Financial Post | By Thomas d'Aquino, John Castellani and Juan Gallardo | May 29, 2003
The evidence is clear that the North American Free Trade Agreement has
promoted North American prosperity by increasing the overall size of the economic pie for all three countries.Yet it is not just the pure economic dimension in which NAFTA shines. NAFTA also has important political, environmental, and social dimensions. NAFTA provided a new model for how countries could achieve regional integration without sacrificing their respective sovereignties.
NAFTA also broke new ground for a free trade agreement by containing strong investment rules under Chapter 11. The key rules are: national treatment, most-favoured-nation treatment, the minimum standard of treatment, a requirement for fair compensation in instances of direct or indirect expropriation, a prohibition of investor performance requirements, and a prohibition on limits to out-transfers of profits. These rules are enforceable through government-to-government dispute settlement. It was in 1988 that the United States Congress designated investment protection as a key objective in future trade agreements, and this goal was immediately accepted by all three governments when the NAFTA negotiations began three years later.
Recognizing the practical difficulties of addressing investment disputes merely on a government-to-government basis, the NAFTA negotiators also provided an investor-state dispute mechanism. In effect, this gives private investors a procedural right to lodge a case against a foreign government that the investor believes has violated any NAFTA investment rule. While such a private right of action had been a feature of investment treaties and investment agreements for decades, NAFTA was the first time such a mechanism (to hold governments directly accountable for the performance of their obligations) was included within a free trade agreement.
Since 1994, there have been less than 20 Chapter 11 cases brought by a
private investor as well as a number of notices of intent to file a case. This seems a small number in view of the $1.7-billion a day in current North American trade and over $250-billion in new cross-border investment since 1994.
Furthermore, several of these actions have been withdrawn or are still in consultations and may never reach a tribunal. Indeed, only four decisions have been adverse to one of the NAFTA governments.
To throw the baby out with the bath water because of a few decisions, as some non-governmental groups seem to want to do, is neither wise nor warranted. Over the past few years, we have heard arguments that future free trade
agreements should leave out investor-state arbitration. It is said that foreign investors should have access only to the complaint mechanisms that domestic investors have.
We strongly disagree with this view. Investor-state mechanisms contribute greatly to raising and sustaining the confidence of foreign investors that they will get a fair shake in host countries whatever the adequacy of those domestic legal systems. In planning a major investment, companies have to think many years into the future and cannot rely on the investment climate as it exists at the beginning of a new project. Nor can investors assume that foreign regulators and foreign courts will always act independently of political currents. That's why investor-state mechanisms play such a useful role in establishing a procedural right to an independent tribunal. Such a right reduces the political risk to the investor, and hence will lead to more investment than would occur in the absence of the investor-state tribunals.
This is why we strongly support the negotiation of an investment chapter in the Free Trade Areas of the Americas that includes recourse to an investor-state mechanism. It is vital, in our view, to work with the investor-state mechanism, and to improve it, not to dispense with it.
Overall, 10 years of experience with the NAFTA provides strong evidence that Chapter 11 has achieved its objectives and that the substantive rules are sound.
In conclusion, NAFTA's investment provisions are working well, perhaps even better than its architects imagined. The direct effects of NAFTA have been to stimulate North American trade and investment, and this has led to greater employment and higher incomes on average for the North American community. Among the reasons for NAFTA's success are the strong protections for investment and the right to enforce these guarantees through investor-state dispute settlement.
Thomas d'Aquino is president and chief executive of the Canadian Council of Chief Executives, John Castellani is president of the U.S.-based Business Roundtable and Juan Gallardo is chairman and CEO of Mexico's Grupo Embotelladoras Unidas.Financial Post:
