A guest post from Luke Eric Peterson of the Investment Arbitration Reporter:
In recent weeks, Mexico has slapped retaliatory tariffs on certain US goods – and sought to justify this by pointing to the US failure to provide greater access for Mexican trucks (more specificially, Mexico cites a failure of the US to comply with a NAFTA panel ruling finding it in violation of its NAFTA obligations).
As Simon noted in an earlier post, Article 2019 of the NAFTA provides for the suspension of trade benefits in certain circumstances. But, he wondered if it permits cross-sectoral retaliation: can Mexico , for example, retaliate against goods, if cross-border services are at the heart of the underlying trade dispute?
Intriguingly, several NAFTA tribunals have recently looked at another aspect of the retaliation issue. However, this has been in the context of NAFTA Chapter 11, which governs investment issues.
First a bit of background: three separate investor-state arbitrations have arisen out of a long-running dispute between the US and Mexico over sweeteners.
At issue in these investor-state cases is a 20% tax levied on users of High Fructose Corn Syrup (HFCS). Trade watchers may recall that his very same tax occasioned some litigation at the WTO. (See WorldTradeLaw.net's Dispute Settlement Commentary for the panel and Appellate Body reports in that case for more details.)
At the WTO, Mexico tried, unsuccessfully, to justify its tax by reference to the US’s alleged failure to fulfill its market access commitments for Mexican sugar under the NAFTA.
Mexico has not had better luck in the NAFTA investor-state context. In two of the three NAFTA Chapter 11 cases to be resolved on their merits thus far, arbitrators have examined whether Mexico can retaliate against U.S.investors. In other words, if the 20% tax is found to breach certain NAFTA Chapter 11 protections owed to US investors in Mexico, can Mexicofall back on an argument that the tax was a valid counter-measure that precludes liability for breaches of NAFTA Chapter 11?
Well, two arbitral rulings have been rendered on this question, and – to put it charitably - the jury is still out. Indeed, a shortcoming of the one-off arbitration provided under NAFTA Chapter 11 is that it can generate diverging or even contradictory holdings from one case to the next. And, that’s what we’ve seen so far on the counter-measures question.
In a November 2007 ruling issued in the Archer Daniels Midland and Tate & Lyle case, a majority of arbitrators ruled that Mexico could raise a counter-measures defence as a matter of customary international law. (Note that Mexico was not relying on Article 2019 of the NAFTA, which provides for retaliation after an adverse panel ruling). Rather, Mexico was falling back on customary international law - presumably because Chapter 11 arbitral tribunals do not have jurisdiction over Chapter 20 of the NAFTA.
On the facts of the case, however, Mexico failed to meet the various tests imposed by customary international law.
Meanwhile, in another NAFTA Chapter 11 arbitration ruling issued a few months later – but only becoming public this month – arbitrators took a very different posture when it came to counter-measures.
In the Corn Products International (CPI) v. Mexico arbitration, the tribunal took the view that a counter-measures defence cannot be raised in a NAFTA Chapter 11 arbitration. The arbitrators reasoned that the rights accorded in Chapter 11 are granted to third-parties (investors) and that they are not inter-state rights.
In lay terms, investors cannot be reduced to casualties in a trade war between the US and Mexico. (A fuller summary of the CIP Award can found in the latest edition of my Investment Arbitration Reporter briefing service).
It remains to be seen how a third tribunal will come down on this issue. A ruling in that case, Cargill v. Mexico, has been expected for some time.
However, for the time being, things are rather muddled when it comes to whether NAFTA parties can retaliate against investors of a party with whom there is a trade dispute. In the ADM case, the tribunal was willing to entertain a counter-measures defence, but it failed on the facts of the case. Yet, in the CPI case, arbitrators rejected the very possibility of a state retaliating against investors from another NAFTA party.
One thing is clear: Mexico had pushed hard for the NAFTA Chapter 11 claims related to the HFCS dispute to be heard before a single consolidated panel. In particular, the Mexican Government raised concerns that separate tribunals could produce different or conflicting holdings on similar legal issues.
However, the claimants objected to Mexico’s consolidation bid. A trio of arbitrators asked to decide whether the cases should be joined together ultimately deferred to the wishes of the respective investors, who had protested that their intense economic competition with each other precluded their cooperation on a single consolidated legal claim against Mexico. However, now that two separate tribunals have offered different views as whether a counter-measures defence can be raised in NAFTA Chapter 11 cases, Mexico’s fears appear to have been realized.
For now, it remains unclear whether foreign investors are insulated from NAFTA trade wars – or whether they can be punished for the “sins” of their home country.
