There has been vocal opposition to Investor-State Dispute Settlement (ISDS) arbitration provisions in Canada’s international trade agreements since the NAFTA entered into force in January 1994. Most recently, opponents have made the same arguments against ISDS in the Canada – E.U. Comprehensive Economic and Trade Agreement (CETA). After twenty years of NAFTA ISDS experience, it seems appropriate to consider whether any of the arguments raised against NAFTA ISDS are valid. Based on a comprehensive review of that experience, it appears that many of them may not be.
ISDS has been included in Canadian international trade agreements since before the NAFTA and is structured to allow investors to use arbitration when they consider that action(s) taken by the host government has violated the investment obligations in the trade agreement to their detriment. For example, ISDS arbitrations have been launched in cases where the investor believes that the host government has expropriated its investment without due process or compensation, or where the host government has taken action tantamount to expropriation that has undermined the value of the investor’s investment. ISDS cases have also been launched in cases where the investor believes that it is receiving less favourable treatment than that accorded to domestic investors in the host country, in similar circumstances. The arbitration is taken under international rules and was intended to allow investors to use arbitration rather than the domestic court systems of the host country. Canadian negotiators obviously believed that ISDS would benefit Canadian investors and have continued to include ISDS in Canada’s international trade agreements.
Those opposed to ISDS generally make two broad claims. First, that ISDS gives preferential treatment to foreign investors by allowing them to use arbitration instead of domestic courts. Second, that ISDS can be used by foreign corporations to force the Government of Canada to abandon appropriate regulatory measures in favour of other measures that benefit those foreign investors. Since the NAFTA entered into force 20 years ago in 1995, foreign investors have taken a total of thirty five arbitration cases against Canada under NAFTA ISDS Fifteen of these cases have been withdrawn or are currently inactive. Eleven cases have been settled, and nine of these cases are currently active. Consequently, there have only been twenty cases seriously pursued by NAFTA investors since 1995, or approximately one each year. Given this rather low level of participation, it is difficult to imagine how support can be found for critics’ claim that ISDS can and will be used by foreign investors as a means of compelling regulatory change.
To put NAFTA ISDS in context, Statistics Canada data reports that the total value of U.S. foreign direct investment in Canada ranged from approximately $193.6 billion in 2000 to $352.1 billion in 2013.[1] Virtually all of this investment would benefit from the protections set out in the NAFTA. Given the extent of U.S. foreign direct investment, the fact that there have only been 20 serious ISDS cases taken against Canada over the past twenty years is a testament to the fact that ISDS has not been improperly used by investors. Even taking into consideration the further 15 cases that have been withdrawn or that are inactive, 35 ISDS arbitrations over 20 years covering over $352.1 billion in direct investment is really little more than a drop in the bucket.
That there have been so few ISDS cases against Canada over the years demonstrates that it is relatively easy for NAFTA governments to comply with the NAFTA investment obligations. For compliance purposes, all the Federal and Provincial Governments have to do is treat all investments, foreign and domestic, fairly; meet the minimum standard of international treatment; not raise unnecessary barriers to the establishment and operation of investments; and not expropriate investments except where there is a public purpose, on a non-discriminatory basis, following due process and where payment of appropriate compensation is provided. Meeting these obligations should not be onerous for any of the NAFTA Parties, particularly as these are the obligations that they negotiated and freely accepted at the outset.
Should any issues arise, the NAFTA Parties could take steps to challenge any violation of the NAFTA investment obligations through State-to-State dispute settlement under NAFTA Chapter 20, but they rarely take action, and generally only in cases where the measure at issue has a much greater impact than the damages sought by investors in individual cases. Furthermore, a successful conclusion of a Chapter 20 case would be a recommendation that the offending NAFTA Party withdraw the offending measure; there would be no requirement that it pay damages to compensate the injured investor. NAFTA ISDS gives the investor an opportunity to challenge measures that would never capture the attention of the NAFTA Party and to be awarded damages to compensate it for any losses that it suffered due to the offending measure at issue.
Consequently, there really does not appear to be any major downside to NAFTA ISDS. The arbitration process has not given foreign investors a significant advantage over Canadians and it has not been used to compel governments to make wholesale regulatory changes. Instead, NAFTA ISDS exists as a tool that can be used by investors to ensure that they are properly compensated if a host NAFTA Party enacts measures in violation of NAFTA obligations that cause them harm. On that basis, ISDS is not a problem but rather a reasonable and useful mechanism that has been included in Canada’s trade agreements and that can be used by investors to protect their investments.
References
[1] http://www.international.gc.ca/economist-economiste/assets/pdfs/Data/investments-investissements/FDI_by_Country/FDIC_stocks_by_Country-ENG.pdf
