April 3, 2019
USMCA: Investment Provisions
Background
include enterprises, stocks, bonds, derivatives, intellectual
The United States-Mexico-Canada Agreement (USMCA) is
property, licenses, or other tangible or intangible property.
a proposed free trade agreement (FTA) that, if approved by
Congress and ratified by Canada and Mexico, would
Figure 1. U.S. FDI Positions with NAFTA Partners
replace the North American Free Trade Agreement
(NAFTA). USMCA would retain NAFTA’s market-
opening measures while adding or updating provisions in
areas such as digital trade, intellectual property rights, and
worker rights. The proposed agreement would make notable
changes to NAFTA’s investment provisions—mainly
qualifying basic investor protections and limiting the degree
to which foreign investors can bring complaints against
their host states under the investor-state dispute settlement
(ISDS) mechanism. ISDS claims with Canada would be
phased out entirely, those with Mexico would be more
restricted than under NAFTA. Given the significant

changes proposed and the importance of U.S. investment
Source: Bureau of Economic Analysis, Hist. Cost Basis, 1993-2017
ties with Canada and Mexico, USMCA’s investment
provisions are likely to be an active part of congressional
Investor Protections under USMCA
debate over the USMCA.
The proposed USMCA contains many of the same core
NAFTA’s Investment Provisions
investment provisions as NAFTA, but with new
qualifications and provisions that reflect more recent U.S.
Enacted in 1994, NAFTA removed investment barriers,
trade and investment agreements. New limits are placed on
ensured basic investment protections, and provided
what provisions are eligible for ISDS, compared to NAFTA
mechanisms for the settlement of disputes over
and past U.S. FTAs.
commitments in the agreement. Since NAFTA entered into
force, the stock of foreign direct investment (FDI) between
Minimum Standard of Treatment (MST). Like NAFTA,
the United States and its NAFTA partners has increased
the proposed USMCA would require that each party accord
dramatically, although it is difficult to determine whether
covered investments “treatment in accordance with
the increase was the result of NAFTA or other factors
customary international law.” However, the proposed
(Figure 1). In 2017, Canada and Mexico ranked fifth and
agreement would add new clarifications, stating that the
thirteenth, respectively, as destinations for U.S. FDI and
concepts of “fair and equitable treatment” (due process) and
third and twentieth as sources of FDI in the U.S.
“full protection and security” (police protection) do not
require treatment in addition to or beyond the minimum
In response to criticism that NAFTA’s investment
standard treatment of aliens under customary international
protections were too broad, subsequent U.S. trade and
law. Previously, some ISDS tribunals had suggested
investment agreements clarified certain provisions and
otherwise. The proposed USMCA would further clarify that
added new transparency requirements. The proposed
an action, such as the implementation of a new regulation,
USMCA would continue some of these trends.
would not be a breach of MST simply because it was
Additionally, the proposed USMCA would place new limits
inconsistent with an investor’s expectations.
on access to ISDS mechanisms. In general, these changes
limit the kinds of claims that foreign investors are able to
National Treatment and Most-Favored-Nation (MFN)
bring in response to domestic regulations.
Treatment. Like NAFTA and other U.S FTAs, the
proposed USMCA would include non-discrimination
Definition of an Investment
provisions, requiring that each country accord the investors
USMCA’s investment chapter defines “investment” more
and investments of another country treatment no less
broadly than NAFTA and echoes the language of more
favorable than that it accords, in like circumstances, to its
recent U.S. FTAs. Whereas NAFTA enumerates what
own investors or the investors of any other country
qualifies as an investment, the proposed USMCA defines
throughout the lifecycle of the investment. However, the
an investment as an asset that an investor owns or controls
proposed USMCA adds further language noting that
that has the characteristics of an investment such as the
whether treatment is accorded in “like circumstances”
commitment of capital or other resources, the expectation
depends on the totality of the circumstances, including
of gain or profit, or the assumption of risk. It then
whether the treatment at issue distinguishes between
enumerates a non-exhaustive list of examples that could
investors or investments based on legitimate public welfare
objectives.
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USMCA: Investment Provisions
Expropriation and Compensation. Like NAFTA, the
of any provision of the agreement and need not exhaust
proposed USMCA states that expropriation may only occur
local remedies.
for a public purpose and must be done in a non-
Procedure and Transparency. The proposed USMCA
discriminatory manner, with prompt, adequate, and
includes updated provisions on panel selection,
effective compensation, and in accordance with due process
transparency, and would require compliance with the
of law. While indirect (also known as regulatory)
International Bar Association Guidelines on Conflicts of
expropriation is still included, the proposed USMCA
Interest in International Arbitration and would forbid
affirms that non-discriminatory regulatory actions designed
arbitrators from acting in another capacity in any other
to protect legitimate public welfare objectives would not
constitute indirect expropriation except in “rare
pending arbitration under the agreement.
circumstances, ” similar to language in more recent U.S.
Figure 2. NAFTA’s ISDS Record (No. of Disputes)
FTAs. USMCA would also place new limits on the
enforceability of this provision through ISDS.
Investor-State Dispute Settlement
To provide investors “due process before an impartial
tribunal,” NAFTA enabled foreign investors to take host
governments to binding arbitration over alleged violations
of investment commitments in the agreement. The proposed
USMCA eliminates ISDS with respect to Canada and
places new restrictions on its use with respect to Mexico.
The new restrictions limit what kinds of alleged violations
investors may bring before ISDS tribunals. The changes,
however, would not disrupt pending ISDS cases under

NAFTA and allow new claims under NAFTA rules for
Source: United Nations Conference on Trade and Development
three years from the date of NAFTA’s termination.
Summary and Issues for Congress
The United States and Canada
NAFTA’s provisions removed barriers to investment and
Three years after the proposed USMCA goes into effect,
established core protections to ensure non-discriminatory
ISDS mechanisms under NAFTA between the United
treatment, among other objectives, with the goal of
States and Canada would be phased out. Absent an
increasing trade and investment across North America. The
independent agreement, U.S. or Canadian investors alleging
proposed USMCA includes many of those same protections
a violation of USMCA by their host government would
but with qualifications in line with more recent U.S. trade
only have recourse to domestic courts or other dispute
and investment agreements, as well as new limitations.
resolution mechanisms. Under NAFTA, the bulk of
The biggest change from NAFTA and recent U.S. FTAs is
disputes brought before ISDS tribunals have involved
the curtailment of ISDS. Supporters of NAFTA’s ISDS
Canadian or U.S. claimants. Canadians initiated 15 of the
mechanism argue that it provides investors a neutral and
16 ISDS cases against the United States (Figure 2).
effective venue for resolving disputes with their host states.
The United States and Mexico
Under this view, NAFTA’s ISDS mechanism encourages
New Limitations. The proposed USMCA retains ISDS
investment, particularly where investors might otherwise
with respect to Mexico but investors could only bring
worry about the effectiveness of local courts in dealing with
claims alleging a breach of national treatment, a breach of
specialized investment issues and discriminatory treatment
most-favored-nation treatment, or for direct expropriation.
without impartial recourse. Opponents, however, have
Claims alleging a violation of national treatment with
raised concerns that NAFTA’s ISDS mechanism (i)
respect to the establishment or acquisition of an investment
provides procedural rights to foreign investors that are
(the so-called “right to invest” provision), claims alleging a
unavailable to domestic investors and (ii) discourages states
violation of the MST, and claims alleging indirect (or
from implementing health and environmental regulations,
regulatory) expropriation, all of which made up the bulk of
among other concerns.
ISDS claims made under NAFTA, would no longer be
Robust ISDS provisions have been a part of U.S. trade
covered. Such claims could still be dealt with through
agreements for decades, and investor protections have been
USMCA state-to-state dispute settlement measures.
longstanding U.S. trade negotiating objectives. Congress
Exhaustion of Local Remedies. Unlike in NAFTA and
may wish to consider whether the proposed USMCA
other U.S. FTAs, USMCA would require investors to
represents a discrete departure from past U.S. policy or a
“exhaust local remedies” by first filing their complaints in
new paradigm for future trade agreements.
the courts or administrative tribunals of the host state and
waiting 30 months before initiating arbitration (unless such
Further Reading
action would be “obviously futile or ineffective”).
CRS Report R44981, NAFTA Renegotiation and the
Proposed United States-Mexico-Canada Agreement
Exceptions for Energy and Infrastructure. The above
(USMCA), by M. Angeles Villarreal and Ian F. Fergusson
limitations would not apply to covered government
contracts with the oil and gas, power generation,
Christopher A. Casey, Analyst in International Trade and
telecommunication, transportation, and infrastructure
Finance
sectors. Claimants in the sectors may use ISDS for a breach
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USMCA: Investment Provisions

IF11167


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https://crsreports.congress.gov | IF11167 · VERSION 1 · NEW

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