National treatment. National treatment under NAFTA chapter 11 requires the United States and individual U.S. states to treat Canadian and Mexican investments and investors no less favorably than they treat their own. With respect to a state or province, national treatment compares treatment of foreign investors with the way a state or province treats investors from other states or provinces.
Examples from U.S. domestic law might be offered as evidence of a general practice accepted as law amounting to an “international custom.” So might practices found in other national legal systems. The International Court of Justice (ICJ) looks at many such sources in developing the body of international law. It might also be argued that U.S. Constitutional law is reflected in “the general principles of law recognized by civilized nations.” For more on the sources of international law recognized by the ICJ, see Statutes of the International Court of Justice, 38-1.
National treatment covers not only intentional discrimination, but also neutral laws that have the effect of changing the conditions of competition in favor of domestic firms. This effects test for national treatment could be significantly more stringent than limits imposed on states by the commerce clause of the U.S. constitution.
Most favored nation (MFN). The MFN obligation requires each party (the U.S.A., Canada, and Mexico) to accord investors of another party treatment no less favorable than that it accords, in like circumstances, to investors of any other party or of a non-party .
This obligation applies with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments. That the NAFTA MFN obligation extends to the establishment of investments significantly extends its breadth. Most international investment agreements, not concluded by the United States, apply only to already-established investments.
MFN language similar to that used in NAFTA has been broadly read by some international investment tribunals. The most notable case is Maffezini v. Spain (ICSID Case No. ARB/97/7), which allowed an Argentine investor to import the more favorable procedural provisions of another bilateral investment agreement that allowed for a shorter waiting period. That agreement was between the host country for the disputed investment (Spain) and a third party (Chile); Maffezini invoked MFN to allow access to the more favorable provisions of that agreement.
NAFTA INVESTOR RIGHTS
|Type of Investment
Most favored nation
Minimum treatment under
Limits on performance requirement
Transfer of profits, payments,
|NAFTA art. 1102
NAFTA art. 1103
NAFTA art. 1105
NAFTA art. 1106
NAFTA art. 1109
NAFTA art. 1110
Expropriation. NAFTA requires member nations to compensate investors if national or subnational governments directly or indirectly nationalize or expropriate an investment of the other countries' investors in its territory. Expropriation includes measures tantamount to nationalization or expropriation. NAFTA panels have to decide not only the scope of expropriation, but also what the open-ended references to tantamount to expropriation and indirect expropriation mean.
Minimum treatment under international law. NAFTA requires member nations to provide other members' investors with treatment in accordance with international law, including fair and equitable treatment and full protection and security.
The open-ended meaning of in accordance with international law,even as now officially interpreted to mean customary international law, could result in a more far-reaching shift away from domestic constitutional law than the expropriation provisions noted above. As Mathew Porterfield has noted:
- A NAFTA panel concluded that “the minimum standard of treatment of fair and equitable treatment is infringed by conduct attributable to the State and harmful to the claimant if the conduct is arbitrary, grossly unfair, unjust or idiosyncratic, is discriminatory and exposes the claimant to sectional or racial prejudice, or involves a lack of due process leading to an outcome which offends judicial propriety—as might be the case with a manifest failure of natural justice in judicial proceedings or a complete lack of transparency and candor in an administrative process.” (Waste Management II, para. 98) (emphasis added) Available at http://www.naftalaw.com
- A dispute panel in a case involving the U.S. – Ecuador BIT reasoned that “the stability of the legal and business framework is . . . an essential element of fair and equitable treatment . . . [an investor] must know beforehand any and all rules and regulations that will govern its investments . . . this is an objective requirement that does not depend on whether the [government] has proceeded in good faith or not” (interpretation of “fair and equitable treatment” under U.S. Ecuador BIT in Occidental v. Ecuador, paras. 183, 185 and 186).
- The standard for minimum treatment is not static but continues to “evolve” as part of customary international law.
Transfer of profits, payments, proceeds of sale. NAFTA requires member nations to permit members' investors to transfer profits, income payments and proceeds of sale.
Limits on performance requirements. NAFTA limits the ability of member nations to impose certain kinds of performance requirements on members' investors. The most common examples of performance requirements include obligations that investors undertake in order to receive a government grant, loan or tax benefit. The limit that is most likely to create a conflict with state law is the NAFTA prohibition on requiring foreign investors to use domestic contents in what they produce.
NAFTA contains specific language related to environmental measures.
Interpreting the text of NAFTA’s investment chapter is further complicated by a separate article (NAFTA art. 1114) on “environmental measures. It is unclear how this article limits the provisions for investor rights. For example, the article on environmental measures provides that: “Nothing in this chapter shall be construed to prevent a Party from adopting, maintaining or enforcing any measure otherwise consistent with this Chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns.” Most likely, the phrase, “otherwise consistent with this Chapter,” is the exception that swallows the rule.
View GAO analysis of NAFTA and environmental side agreements: