Introduction
Regardless of one’s own views on the matter, the Trump Administration has introduced an altered geopolitical landscape for international relations and international law. Many call this the “Trump Effect,” referring to the gravity of the intended and unintended effects on the international community of this particular change in control of the U.S. executive branch.
International business disputes, often found at the intersection of international trade, commerce, and development, are not immune from these effects. This article briefly examines three areas where the Trump Administration’s approach to foreign policy and international relations is changing the ways in which international business disputes arise and may be resolved.[1]
1. The WTO: Systemic Stressors and Future Viability
The Trump Administration’s impact on international trade (and underlying business opportunities) cannot be minimized. In light of recent U.S. import restrictions under Section 232 of the Trade Expansion Act of 1962, several World Trade Organization (WTO) Member States have asserted claims against the United States before the WTO’s Dispute Settlement Body.[2] The U.S. defense is premised on the idea that these disputes are “non-justiciable,” as the measures relate to national security under Article XXI of the General Agreement on Tariffs and Trade 1994 (GATT 1994).[3]
The Russia – Measures Concerning Traffic in Transit Panel Report, issued in April 2019, became the first WTO decision interpreting Article XXI of GATT 1994. It rejected the Trump Administration’s non-justiciability argument.[4] This decision limits Member States’ range of defenses before the WTO and allows for more scrutiny of their actions, which may impact Member States’ commitments to the Dispute Settlement Body specifically, and the WTO generally.
Separately, the Trump Administration has blocked efforts to fill vacancies on the Dispute Settlement Body’s Appellate Body. Indeed, it has been more than two years since the Appellate Body has had a full roster of seven members.[5] Continued vacancies, with only three seats currently filled, exacerbate delays and make it impossible for the Appellate Body to issue reports by the required deadlines.[6] While this development impacts only appellate review of disputes, it certainly causes concern regarding the WTO’s future viability. Without action, by December 10, 2019, the terms of two further Appellate Body Members will expire and only one seat in the Appellate Body will be occupied. It will become impossible for the Appellate Body to function, as a minimum of three panel members are required to hear an appeal.[7]
Already Member States are developing work-arounds. At the end of July, Canada and the European Union issued a joint statement confirming that they had agreed to an Interim Appeal Arbitration Arrangement to resolve WTO disputes at the appellate level.[8] Recently, the European Commission announced a mandate reflecting its interest in extending the interim arbitration arrangement to other interested third-parties.[9] The arrangement aims to develop a parallel ad hoc system for dispute resolution, permitted under Article 25 of the WTO’s Understanding on Rules and Procedures Governing the Settlement of Dispute, but it has not previously been tested and is only a temporary solution to a systemic challenge.
2. From NAFTA to USMCA: A New Era in Regional Investor-State Dispute Settlement
The North American Free Trade Agreement (NAFTA) has been in effect for 25 years, enabling a free-trade zone between the economies of the United States, Canada, and Mexico. When it was negotiated, it was universally heralded for providing regional foreign investors (and the Member States in which they invest) with a benchmark for rights and obligations.[10] In particular, the Investor-State Dispute Settlement (ISDS) mechanism of Chapter 11, which allows foreign investors to assert claims against other Member States under certain conditions, was key to its success.
In October 2018, President Trump collaborated with his Canadian and Mexican counterparts to unveil the U.S.-Mexico-Canada Agreement (USMCA).[11] From a trade and economic perspective, the resounding view is that not much has changed.[12] From an ISDS perspective, USMCA’s Chapter 14, focused on resolution of investment disputes, reflects noteworthy shifts.[13]
In contrast with NAFTA, the proposed USMCA no longer adopts a “balanced” approach to rights and obligations among the three Member States. Indeed, Canada has withdrawn from Chapter 14 entirely. Its consent for legacy claims will expire three years after NAFTA’s termination (a currently undetermined date).[14] ISDS survives for the benefit of American and Mexican investors, but the types of disputes investors may pursue (and the procedural means to do so) have been changed, and certain elements are now dependent on national identity:
- First, investors (i.e., prospective claimants) are now required to litigate claims “before a competent court or administrative tribunal of the respondent.”[15] Claimants must litigate until a “final decision from a court of last resort,” or, alternatively, 30 months have elapsed since local court proceedings were initiated.[16] There is an exception to this local litigation requirement “to the extent recourse to domestic remedies was obviously futile or manifestly ineffective.”[17] This scheme is accompanied by a four-year concurrent statute of limitations for asserting any treaty claim.[18]
- Second, USMCA provides an “asymmetrical” fork-in-the-road provision.[19] If, during local court proceedings, an American investor alleges a breach of the USMCA itself (as opposed to a breach of Mexican law), this will bar any right to arbitration under Chapter 14 of the USMCA.[20] The USMCA does not contain a parallel provision for Mexican investors, thereby altering the scope of an investor’s rights based solely on nationality.
- Finally, investors may only pursue claims concerning (a) direct (but not indirect) expropriation,[21] (b) violations of national treatment,[22] or (c) violations of the USMCA’s Most Favored Nation (MFN) provision.[23] There is a carve-out for MFN claims concerning “the establishment or acquisition of an investment.”[24] This is a departure from the approach of similar provisions in other investment agreements.
Further ISDS rights are available for claims concerning government contracts in several highly regulated sectors (including energy, telecommunications, transportation, and infrastructure).[25] They allow investor-claimants to pursue claims for violations of the minimum standard of treatment under customary international law, indirect expropriation, and the establishment or acquisition of an investment.[26]
Although leaders of all three Member States signed the USMCA at a ceremony in fall 2018, the treaty will not be binding until it is ratified domestically by each of them. Unsurprisingly, in June, Mexico became the first Member State to ratify the USMCA.[27] Compared to the other Member States, Mexican law provides for the shortest path for ratification and Mexico generally has been a very strong proponent of the USMCA.[28] Canada and the United States, on the other hand, have both initiated the ratification process and progress is expected during the upcoming months. Following ratification by the remaining two Member States, U.S. businesses with investments and business activities in Mexico will be better able to assess the impact on their rights.
3. U.S. Sanctions: Extraterritorial Application, Complexity in Compliance, and Increased Risks
The use of Office of Foreign Assets Control (OFAC) sanctions to implement U.S. foreign policy is not new, and U.S. businesses working abroad (including their foreign subsidiaries) are accustomed to complying with these laws. But the Trump Administration has increased the breadth of these sanctions and also increased OFAC’s enforcement efforts. In just the past few months, new sanctions targeting Venezuela, Russia, and Nicaragua have been introduced.[29] This is apart from the broad sanctions which continue to target Iran, now with greater force and complexity.
In May 2018, the Trump Administration announced its withdrawal from the Joint Comprehensive Plan of Action (JCPOA).[30] This is a change from the policy adopted by other P5+1 partners (China, France, Russia, the United Kingdom, and Germany), which remain committed to the 2015 agreement, which seeks to limit Iran’s nuclear activities in exchange for sanctions relief.[31] At initial review, the U.S.’s departure from JCPOA is not significant; even during its participation in JCPOA, the comprehensive U.S. embargo against Iran remained in place with very limited exceptions. U.S. persons remained prohibited from doing business with Iran or its government.
The impact on businesses is clear when examined from an international compliance perspective. During the Obama Administration, the U.S., E.U., and other allies cooperated to align their sanctions on common targets to create coherence and maximize impact (an example is the JCPOA). The Trump Administration adopts a unilateral approach toward sanctions, which creates divergence in both the timing and substance of global sanctions measures. This has caused the E.U. to expand the scope of its blocking regulation to prohibit E.U. companies from complying with U.S. secondary sanctions that target Iran.[32]
Secondary sanctions target foreign individuals and entities for engaging in enumerated activities that may have no U.S. jurisdictional nexus. The goal is to inhibit non-U.S. citizens and businesses abroad from doing business with a target of primary U.S. sanctions.[33] Violation of secondary sanctions by a non-U.S. entity can cause it to be subject to various sanctions by the U.S. government. Although OFAC provided 90- and 180-day wind-down periods, those periods have now expired, and the Trump Administration has signaled that it will fully enforce the sanctions now in effect.[34] This creates challenges for international businesses which must comply with both U.S. and E.U. law. Further challenges concerning available claims and defenses may emerge in the future as these businesses encounter disputes related to their international activities.
Conclusion
At the moment, it is difficult to discern whether businesses working internationally are faring better or worse than they have under past U.S. administrations. However, at the very least, businesses today may need to look to different fora and mechanisms to protect their investments and advance their rights. Separately, businesses may be exposed to increased or different risks than they may have experienced under the Obama Administration. These shifts make for a dynamic and evolving environment that should be closely monitored by international business litigators and dispute resolution specialists.
[1] This article draws upon themes discussed during a program at the ABA Section of International Law’s Annual Conference this past spring, chaired and moderated by the author (see Farshad Ghodoosi, Kiran Nasir Gore, Mélida Hodgson, Ting-Ting Kao & M. Arsalan Suleman, Panel Presentation at ABA Section of International Law Annual Conference: The Trump Effect on the Future of Global Dispute Resolution (Apr. 10, 2019)). All opinions expressed here are exclusively the author’s and should not be attributed to any of her fellow panelists or any organizations/firms with which they are affiliated.
[2] Challenges have been brought by China, India, the European Union, Canada, Mexico, Norway, Russia, Switzerland, and Turkey. Several other countries have joined these disputes as Third Parties.
[3] Third-Party Oral Statement of the United States, Russia – Measures Concerning Traffic in Transit, WT/DS512, at 4 (Jan. 25, 2018); Third-Party Executive Summary of the United States, Russia – Measures Concerning Traffic in Transit, WT/DS512, at 2 (Feb. 27, 2018).
[4] See Panel Report, Russia – Measures Concerning Traffic in Transit, ¶ 7.103, WTO Doc. WT/DS512/R (adopted Apr. 5, 2019).
[5] Jennifer A. Hillman, How to Make the Trade War Even Worse, N.Y. Times (Dec. 17, 2018). See Joost Pauwelyn, WTO Dispute Settlement Post 2019: What to Expect? What Choice to Make?, Working Paper at 1 (July 6, 2019) (“The last time the AB was fully composed (seven ABMs) is now two years ago (June 2017).”).
[6] Id. See also WTO Members Intensify Debate Over Resolving Appellate Body Impasse, Int’l Ctr. Trade & Sustainable Dev. (June 28, 2018); Tom Miles, Trump Threats, Demands Spark ‘Existential Crisis’ at WTO, Reuters (Oct. 24, 2018).
[7] The international community has begun speculating how, without action to ensure a functional Appellate Body, the WTO may continue to oversee and adjudicate trade disputes going forward. See generally Pauwelyn above.
[8] Joint Statement by Canada and the European Union (EU) on an Interim Appeal Arbitration Arrangement (July 25, 2019).
[9] News Release, European Commission Adopts Mandate to Extend Interim Appeal Arbitration Arrangement (Sept. 4, 2019).
[10] North American Free Trade Agreement (NAFTA) (Jan. 1, 1994).
[11] See generally Robert Landicho and Andrea Cohen, What’s in a Name Change? For Investment Claims Under the New USMCA Instead of NAFTA, (Nearly) Everything, Kluwer Arbitration Blog (Oct. 5, 2018).
[12] See e.g., Daniel J. Ikenson, USMCA: A Marginal NAFTA Upgrade at a High Cost,” Cato Inst. (April 10, 2019); Gwynn Guilford, “The net impact of Trump’s new NAFTA is probably nothing, Quartz (Apr. 22, 2019).
[13] For a more in-depth discussion, see generally Kiran Nasir Gore, From NAFTA to USMCA: Providing Context for a New Era of Regional Investor-State Dispute Settlement, 8 Young Arbitration Rev. 4 (July 2019).
[14] A “legacy investment” is defined as “an investment of an investor of another Party in the territory of the Party established or acquired between January 1, 1994, and the date of termination of NAFTA 1994, and in existence on the date of entry of force of this agreement.” USMCA, Annex 14-C (Legacy Investment Claims and Pending Claims), Art. 6(a).
[15] Id., Annex 14-D (Mexico-U.S. Investment Disputes), Art. 14.D.5 (Conditions and Limitations on Consent).
[18] Id., Art. 14.D.5 (Conditions and Limitations on Consent).
[19] For an in-depth discussion, see Alexander Bedrosyan, The Asymmetrical Fork-in-the-Road Clause in the USMCA: Helpful and Unique, Kluwer Arbitration Blog (Oct. 29, 2018).
[20] USMCA, Annex 14-D (Mexico-U.S. Investment Disputes), App’x 3.
[21] “Direct expropriation” occurs when “an investment is nationalized or otherwise directly expropriated through formal transfer of title or outright seizure.” Id., Annex 14-B (Expropriation), Art. 2.
[22] “National treatment” means “treatment no less favorable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory” Id., Art. 14.4.1 (National Treatment).
[23] An MFN claim arises when a State’s treatment of an investor is “less favorable than the treatment it accords, in like circumstances, to investors of any other Party or of any non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory” Id., Art. 14.5.1 (Most-Favored-Nation Treatment).
[24] Id., Annex 14-D (Mexico-U.S. Investment Disputes), Art. 14.D.3 (Submission of a Claim to Arbitration), Art. 14.D.3 (Submission of a Claim to Arbitration), note 22.
[25] Id., Annex 14-E (Mexico-U.S. Investment Disputes Related to Covered Government Contracts), Art. 6.
[27] Mary Beth Sheridan, Mexico becomes first country to ratify new North American trade deal The Wash. Post. (June 19, 2019).
[28] Ryan Bernstein and Mariam Etedali, Clock is ticking for ratification of USMCA trade deal, MarketWatch (June 18, 2019).
[29] See, e.g., Press Release, Treasury Sanctions Security Officials Associated with Violence and Obstruction of Humanitarian Aid Delivery, U.S. Treasury (Mar. 1, 2019); Press Release, Treasury Sanctions Russia over Continued Aggression in Ukraine, U.S. Treasury (Mar. 15, 2019); Press Release, Treasury Sanctions Members of Nicaraguan President Ortega’s Inner Circle Who Persecute Pro-Democracy Voices,” U.S. Treasury (June 21, 2019).
[30] Mark Landler, Trump Abandons Iran Nuclear Deal He Long Scorned, N.Y. Times (May 8, 2018).
[31] Joint Comprehensive Plan of Action (JCPOA).
[32] Council Regulation (EC) No. 2271/96 (Nov. 22, 1996), protecting against the effects of the extraterritorial application of legislation adopted by a third country, and actions resulting therefrom.
[33] Jeffrey A. Meyer, Second Thoughts on Secondary Sanctions, 30 U. Pa. J. Int’l L. 905, 906 (2009).
[34] See generally U.S. Treasury Iran Sanctions Resource Center.