Contributed by Robert Lyman © 2017

Cropped photo of Robert Lyman

Robert Lyman

According to a recent poll of Canadians conducted by EKOS Research on behalf of the Council of Canadians, almost three quarters of Canadians would support “walking away” from the North American Free Trade Agreement (NAFTA) if the current negotiations on its renewal are not good for the people of Canada. Well, of course they would. To make things confusing, the actual question was cast in terms of a deal “not good for the people or the environment”. Adding the reference to the environment is an obvious attempt to imply that NAFTA is in some way harmful to the environment.


In fact, the wording of almost all the questions on the poll offers a misleading choice designed to skew the public response. For example, one question asks for the participants’ degree of agreement or disagreement with a statement that NAFTA’s proportionality clause “forces Canada to export Canada’s energy resources at a percentage of what it exported in previous years”. That statement is false, as the proportionality clause only applies in the case that Canada imposed energy export controls, which it has no intention to do. Another question asks participants’ degree of agreement or disagreement with a statement that “Water is defined as a tradable good or service in NAFTA” and “Water should be removed from NAFTA”, when there are no clauses concerning water in the NAFTA Agreement. By misleading people from the start, the poll uses dishonest methods to elicit alarmed responses.


The purpose of this note is to offer to those Canadians who read about the outcome of the poll a factually correct explanation of the issues in play on the three areas in which the EKOS poll focused. These are:


  • Whether clauses in NAFTA make water vulnerable to “export and privatization” and should be removed from the agreement;
  • Whether the energy “proportionality” provisions of the agreement should be removed; and
  • Whether the Chapter 11 provisions that allow corporations to sue states should be eliminated.


Each of these issues relates to a fairly complex question of international trade law and practice on which few Canadians have any detailed knowledge. A few pages of text cannot adequately explain the issues. I will, however, try to present the essential facts and offer sources where readers can go to read more if they are interested.


NAFTA and Water 

Under the federal government’s water policy established in 1987 and still in force, the government is committed to “take all possible measures within the limits of its jurisdictional authority to prohibit the export of water by inter-basin diversions, and strengthen federal legislation to the extent necessary to implement this policy fully.


The federal government has consistently taken the position that the NAFTA does not apply to water in its natural state. Water was not discussed during the NAFTA negotiations with the United States and Mexico. In fact, Canada’s legislation to implement the original Canada-United States Free Trade Agreement (FTA) states clearly that the FTA does not apply to water, except in the case of water packaged as a beverage or in tanks.


Even if this were not the case, NAFTA Article 201 (under the definitions of general application) defines the “goods of a party” to which it applies as “domestic products as these are understood in the General Agreement on Tariffs and Trade.” As the GATT does not define “product”, the meaning of this word is its ordinary meaning, which is “something that is produced.” For a thing to be produced, it must be extracted, harvested, collected, stored, graded, transported, refined, processed, assembled, packaged, or somehow transformed into an article of commerce. Water in lakes or aquifers are not “products” and are not subject to NAFTA provisions.


The concerns raised by the Council of Canadians are thus completely unwarranted.


For a much more detailed explanation of these issues, see the following brief:


The Proportionality Provision


The goal of a free trade agreement is to encourage mutually beneficial trade among a group of countries by eliminating artificial barriers to that trade. One of the principles that underlie such agreements is that the governments concerned will not discriminate against the companies and citizens of the other countries for purposes of trade and investment. In other words, the companies of each country are to be accorded “national treatment”; they will be treated, for purposes of trade and investment, exactly the same as the companies of the other countries.


Chapter 6 of the NAFTA sets out the provisions that will govern trade in energy and basic petrochemicals. It does not restrict the ability of Canada to impose restrictions on the export of energy products. It requires, however, that if Canada were to impose such restrictions on exports to the United States and Mexico, or if the United States or Mexico were to impose restrictions on the export of energy to Canada, the restriction must not reduce the proportion of the total export shipments of that energy product to that of the total supply of that product during the previous three years. What that means is that if, for example, Canada decided to cut the amount of oil sold in 2018, it must treat American and Mexican export customers generally the same as domestic customers and not discriminate against them.


The original need for such a provision arose out of circumstances in the 1970’s and early 1980’s, when Canada’s policy was to restrict energy exports as a way to increase energy security during an international oil supply disruption. In fact, this policy contributed nothing to Canada’s security of energy supply. It was only when Canada removed export controls on oil and natural gas that the petroleum industry, responding to market signals, sharply increased Canada’s reserves and production.


Export controls were removed in 1985, 32 years ago. Canada’s security of energy supply today is assured through its diversity of energy supplies, a flexible energy system, the steady growth in Canadian energy production, and the declining role of OPEC as a supplier of the world’s oil. Indeed, today the United States is a large and growing oil exporter, as is Mexico. There is virtually no reason why Canada would want to restrict energy exports. If, for some future reason, the situation changed, the principle of national treatment would assure the fair treatment of Canadian oil importers just as much as it would the fair treatment of United States and Mexican importers.


The concern over the “proportionality clause” in NAFTA thus is an anachronism; it is a leftover from a bygone era of energy policy in the 1970’s and 1980’s and unwarranted today.


Dispute Settlement – The Right of Companies to Sue Governments 

All free trade agreements recognize that, despite the agreement on free trade and national treatment principles, disputes will sometimes arise that require resolution through the courts or other dispute resolution mechanisms.


Chapter 11 of NAFTA contains detailed dispute resolution provisions for officiating disputes related to cross-border investments. It enables private corporations in one NAFTA country to sue, through an arbitration process, the national government of another NAFTA party where that government’s actions negatively affect the first party’s investment rights. The key provisions include:


  • Article 1102, which requires a party to treat investors from the other NAFTA countries (and their investments) as it treats its own investors (i.e. the national treatment principle).
  • Article 1103, which prohibits a country from treating an investor or investment from a non-NAFTA country more favourably than an investor from a NAFTA country (i.e. what is called the “most-favoured nation” clause).
  • Article 1106, which prohibits the imposition and enforcement of a number of specified performance requirements (such as rules requiring manufactured goods to contain a certain level of domestic content, or restricting levels of a certain percentage of goods or services for export purposes).


The Chapter also sets out the dispute settlement procedures necessary to resolve complaints between investors and NAFTA party governments that assure equal treatment with the principle of international reciprocity and due process before an international tribunal.


The use of the dispute settlement procedures is not arbitrary; in fact, it is governed by strict rules. An investor claim must be brought within three years of when the investor first learned that it had incurred a loss or damage. Parties must first attempt to settle a claim through consultation or negotiation, and should that process fail, then the initiating investor must submit a notice of its intention to submit a claim to arbitration at least 90 days before the claim is submitted.


An arbitration tribunal has no authority to order a government to change its laws or regulations, but it may award monetary damages, restitution of property, and legal costs if warranted.


The Council of Canadians likes to give the impression that these rules were designed to frustrate Canada’s environmental and health regulations, but that is not true. The reason such provisions were included was largely to offer an alternative to pursuing cases involving nationalization or abuse of foreign investors’ property interests before the courts of a country where the courts might be prejudiced or vulnerable to political influence. Clearly, these concerns were primarily directed at Mexico, which in the past has discriminatory actions against foreign investors. To date, there have been 45 notices to commence arbitration filed by corporation and investors under NAFTA’s Chapter 11 investor provisions. Of these 45 notices, only 13 have been against the Canadian government; most have been against Mexico, which has been the recipient of 18 notices of intent. Of the 45 notices of intent filed, 21 have been withdrawn. Further, of the 12 cases that have been concluded, only 5 have been won by investors (including one case that was settled). In these 5 cases, investors have claimed a total of U.S. $791 million, but only received a total of U.S. $35.5 million. Canada, for example, has only paid out a total of U.S. $18.4 million in three cases that were won by investors, while over U.S. $900 million has been claimed.


The legal firm of Millar Kreklewetz LLP has provided a good summary of the dispute settlement mechanism here:


The Council of Canadians also ignores the benefits to Canadians firms from having access to an impartial international panel to address disputes in which United States governmental action or U.S. courts have treated Canadian firms unfairly. The current U.S. Administration has already stated that it is in favour of laws and regulations that offer protection or advantageous treatment to American firms over those of other countries. This makes it all the more important to have available legal protections for Canadian firms.


There is no small irony in the allegation that U.S. companies might use the NAFTA dispute settlement mechanism as a way to insert economic interests into public policy decisions about the environment. Canadian and American environmental groups constantly use lawsuits and appeals to tribunals as a way to insert environmental issues into public policy decisions about economic projects. Are Canadians to forget the dozens of lawsuits and delaying tactics used by environmental groups to block the consideration and approval of energy pipeline projects in Canada and the United States? Are we to believe that the legal system should be used as a defence for only one side’s views?


Having noted these points, there are reasons to believe that the dispute settlement mechanism can be improved and that the historic concerns about the impartiality of Mexico’s courts may no longer warrant an alternative NAFTA-based dispute settlement mechanism. Those issues should be addressed by the participating governments based on the legal merits, not because of a false claim that dispute settlement threatens Canada’s environment.


The Benefits of NAFTA 

It seems clear that the Council of Canadians is intent on undermining the credibility of NAFTA and ignoring the significant economic benefits that have accrued to the North American economy since the conclusion of this agreement. The reality is that trade has increased five-fold since NAFTA’s 1994 implementation. Foreign direct investment within the NAFTA regions has increased significantly. Unfortunately, despite the growth of trade, there continue to be disagreements about the continued and potentially growing protectionist actions in all three countries. Each country has legitimate concerns about how well the agreement has served its original purposes and there are ample opportunities to make the agreement better. Those objectives will not be served by spreading unjustified and out-of-date fears about how the agreement has affected the parties to date.