision was renderedin 2001, and it was not until 2011 that
the United States and Mexico agreed to an implementation mechanism
after Mexico had imposed retaliatory tariffs (see North American Free
Trade Agreement [1992]). Perhaps equally telling, as of January 2013
there is no agreed roster of panellists. The likely reason for
the parties’ lack of reliance on NAFTA dispute settlement is the
on-going close diplomatic and economic relations between them. It may be
evident to politicians and diplomats on all sides that the
legislatures of the respective countries will not be
easily persuaded to modify their rules on the basis of decisionsby
ad hoc arbitrators. If solutions are to be found, the
politicians and diplomats will need to find them. Chapter 19 has
been more heavily used, mainly because it can be invoked by
private disputants, but even here when the economic stakes are
large, as in the Certain Softwood Lumber Products from Canada cases (see
North American Free Trade Agreement, Case Law), the parties tend
to rely on diplomatic solutions. The relative lack of
weight given to NAFTA dispute settlement, as compared for
example with the role played by the European Court of
Justice (European Union, Court of Justice and General Court), flows from a
conscious decision by NAFTA parties not to pursue a close level
of institutional integration. The role so far played by the
NAFTA dispute settlement system is consistent with its design.
Select Bibliography
FM Abbott ‘NAFTA and the Legalization of World Politics: A Case
Study’ 54 (2000) IntlOrg 519– 47.
FM Abbott ‘The North American Integration Regime and Its
Implications for the World Trading System’ in JHH Weiler (ed) The
EU, the WTO, and the NAFTA: Towards a Common Law of
International Trade (OUP Oxford 2000) 169–200.
FM Abbott ‘The Political Economyof NAFTA Chapter 11: Equality
Before the Law and the Boundaries of North American
Integration’ (2000) 23 HastingsIntl&CompLRev 303–10. RH Folsom MW
Gordon and JA SpanogleHandbook of NAFTA Dispute Settlement
(Transnational Publishers Ardsley 2000).
P Macrory ‘NAFTA Chapter 19: A Successful Experiment in International
Trade Dispute Resolution’ (2002) 168 CD Howe Institute Commentary 1–
24.
Select Documents
North American Free Trade Agreement Secretariat.
Certain Softwood Lumber Products from Canada (Decision) (NAFTA Panel, 17
December 1993) USA-CDA-1992-1904-01.
Certain Softwood Lumber Products from Canada (Decision) (NAFTA Panel, 17
March 2006) USA-CDA-2002-1904-03.
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Certain Softwood Lumber Products from Canada (Opinion and Order) (NAFTA
Extraordinary Challenge Committee, 10 August 2005) USA-CDA-2004-1904-01ECC.
Cross-Border Trucking Services (Final Report) (NAFTA Arbitral Panel, 6 February
2001) USAMEX-1998-2008-01.
North American Agreement on Environmental Cooperation (1993)
(signed 8 September 1993, entered into force 1 January 1994)
(1992) 32 ILM 1482.
North American Agreement on Labor Cooperation (signed 14
December 1992, entered into force 1 January 1994) (1993) 32 ILM
1499.
North American Free Trade Agreement (adopted17 December
Pure Magnesium from Canada (Decision and Order) (NAFTA Extraordinary
Challenge Committee, 7 October 2004) USA-CDA-2003-1904-01ECC.
Subscriber:
Agreement,Case-Law
FrederickMAbbott

Articlelastupdated: June InternationalLaw[MPEPIL]
2014
Subject(s):
NAFTA (North American Free Trade Agreement) — Tariffs — Most-favoured-nation

treatment(MFN) — National treatment
Rüdiger Wolfrum.
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A. NAFTAChapter 20 Panel Decisions
1 The institutional organization of the North American Free
Trade Agreement (1992) (‘NAFTA’) dispute settlement system is described
in a separate contribution (North American Free Trade Agreement,
Dispute Settlement). In this contribution the decisionsrenderedby
the various bodies constitutedunder that system are described.
2 As of 15 July 2009, three decisionshave been renderedby

panels under the Chapter 20 disputesettlement procedure.
1. Canadian Agricultural Tariffs (Canada v US)

3 The first NAFTA claim decided under the Chapter 20 procedure
involved an alleged conflict between the World Trade Organization (WTO) and
NAFTA obligations (Tariffs Applied by Canada to Certain US-Origin
Agricultural Products). Prior to the entry into force of the
NAFTA, Canada maintained certain agricultural quotas. The NAFTA authorized
Canada to maintain those quotas by reference to an earlier provisionin
the Canada–United States Free Trade Agreement (‘CUSFTA’). The WTO
Agreement on Agriculture (signed 15 April 1994, entered into
force 1 January 1995; 1867
UNTS 410) required Canada to eliminate its agricultural quotas, which
Canada—as well as other WTO members—was entitled to accomplish
by tariffication. Tariffs would replace quotas. However, the NAFTA provides that
its parties may not raise tariffs—including on agricultural products—
and when Canada imposed new tariffs on agricultural products from the
United States (‘US’), the United States objected and filed a NAFTA
complaint.
4 Canada argued that it was required by the WTO agreement to

tarifficate its quotas, and that inany case it was allowed to
tarifficate its quotas under the NAFTA because it expressly‘retained’
certain rights to restrain agricultural imports negotiated under the
General Agreement on Tariffs and Trade (‘GATT’; see General Agreement
on Tariffs and Trade [1947 and 1994]). The United States argued that
the WTO agreement did not obligate tariffication of quotas, it
only authorized tariffication. Canada might have eliminated its quotas
without imposingtariffs that violated the NAFTA, and without violating the
WTO agreement. The United States further argued that the rights that
Canada retained under the GATT were limited to those that had
been exercised when the NAFTA entered into force, and that
Canada could not thereafter adopt new measures that were
inconsistent with the NAFTA. The NAFTA panel had to decide whether
Canada’s retention of rights under the GATT included the authorityto
take new action under an old GATT rule.
5 The panel observedthat the NAFTA uses a variety of terms and

formulations to address its relationship to the GATT 1947 and
WTO, as well to the CUSFTA. The panel said:
The interpretation of these agreements is complicated by

a number of factors. The NAFTA incorporates obligations from
other agreements including both the [CUS]FTAand the GATT. The
terminology used in the drafting of the various provisions,
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both within and across these agreements,is not marked by
uniformity or consistency. As discussed more fully below,
words like ‘existing’, ‘retain’, or ‘successor agreements’ appear
in some contexts yet do not appear in others where their presence
may have been thought apposite.As a result, the Panel has
been faced not only with the task of determining meaning
from the presence of certain words, but also with the more
difficult task of divining meaning from the absence of particular
words (at para. 123).
6 The panel ultimately determined that the term ‘retain’ as

used in the CUSFTA, and incorporatedby reference in the
NAFTA, does not import a temporallimitation on the exercise of
rights by
Canada. A right that is ‘retained’ may be exercised in
the future. Canada’s retained rights under the GATT—and agreements negotiated
under the GATT—were not limited to those that had been
expressly exercised prior to the NAFTA, but could include rights
exercised in the future. Because Canada retained rights to impose
agricultural restrictions under the GATT, Canada could tarifficate its
agricultural quotas in spite of the NAFTA’s prohibition of new
tariffs.
7 The panel noted at several points that the NAFTA uses the
term ‘successor agreement’ to the
GATT when it intends to make clear that Uruguay Round results are to
be included in relation to the NAFTA, but the panel also
observedthat the NAFTA’s terminology is sufficiently inconsistent so
that general guidelines for interpretation are difficult to extract.
There is no sweeping conclusion to be drawn from the
Canadian Agricultural Tariffs panel report in regard to whether the
NAFTA generally takes precedence over the GATT 1994. The panel
effectively confirms that this matter will require further sorting out in
the context of specific cases.
2. Broom Corn Brooms (Mexico v US)

8 The second case to come before a NAFTA Chapter 20 dispute
settlement panel directly raised the question whether NAFTA panels are
authorized to adjudicate claims arising under both the NAFTA and
WTO-GATT (US Safeguard Action Taken on Broom Corn Brooms
from Mexico; ‘Broom
Corn Brooms Case’). In the Broom Corn Brooms Case, Mexico objected to the
manner in which the United States had imposed safeguard measures
against imports of Mexican brooms. Mexico argued that the United States
action failed to apply the appropriate injury test under the Art.
XIX GATT safeguards provision, which provisioncontains language equivalent to
the language of the NAFTA Chapter 8 safeguards text. Because Art.
802 (1) NAFTA provides that ‘Each Party retains its rights and
obligations under Article XIX of the GATT or any safeguard
agreement pursuant thereto … ’, Mexico considered that it was
entitled to rely on GATT language and dispute settlement precedent
under which the US safeguard action was allegedly taken upon an
overly narrow definition of injury to domesticindustry.
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9 The panel did not decide whether it was authorized to
adjudicate GATT legal claims. It found thatthe United States had
failed to comply with certain procedural rules that are common to
the NAFTA and GATT, and that Mexico’s claim could be addressed
at the present stage by application of the NAFTA alone.
10 The text of the NAFTA, including the dispute settlement chapter,

allowed for reasoned argument on each side of the issue. The
United States relied on portions of NAFTA Chapter 20 referring to ‘this
Agreement’ and its standard terms of reference, as well as
differences in how references to the GATT are styled in the
NAFTA text. The United States acceptedthat its position would demand that
Mexico pursue claims in both the NAFTA and WTO to vindicate
rights—or assert defenses—that differ under the two agreements. The
Mexican government relied on the fact that the NAFTA parties have
authorized claims arising under both agreements to be brought in
the NAFTA—or WTO—as evidence that the parties must have
intended that the panels charged with deciding cases could apply both sets
of rules, particularly in light of language that makes the
selected forum the exclusive one.
11 It would be difficult on the basis of the NAFTA text to

conclude whether the parties intended WTO-GATT rules to be considered
by NAFTA panels only in those cases in which the NAFTA
appeared to directly incorporate WTO-GATT rules. On a policy
level, the US position demands careful forum shoppingon the part of
a prospective claimant.It would lead to delays in the
resolution of disputes as NAFTA parties assert rights to pursue back-to-back
claims. It would appear to encourage political friction as parties
refuse to reach adjudicated settlement of disputes pending lengthy
procedures in two fora.
3. Mexicov United States—Cross-Border Trucking

12 The NAFTA obligates the United States and Mexico to open restricted
areas near their mutual border to cross-border trucking services three
years after the date of signing, and to broadly open their
territories to cross-border trucking services 6 years after entry into
force of the agreement.
Chapter 9 NAFTA sets forth rules applicable to the setting and

maintenance of technical standards. Under the technical standards rules,
each party is entitled to adopt and maintain measures relating to
human safety (Art. 904 (1) NAFTA) at a level it considers
appropriate (Art. 904 (2) NAFTA) in accordance with certain risk
assessment rules (Art. 907 (2) NAFTA). Mexico alleged national treatment
and violations of the most-favoured-nation clause (‘MFN’) with
regard to regulatory measures, as well as national treatment and
MFN violations with respect to investment.
13 The US argued that fundamental disparities between US and

Mexican regulatory systemslegitimized a blanket restriction on
allowing Mexican cross-border trucking into the US. It claimed that it
was only required to provide national treatment under ‘like
circumstances’, and that deficiencies in the Mexican regulatory system
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meant that US and Mexican trucks were not in ‘like circumstances’.
The United States made a similar argument with respect to the
denial of MFN treatment as compared with Canada.
14 In its decision, the panel invoked principles established in

GATT-WTO jurisprudence, includingpanel and appellate body reports, as
well as customary international law, decisionsof the International
Court of Justice (ICJ), and expert commentators. The panel stated that
the NAFTA and WTO national treatment principles are basically the
same, and common to the field of international trade. In
looking at conduct by the United States, it indicatedit would
avoid inquiring into motivation, for example union pressure on the Clinton
Administration.
15 The panel rejected the US defence to the claim of national

treatment violation,holding theUnited States was obligated to
treat US and Mexican truckers performing similar functionsin the sameway.
Each Mexican trucking license application must be reviewedon its own
merits, just as were US national applications. The panel said that if
harmonization of regulatory systems was required as a precondition
of national treatment, this would undermine the concept of
national treatment. Regarding the MFN claim, the panel said that
the United States was obligated to provide equivalent treatment
to cross-border trucking from Canada and Mexico, and that the
United States had not done this.
16 The US invoked Art. XX (b) GATT analogueof NAFTA to

justify failure to provide national and MFNtreatment. Regarding the
burden of proof, the panel said that, as a general matter, a
party alleging an inconsistency with the NAFTA generallyhas the
burden of proof to establish it. It says that the party invoking an
exception also has the burden of proof to establish its
entitlement. Thus, theUS had the burden to show its restrictions
on Mexican trucking were ‘necessary’. The panel invoked, inter alia, the
WTO appellate body decision in United States—Import Prohibition of
Certain Shrimp and Shrimp Products ([12 October 1998] WT/DS58/AB/R) to
support its holding that the US could have pursued less trade restrictive
conduct.
17 In responseto Mexico’s claim that the US had failed to

permit non-discriminatory national andMFN investment, the US argued that
because there was no demonstrated Mexican interest in investing in US
trucking, Mexico could not demonstrate violations. The panel said that
under WTO law it is not necessary to demonstrate ‘actual’
trade effects—ie nullification or impairment. An imbalance in
competitive conditions is adequate.
18 The panel concluded by emphasizing that it was not

holding that the United States should lowerits trucking safety standards, but
rather that it must allow Mexican truckers to demonstrate compliance with
them.
19 In 2009, Mexico imposed retaliatory tariffs on approximately US$2.4

billion of US exportsfollowing failure by the United States to
implement the recommendations of the dispute settlement panel. On 6
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July 2011, the United States and Mexico adopted a Memorandum of
Understanding further to which the United States implemented a
three-year Cross-Border Trucking Pilot Program through which a number of
Mexico-based trucking companies have been authorized to transport
goods into the United States. It is intended that the authorization
program,operatedby the US Department of Transportation, will be
made permanent once satisfactory compliance by Mexican trucking
companies with the requirements of the pilot program has
been verified. Mexico has withdrawn its retaliatory tariffs.
B. Chapter 19 NAFTAPanel Decisions

20 As of June 2014, more than 50 Chapter 19 NAFTA panel
decisionshave been adopted. Only a few such decisionshave generated
significant controversy, and those have involved subjectmatter in
contention between Canada and the United States since well before
entry into force of the NAFTA. Controversy has been more
focused on subsidy-countervailing duty cases that implicate allegedly
impermissible government action, rather than on antidumping cases that
address conduct by private parties (though a few recent cases have
involved claims challenging the US administrative practice of ‘zeroing’).
21 The most controversial decisions, generallyreferred to as the

CanadianSoftwood Lumbercases, have involved alleged Canadiansubsidization of
its softwood lumber industry’s exports to the United States. The US
Department of Commerce and International Trade Commission
determined that the harvesting or ‘stumpage’ fees assessed by
Canadianprovincial governments on lumber taken from public lands constituted
a subsidy to the Canadiansoftwood lumber export industry. A
series of objections from Canada followed, charging that the
United States agencies had failed to follow domesticlegislation in
applying countervailing duty law (‘CVD’), for example by failing to make all
the requisite findings required for an adverse determination. After a
number of iterations of Chapter 19 NAFTA panel decisions—and extraordinary
challenge procedures brought by the United States—a Chapter 19
panel sided with Canada in deciding that the United States agencies
should have, but did not, making proper findings of material injury to
US domestic industry.Following that decision, and during a lull in
Chapter 19 proceedings, Canada and the United States in late
2006 reached a seven-year agreement on resolution of this
long-running dispute which: (1) required the United States to refund
most of the CVDs that had been collected from Canadianexporters,
and (2) required Canada to implement a 15% export tax on
softwood lumber when the price of lumber fell below a certain
level. The agreement between Canada and the United States continues
to be the subject of intense controversy. The 2006 agreement
authorized each party to request dispute settlement before the London
Court of International Arbitration, and the United States has pursued
claims against Canada on three occasions. The United States was
successful in the first two actions, resulting in the imposition of
additional export charges on Canadian products. In the third case
decided in July 2012, the arbitration panel was unable to find
a conclusive link between claimed changes in timber grading and government
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action. The parties have agreed to extend the Softwood Lumber
Agreement until October 2015.
C. Chapter 11 NAFTAArbitration Decisions

22 Investor-to-State arbitration under the NAFTA Chapter 11 dispute settlement
provisions has proven to be the most controversial of the
NAFTA dispute settlement mechanisms.
23 There is no central NAFTA Secretariat databaseof Chapter 11

actions as there is for Chapters 19 and 20. According to
the US Department of State, as of June 2014, 17
Chapter 11 claims have been brought against the United States, 14
against Canada and 13 against Mexico (Foreign Affairs and International
Trade Canada shows a larger number of claims initiated against Canada: of
which 11 have been completed, 9 are current or intent to
initiate has been received,and 15 are inactive or have been
withdrawn. The Mexican Ministry of Economyas of January 2013
showed 14 completed, 6 current or intent to initiate received,and 5
inactive cases against Mexico).
24 Four notable decisionsare discussed below, three of which involve

environment-relatedinvestment claims—one of which also concerns cultural
rights—and one of which involves allegations of failure of due
process. One claim initiated in 2013, but not yet decided, is also
discussed.
1. Metalclad v Mexico(30 August 2000) (ICSID Additional

Facility)
25 Metalclad, a US enterprise, initiated a claim against the
government of Mexico arising out of thealleged taking of its
investment in a hazardous waste storage facility in Mexico
(Metalclad Corporation v United Mexican States). Metalclad acquired control over
investments previously undertaken by Mexican nationals. Metalclad
received approval from Mexico’s federal authorityfor continued construction and
eventual operation of this facility. However, municipal authorities
where the facility was located refused to approve continued construction
and operation, which was intensively opposed by local residents.
Federal government authorities had apparently assured Metalclad their
approval was sufficientfor construction and operation of the
facility, but the federal authoritiesapparently were not justified in
their assurances. Immediately prior to departure from office, the
governorof the province in which the facility resided signed an
‘ecological decree’ which placed the waste facility within a protected
ecological zone, preventing its completion and operation.
26 The panel found against Mexico on two principal grounds. First, it

found that by failing toproperly apprise Metalclad regarding the
legal requirements for constructing and operating the facility,
Mexico had breached a duty of transparency that was
implicit in the protection of investment guaranteed to foreign
investorsby the NAFTA investment chapter. Second, it found that the
regulatory action taken by the provincial and municipal
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governments, and especially the ecological decree, constituted an
impermissible expropriation of property under the international legal standards
incorporated in the NAFTA investment chapter. The panel awarded
approximately US$16.8 million to Metalclad.
27 Mexico brought an action in the Supreme Court of British Columbia,

Canada, seeking to annulthe award. Mexico and Metalclad had agreed on
Vancouver as the place of arbitration. The Canadian court
determined that the International Commercial Arbitration Act of
Canada provided the standards of review for the appeal. The
court ultimately decided that the arbitration panel had exceeded the
scope of its authorityby incorporating an alleged, but non-existent,
customary international law rule of transparency into the NAFTA
investment chapter rules on expropriation. While this might have
resulted in annulment of the award, the court upheld the
decision on grounds that the ecological decree in fact constituted
an impermissible regulatory taking. It ordered a modestreduction in
the amount of the award to reflect its determination that the
taking occurred later than the panel had found, so that the
interest amount on the award should be adjusted downward.
2. Loewen v United States (26 June 2003) (ICSID)

28 Loewen was a Canadianoperator of funeral homes which had entered into
a contract topurchase a small Mississippi funeral home operator.
The contract had a value of about US$4 million. Loewen was
alleged in a State trial court civil action in Mississippi to
have breached the contract. The jury in the case found in
favour of the local Mississippi operator and awarded him US$500
million in damages, including US$75 million for emotional distress and
US$400 million in punitive damages. In order to appeal the
award, Mississippi law required Loewen to post a bond of 125% of
the damage award within seven days, totaling US$625 million. Loewen sought
relief from this requirement from the Mississippi Supreme Court, which
denied the request. According to Loewen, this effectively foreclosed
its route of appeal and forced it to enter into a
settlement agreement with the local operator in the amount of
US$175 million. Loewen sought damages from the United States for violation of
Chapter 11, most particularly its national treatment and due process
requirements (Loewen Group Inc v United States of America).
29 The panel found that a gross miscarriage of justice had

occurred in Mississippi as counsel forthe local operator had repeatedly
sought to inflame jury sentiment against Loewen by referring to it as
a ruthless foreign enterprise intent on taking advantage of an
unsophisticated local Mississippi businessman, and the trial court judge had
failed to control this misconduct. The panel further found that
there was no rational basis for the award of a US$500
million judgment, which effectively amounted to a denial of due
process under customary international law standards. However, the
panel also found that Loewen had not carried its burden of proof in
demonstrating that it had exhausted its rights of appeal in the
US national court system, including by filing a petition for certiorari
before the US Supreme Court. Because the takings measure of the
Subscriber:
United States was not final, Loewen had failed to demonstrate that the
United States was responsible for a violation of customary international
law. This was not a question of exhaustion of local
remediesprior to initiation of a claim under Chapter 11; instead, the
question was whether an unlawful takings action had been completed. The
panel went on to decide that because Loewen, subsequent to the
commencement of the Chapter 11 proceeding, had transferred
control of its business to a USbased enterprise, it was no
longer in a position to pursue a Chapter 11 claim because the
NAFTA requirement of diversity of nationality requirement was no
longer satisfied. In sum, no relief for Loewen.
3. Methanex v United States (3 August 2005) (UNCITRAL

Rules)
30 Methanex is a Canadiancorporation that is a leading
producerof methanol, which is a principalcomponent of a
gasoline additive known as MTBE. California had required gasoline producers
to include MTBE in product sold within the State as a
means to reduce environmental pollution. However, scientific evidence subsequently
emerged that MTBE may be a carcinogen. As a consequence,
California decided to ban the use of MTBE as a
gasoline additive. Methanex claimed that it suffered significant economic
harm as a result of this decision because its US-based
affiliates were major suppliers of product to the California gasoline
additives market. Methanex argued that California’s ban on MTBE was not
based on legitimate regulatory concerns, but was instead
motivated by an interest in protecting and advancing the
interests of competing US suppliers of ethanol, including the interests of
Archer-Daniels-Midland (‘ADM’), which it alleged impermissibly sought to
influencethe decisionsof California’s then governor. This, according
to Methanex, constituted a denial of national treatment, and an
impermissible regulatory taking without public purpose.
31 The panel found that Methanex had failed to prove its

claims. The panel found that theCalifornia legislature and executive
had acted on the basis of substantial scientific evidence, and
that California had a justified legislative interest in taking the
steps that it did. The panel also found that Methanex had
failed to prove that California’s governorhad been improperly
influenced by ADM. The panel essentially found implausible Methanex
theory that it was the victim of a grand conspiracy to
substitute US-Midwest produced ethanol for Canadianproduced
methanol.
4. Glamis Gold v United States (8 June 2009) (UNCITRAL

Rules)
32 Glamis Gold is a Canadiannational enterprise that acquired gold
mining rights on certainfederal land in south-eastern California.
Glamis claimed that the federal and State California governments of the
United States unlawfully expropriated its investment in acquiring
mining rights and preparing to mine through a series of
legislative and regulatory measures that effectively deprived it
Subscriber:
of the value of its investment. Glamis had initiated the
‘Imperial Project’ in 1994 and effectively terminated the project in
2003, alleging that land-use/environmental conditions and delays made
continuation economically unfeasible.
33 The panel decision includes an illuminating introductory discussion of

the role andjurisprudential charter of Chapter 20 dispute settlement
panels. It observes that while NAFTA ad hoc investment arbitration
panels are not bound by decisionsof prior panels, they nonetheless
operate within a public environment that encourages consistency in
the development of rules, which tendency may also be seen in
other dispute settlement bodies.
34 The panel rejects the expropriation claim on two principal grounds.

First, it determines thatGlamis failed to show that the
value of its investment was so severely diminished as to
constitute the subject of a regulatory taking within the meaning of
Art. 1110 NAFTA. Glamis had put the value of the Imperial Project at
US$49.1 million, and the panel determined that even taking into
account the complained of legislative and regulatory measures,
the value of the project should be in excess ofUS$20 million. The
panel did not regard this as a sufficientadverse regulatory
impact.
35 A good part of the panel decision is devoted to ascertaining

the meaning of, and the customaryinternational law standard for, ‘fair
and equitable treatment’ as used in Art. 1105 NAFTA. The
panel found that the standard articulated in LFH Neer (USA) v
United Mexican States ([1926] 4 RIAA 60) remains of the relevant
standard, stating (at para. 22):
Given the absence of sufficientevidence to establish a change in

the custom, the fundamentals of the Neer standard thus still apply
today: to violate the customary international law minimum standard
of treatment codified in Article 1105 NAFTA, an act must be
sufficiently egregious and shocking—a gross denial of justice,
manifest arbitrariness, blatant unfairness, a complete lack of
due process, evident discrimination, or a manifest lack of reasons
—so as to fall below acceptedinternational standards and
constitute a breach of Article 1105(1). Such a breach may be
exhibited by a ‘gross denial of justice or manifest
arbitrariness falling below acceptable international standards;’ or
the creation by the State of objectiveexpectations in order to
induce investment and the subsequent repudiation of those a
expectations. The Tribunal emphasizes that, although bad faith may
often be present in such a determination and its presence
will certainly be determinative of a violation,a finding of bad
faith is not a requirement for a breach of Article
1105(1). The Tribunal further finds that although the standard for finding
a breach of the customary international law minimum standard
of treatment therefore remains as stringent as it was
under Neer; it is entirely possible that, as an international
community, we may be shocked by State actions now that
did not offend us previously.
Subscriber:
5. Eli Lilly v Canada(Claim Initiated 12 September
2013)
36 Unlike the previously discussed cases that are the subject of
panel decisions, this discussion isof a pending controversy, but
one that is noteworthy because of the extent to which it
challenges conventional notions of the proper scope of investor to
State dispute settlement. The US-based pharmaceutical company, Eli Lilly,
in September 2013 initiated a claim against the government of
Canada under the NAFTA based on an allegedly improper
interpretation by the courts of Canada of the utility doctrine in
patent law, including by Canada’s Supreme Court. Eli Lilly argues that
judicial invalidation of two of its patents based on failure to
adequately disclose utility constitutes a failure toprovide adequate
investor protection, as well as expropriation of its property.
37 The main utility doctrine at issue is that of ‘sound prediction’

(a sub-doctrine of the ‘promisedoctrine’)that requires, if utility has
not been ‘demonstrated’ at the time of patent application, that
the applicantdisclose a sound prediction of utility. To meet the
requirement for sound prediction, the applicantmust disclose: (1) a
factual basis for the prediction, (2) an articulable and
sound line of reasoning at the time of patent application
from which the desired result can be inferred from the factual
basis, and (3) proper disclosure, normally, a full, clear and
exact description of the nature ofthe invention and the
manner in which it can be practiced(Apotex v Wellcome
[2002] 4 SCR 153, Sup Ct Canada). Eli Lilly argues that the
doctrine of sound prediction violates customary international intellectual
property law and the terms of the NAFTA. Eli Lilly has
asked for US$500 million as compensation.
38 This is an extraordinary challenge to the sovereign

courts of Canada, and to the way in whichintellectual property law
has traditionally developed, including in the United States, EU and
other industrialized countries. Neither the TRIPS Agreement, the
Paris Convention on the Protection of Industrial Property, nor
the NAFTA define the way the criterion of utility is to be
implemented or interpreted. There is good reason to believe that the
initiation of this Chapter 11 claim by Eli Lilly has caused governments
both within and outside the NAFTA to question whether a broad
subject matter for investor to State dispute settlement is prudent.
D. Observations and Assessment

39 The modest role so far played by Chapter 19 and 20
panels is consistent with the role intendedby the NAFTA
parties (see also North American Free Trade Agreement, Dispute
Settlement). The NAFTA dispute settlement system was not modelled
on the European Court of Justice. It was not intended to
create a strong institution. As far as Chapter 19 and
Chapter 20 decisionsare concerned, there has been rather limited political
controversy.
Subscriber:
40 The potential role of Chapter 11 NAFTA panels has raised the
most questions. But the arbitrators have acted with appropriate
restraint and so far this has ameliorated concerns. The political
institutions in the three parties are not anxious to see
their regulatory powers substantially constrained—or threatened—by international
arbitration, and public interest-oriented nongovernmental organizations likewise do
not support policy intervention by arbitrators. A decision against
Canada in the Eli Lilly case could well cause the NAFTA
Parties to revisit the terms of Chapter 11. However, that
presupposes a very unlikely decision by the arbitrators. Initiation of
the claimhas already escalated doubts.
41 One unanticipated aspect of NAFTA dispute settlement is that

Chapter 11 claims have been distributed more or less equally among
Canada, Mexico, and the United States and have addressed subject matter
different from that contemplated by the NAFTA negotiators.
Select Bibliography
Public Citizen and Friends of the Earth (eds) NAFTA Chapter 11,
Investor-to-State Cases: Bankrupting Democracy: Lessons for Fast Track
and the Free Trade Area of the Americas (Public Citizen’s Global
Trade Watch Washington 2001).
S Sinclair ‘NAFTA Chapter 11 Investor-State Disputes’(Canadian Center for
Policy AlternativesOttawa 2005).
J Fritelli ‘Status of Mexican Trucks in the United States: Frequently
Asked Questions’ (3 January 2014) Congressional ResearchService, R41821
(21 July 2014) <https://www.fas.org/sgp/crs/misc/R41821.pdf>.
Select Documents
Canada–United States Free Trade Agreement (signed 4 October 1988,
entered into force 1 January 1989).
Cross-Border Trucking Services (Final Report) (6 February 2001) USA-MEX-98-2008-01
in JR Holbein and DJ Musch (eds) North American Free
Trade Agreements: Treaties (Oceana Dobbs Ferry) vol 4 (Rel 2009-2) 7–
79.
Glamis Gold Ltd v United States of America (8 June 2009).
Loewen Group Inc v United States of America (Award of 26
June 2003) ICSID Case No ARB(AF)/98/3 (2005) 7 ICSID Rep 442.
Metalclad Corporation v United Mexican States (Award of 30 August
2000) ICSID Case No.
ARB(AF)/97/1 (2000) 5 ICSID Rep 209.
Methanex Corp v United States (Decision of the Tribunal on Petitions
from Third Persons to Intervene as Amici Curiae) (15 January 2001).
Notice of Arbitration, Eli Lilly and Company, Claimant v
Government of Canada, Respondent, in the Arbitration under the
Arbitration Rules of the United Nations Commission on
International Trade Law and the North American Free Trade
Agreement, 12 September 2013.
Softwood Lumber Agreement (done 12 September 2006) and Dispute
Settlements <http://www.international.gc.ca/controls-controles/softwood-bois_oeuvre/index.aspx?
lang=eng> (21 July 2014).
Subscriber:
Tariffs Applied by Canada to Certain US-Origin Agricultural Products
(Final Report) (2 December 1996).
US Safeguard Action Taken on Broom Corn Brooms from Mexico
(Final Report) (30 January 1998).
Subscriber:

Northamericanfreetrade Agreement (1992) : Frederickmabbott

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NorthAmericanFreeTrade

Contenttype: Product: MaxPlanck

Regional organizations — NAFTA (North American Free Trade Agreement) —

3 The prospect of enhanced political integration did not motivate any

4 There was significant political opposition in the US to the

5 President William Jefferson (‘Bill’) Clinton entered office subsequent to the

6 The NAFTA follows the customary ‘free trade area’ agreement

C. Content and Purpose of the Agreement

9 The NAFTA imposed significant limitations on duty drawback or

11 The NAFTA liberalization of telecommunications (Chapter 13) and

13 Investment liberalization (Chapter 11) is accomplished through the

14 The NAFTA includes Chapter 17 on intellectual property (‘IP’). This

15 The NAFTA rules on antidumping (‘AD’) and countervailing duties

D. Institutional Structure and Domestic Implementation

17 The NAFTA establishes a Secretariat, but this is merely a

19 The NAFTA includes a panel dispute settlement mechanism (Chapter 20)

20 The NAFTA contains a separate dispute settlement mechanism (Chapter 19)

21 As noted earlier, there are two side agreements to the

22 When it adopted the NAFTA Implementation Act, the US Congress

FM Abbott Law and Policy of Regional Integration: The NAFTA

Contenttype: Product: MaxPlanck

Regional organizations — Political violence — NAFTA (North American Free

3 With respect to subject matter that is covered both by the

(a) concerning a measure adopted or maintained by a

(b) that raises factual issues concerning the environment, health,

4 In such cases, the complained-against party may demand that a

5 It is evident that there exists the possibility for conflicting

6 The NAFTA generallypermits each party to maintain its antidumping and

7 Chapter 20 provides for an initial period of consultation during

8 Five panellists are selected, preferably from a roster of 30

9 Chapter 20 panels are directed to make findings and recommendations to

10 There is no appeal mechanism in the Chapter 20 arrangement.

11 As of June 2014, only three panel decisionshad been rendered

12 The ad hoc nature of Chapter 20 proceedings and the

14 Unlike the results of NAFTA Chapter 20 dispute settlement proceedings,

15 Also unlike Chapter 20, Chapter 19 establishes a mechanism for

(i) a member of the panel was guilty of gross

(ii) the panel seriously departedfrom a fundamental rule of

(iii) the panel manifestly exceeded its powers, authorityor

(b) any of the actions set out in subparagraph

16 The so-called ‘extraordinary challenge procedure’ is heard by a

18 The law of unintended consequences has operatedin respect to

B. The North American Agreement on Environmental

20 Pursuant to the North American Agreement on Environmental

21 In addition to the foregoing dispute settlement procedure, the

22 The North American Agreement on Labor Cooperation (1993)

Contenttype: Product: MaxPlanck

NAFTA (North American Free Trade Agreement) — Tariffs — Most-favoured-nation

2 As of 15 July 2009, three decisionshave been renderedby

1. Canadian Agricultural Tariffs (Canada v US)

4 Canada argued that it was required by the WTO agreement to

5 The panel observedthat the NAFTA uses a variety of terms and

The interpretation of these agreements is complicated by

6 The panel ultimately determined that the term ‘retain’ as

2. Broom Corn Brooms (Mexico v US)

10 The text of the NAFTA, including the dispute settlement chapter,

11 It would be difficult on the basis of the NAFTA text to

3. Mexicov United States—Cross-Border Trucking

Chapter 9 NAFTA sets forth rules applicable to the setting and

13 The US argued that fundamental disparities between US and

14 In its decision, the panel invoked principles established in

15 The panel rejected the US defence to the claim of national

16 The US invoked Art. XX (b) GATT analogueof NAFTA to