I. INTRODUCTION
“It does little good to forecast the future of semiconductors or energy, or the future of the family (even one’s own family), if the forecast springs from the premise that everything else will remain unchanged. For nothing will remain unchanged. The future is fluid, not frozen.”
— Alvin Toffler, The Third Wave
On November 30, 2018, after 14 months of heated negotiations, representatives of the United States, Mexico and Canada signed the NAFTA 2.0, known as the “United States-Mexico-Canada Agreement” (USMCA), or as referred to officially by the Government of Canada, the Canada-United States-Mexico Agreement (CUSMA).1
The CUSMA will supersede the quarter-century-old North American Free Trade Agreement (NAFTA) when the agreement comes into force. At the time of writing, however, there remain significant political hurdles to overcome before the newly negotiated CUSMA comes into force – most notably ratification by the U.S. Congress. Accordingly, for at least the next several months, the original NAFTA is the operative agreement unless President Trump makes good on his threat to withdraw from NAFTA,2 or until each of the three countries implements the CUSMA by its adoption into their respective domestic legislation. With these important reservations, January 1, 2020 is a likely target date for the new agreement to come into force.
The most visible change in the CUSMA is the absence of a specific chapter dealing with energy matters. Chapter 9 (Energy) of the original Canada-U.S. FTA and Chapter 6 (Energy and Basic Petrochemicals) of NAFTA which are no longer part of the framework governing trade among the North American countries. Accordingly, it is necessary to look at a variety of provisions in the new agreement to determine the rules that apply to trade and investment for the energy sector.
With respect to energy, which has been heralded as a “crown jewel of NAFTA nations”,3 CUSMA provides continuity and a solid framework for the energy sector. The regulations applying to the free flow of natural gas, oil and, for the most part, electricity, are “largely untouched”.4 While the CUSMA does not radically change the business landscape for the energy industry, it contains several significant changes that warrant the attention of Canadian energy stakeholders, such as oil and gas producers and service providers, power producers, pipeline operators, engineering/design, procurement and construction (EPC) companies, and their business advisors. These changes include removal of the energy proportionality requirement, phase-out of the Investor-State Dispute Settlement mechanism for Canadian investors, and a bilateral U.S.-Canada side letter on energy instead of a chapter on energy that binds all three CUSMA parties. In addition, Canada is not a party to the procurement chapter, leaving future Canadian bidders to navigate around the World Trade Organization’s Government Procurement Agreement or the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, depending on whether the procurement opportunity is in the United States or Mexico.
This Article offers a snapshot of the political dynamic of the CUSMA negotiation, outlines the significant changes that the energy industry and its stakeholders should anticipate, and concludes by offering key takeaways to consider in navigating the new North American trade frontier.
(A) Political Dynamic of CUSMA Negotiation
Since the Office of the U.S. Trade Representative (USTR) issued the Trump administration’s negotiation objectives for NAFTA in July 2017,5 the respective political landscapes in the United States and Mexico have shifted, adding a layer of uncertainty to the repeal and replacement of the NAFTA by its successor agreement, CUSMA.
On the U.S. front, the 2018 midterm elections in November resulted in a divided Congress, with Democrats capturing the House of Representatives and the Republicans strengthening their Senate majority. Since December 22, 2018, a host of U.S. government agencies has shut down as the result of a standoff between President Trump and Congress arising from cross rejections of proposed spending packages for funding the federal government proposed by each of President Trump and Congress.6
Mexico’s left leaning President Andreas Manuel Lopez Obrador assumed office on December 1, 2018. He has accepted the conclusion and signing of the CUSMA.7 However, the Mexican relationship with the U.S. remains difficult, on both trade and more generally as witnessed by the fracas over President Trump’s proposed border wall.
(B) Ratification of CUSMA in Canada
When providing for the implementation of NAFTA in the North American Free Trade Implementation Act, the Canadian Parliament modified elements of federal law to give effect to NAFTA.8 Currently, the National Energy Board Act requires the National Energy Board (NEB) to give effect to the NAFTA when it exercises its functions. If, and when, CUSMA is ratified, its implementing legislation is likely to contain a similar provision.9 The Canadian government currently plans to ratify NAFTA and pass the necessary implementing legislation quickly after the U.S. does so. Therefore, this is expected to be a time sensitive endeavour, requiring Parliament to hold hearings and pass the legislation in an expeditious manner. Accordingly, energy stakeholders who may be affected by CUSMA are encouraged to take proactive steps to seek consultation on how they can meaningfully engage in discussions with government representatives to get a good understanding of how the implementing legislation will be drafted on matters of particular interest to their businesses. In addition stakeholders might want to make suggestions as to how the legislation should be worded.
(C) What Has Changed?
The CUSMA contains energy-related provisions in various parts of the agreement, and a very short separate chapter titled “Recognition of the Mexican State’s Direct, Inalienable and Imprescriptible Ownership of Hydrocarbons”. In addition, Canada and the United States agreed to the contents of an enforceable bilateral U.S.-Canada side letter on energy regulatory measures and regulatory transparency, which does not apply to Mexico.
1. Removal of the Proportionality Requirement
For Canada and the United States, one of the key changes in CUSMA is the removal of the “energy proportionality clause”. This clause, which was part of Article 605 in NAFTA,10 in effect requires Canada and the U.S. to provide national treatment to the domestic purchasers of energy products in the other country if action to restrict exports is taken in times of shortage as permitted under Article XI of the General Agreement on Tariffs and Trade (GATT).11 Under its terms, no government measure may reduce the proportion of the supply of an energy product to the other Party based on recent export levels. The obligation never operated to guarantee the supply of a specific quantity of product, rather it prevented governments from intervening in the market with the effect of reducing supply in a way that disproportionally impacts domestic purchasers in the other country. The NAFTA Parties have never invoked this clause, and concern in the U.S. about the reliability of energy supply has dissipated with the enormous growth in its own energy production.
2. Phase out of the Investor-State Dispute Settlement Provisions between Canada and the United States
NAFTA Chapter 11’s investor-state dispute settlement provisions (known as ISDS) establish a mechanism to resolve disputes between the NAFTA Party states and their investors for the investments covered by the agreement. From the perspective of oil and gas investors, NAFTA’s ISDS mechanism has been critical in protecting against unfair treatment or expropriation by other host countries. Private investors were able to seek not just recovery of incurred costs but expected profits as well. It is clear investors had structured their investment proposals so as to take advantage of the potential Chapter 11 remedies. For instance, at the time of writing, four of the five ongoing NAFTA Chapter 11 arbitration cases filed against the Government of Canada are in the energy space, respectively involving a quarry and marine terminal project, oil and gas resources development and production (two cases), and a wind farm development.12
Crucially, the CUSMA will phase out the NAFTA ISDS provisions between Canada and the United States. According to CUSMA Chapter 14 on Investment, for three years after the termination of NAFTA,13 existing “legacy investment claims and pending claims”14 will be covered under what were formerly provisions of NAFTA Chapter 11. Thereafter, ISDS will not be available to protect investments of Canadian investors in the United States, or those of U.S. investors in Canada. This lack of private recourse to NAFTA-based arbitration will resonate in the energy space.
Canadian or U.S. investors must initiate any valid claims regarding investments established or acquired while NAFTA was in force within three years of NAFTA’s termination. After the three-year window for legacy claims, Canadian and U.S. investors will no longer be able to invoke NAFTA-based ISDS remedies. As a strategy, Canadian investors who have potential investment disputes against the United States should consider retaining legal counsel to assess the merit of the case within the three-year window.
There is narrower but continued access to ISDS for U.S.-Mexico investments in key industries, which include oil and gas,15 power generation services,16 transportation,17 the ownership or management of certain roads, railways, bridges or canals,18 and telecommunications.19 In these cases, U.S. or Mexican investors may bring claims based on most investor protections in CUSMA without first pursuing local remedies. For other sectors, CUSMA maintains U.S.-Mexico ISDS only if the claimant exhausts national remedies first. This means that the claimants cannot bypass Mexican courts; in fact, they must try to use local remedies for 30 months, and ISDS is then available if this recourse does not result in a conclusion.20
As the result of these changes, Canadian or American investors are limited to adjudicating future investment disputes in domestic courts or before other international arbitration tribunals.
On the other hand, Canadian energy investors in Mexico, and vice versa, benefit from ISDS protection through the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) provisions, which came into force on December 30, 2018.21 Investors from Mexico and Canada, therefore, still enjoy potential remedies for private investment disputes arising in the other country.
The Parties to CUSMA may nevertheless challenge violations of investment protections in the Agreement through state-to-state dispute settlement found under Chapter 31 of the CUSMA,22 which is to the replacement for NAFTA Chapter 20, which allows the government of any NAFTA country to file a complaint when it believes another government is violating the agreement. State-to-state dispute settlement, however, may not provide redress for damage suffered by private investors due to violations of the CUSMA.
3. Elimination of Tariffs on Heavy Oil Containing Diluent
CUSMA includes a rule of origin amendment to allow up to 40 per cent of non-originating diluent in pipelines for transportation of crude oil without affecting the status of the oil as a product eligible for duty free treatment under the Agreement.23 This has been a longstanding Canadian industry request. When producers blend bitumen and heavy crude oil with condensates or diluents to transport the oil by pipeline, the blended crude may no longer qualify as “wholly obtained or produced” in Canada if the diluent itself did not qualify as NAFTA originating. Some Canadian crude shipments did not qualify for duty free treatment under the NAFTA and were subject to American duty. This amendment will resolve this technical issue that resulted in upwards of $60 million a year in duties and other fees on Canadian crude exports to the United States.24
4. CUSMA Does Not Cover Government Procurement as between Canada and the United States
One of the most surprising features of the CUSMA is the omission of Canada from the procurement provisions of the Agreement.25 The obligations of the procurement chapter apply only between the United States and Mexico.26 Government procurement as between Canada and the United States is covered by the Government Procurement Agreement (GPA) of the World Trade Organization (WTO), to which Canada and the United States are parties. Mexico is not a party to the GPA.
The current revised GPA came into force in 2014. It is an improved version of the original agreement and provides for more coverage than the earlier GPA or the NAFTA. Canada’s coverage of entities under the GPA is broader as it binds the procurement of its provinces, while NAFTA has no sub-central coverage. Under both agreements, Canada covers the same federal government entities and government enterprises.27 Under the GPA, 37 U.S. states are covered by the agreement as “Sub-Central (Federal) Government Entities.”28 In these states, Canadians are eligible to bid on contracts as provided for under the agreement.
This is significant because while most procurement funding may come from the federal governments, in the majority of projects the procuring entity is at the state or local level. While these trade agreements do not apply to municipalities, open access to state level procurement is an important advantage offered by the GPA and presents significant opportunities for Canadian energy businesses.29
The most obvious differences are the higher thresholds (the monetary values at or above which procurement is open to foreign suppliers under the agreement) that apply to the covered procurement under the GPA compared to the NAFTA procurement provisions. This reduces the number of contracts that U.S. and Canadian firms are eligible to bid on in each government’s respective procurement markets.30
On the other hand, the thresholds applicable under CUSMA to Mexico and the United States remain the same as those currently available under NAFTA. As in NAFTA, the CUSMA allows Mexico to set-aside a certain amount of its procurement for Mexican suppliers. It may set aside procurement contracts up to $2.328 billion each calendar year, with the amounts subject to annual adjustment for cumulative inflation.31 These are allocable by all entities, including Petróleos Mexicanos (PEMEX) and Comisión Federal de Electricidad (CFE) (Federal Electricity Commission). However, the total value of the government contracts set aside by PEMEX and CFE may not exceed US$466 million each year.32 There are also a range of set asides that the United States can use to frustrate foreign access to its procurement markets.
Finally, the CPTPP governs Canada’s procurement relationship with Mexico. All Canadian provinces and territories made sub-national commitments on government procurement in the CPTPP that are comparable to those found in the GPA. Commitments at the sub-national level are limited to the procurement activities conducted by provincial/territorial departments and agencies; procurement activities of Canadian municipalities are not covered under the CPTPP.
Depending on the nature of the procurement and the entity doing the procurement, potential Canadian bidders will have to seek various provisions under the GPA or the newly-minted CPTPP. Below are the full access thresholds under the CPTPP, NAFTA and the GPA, for goods, services and construction of government entities (i.e., departments and agencies), and crown corporations and other government enterprises.
Table 1: thresholds on trade agreements
(CAN$ December 30, 2018, to December 31, 2019)
Free trade agreement | Entities (departments and agencies) | Crown corporations and other government enterprises | ||||
---|---|---|---|---|---|---|
Goods | Services | Construction | Goods | Services | Construction | |
CPTPP | 237,700 | 237,700 | 9,100,000 | 649,100 | 649,100 | 9,100,000 |
North American Free Trade Agreement (NAFTA) | ||||||
Canada/US | 32,900 | 106,000 | 13,700,000 | 530,000 | 530,000 | 16,900,000 |
Canada/Mexico | 106,000 | 106,000 | 13,700,000 | 530,000 | 530,000 | 16,900,000 |
World Trade Organization – Government Procurement Agreement (WTO-GPA) | 237,700 | 237,700 | 9,100,000 | 649,100 | 649,100 | 9,100,000 |
Source: Treasury Board of Canada Secretariat, Contracting Policy Notice: 2018-0133
5. The Bilateral Canada-U.S. Side Letter on Energy
Canada and the United States negotiated a side letter to CUSMA on energy,34 titled “Energy Regulatory Measures and Regulatory Transparency”, in the final phase of the negotiation as a substitute for an energy chapter that had been negotiated but was dropped at the request of Mexico’s incoming government during the bilateral U.S.-Mexico phase of the negotiations over the summer. When confronted with a fully concluded bilateral free trade agreement between the United States and Mexico in August 2018,35 Canadian negotiators quickly took note that the energy chapter had disappeared and engaged with their American counterparts over the idea of including a bilateral side letter that would be enforceable and would form an integral part of the entire agreement. Canada and the United States agreed that the side letter “shall constitute an integral part of the Agreement.”36 Its provisions will come into effect when CUSMA comes into force. The side letter offers a fail-safe, binding guarantee that stakeholders will not be subject to treatment that is worse than what is now applied.
The salient features of the side letter are:
- The side letter applies only to energy regulatory measures at the central level of government (Article 2).
- An article encouraging cooperation in the energy sector (Article 3). While the provision is largely symbolic, the language captures the Canadian and American commitments to cooperate on energy regulation in recognition of the importance of enhancing the integration of North American energy markets based on market principles.
- Provisions that require Canada and the United States to establish or maintain an independent regulatory authority, and the establishment of transparency requirements for the authorization process in the energy sector (Articles 4.1, 4.2, 4.3 and 4.4). This is an important substantive provision of the side letter and is particularly relevant for Canadian energy industry stakeholders. It addresses regulatory measures and the requirement for transparency. Paragraph 4.3 allows a Party to require an authorization to participate in energy-related activities in its territory. For example, the Government of Canada may require applicants to seek authorization to engage in activities such as operating a pipeline, something that the National Energy Board does.37 Paragraph 4.4 includes notice requirements, which are important given the experiences that some Canadian firms have in the United States. Publishing information relevant to the authorization process, and establishing this requirement in law, are a prerequisite to requiring an authorization. Importantly paragraph 4.2 requires that each Party “endeavor to ensure that in the application of an energy regulatory measure, an energy regulatory authority within its territory avoids disruption of contractual relationships to the maximum extent practicable.”
- Requirements for Canada and the United States to provide a right of appeal or judicial review of certain decisions concerning these authorizations in accordance with each Party’s law (Article 4.8). Corollary to the notice requirement, this paragraph provides a legal avenue for appeal or judicial review by an unsuccessful applicant. The right of judicial review currently exists in practice; thus this provision is considered a treaty “lock in” of existing domestic (non-treaty based) law. However, this right of appeal or review does not apply to authorizations for “the construction, connection, operation, or maintenance of cross-border infrastructure, including electric transmission facilities and pipeline networks, at international boundaries.”38
- An obligation stating that measures governing access to or use of energy infrastructure must be “neither unduly discriminatory nor unduly preferential” (Article 5.1). This provision establishes non-discriminatory treatment regarding access to electric transmission facilities and pipeline networks. There have been issues of this kind in the past originated at the state level where the California Public Utilities Commission sought to upset the longstanding contractual framework governing the flow of natural gas from Alberta. Given the broad language employed it remains to be seen whether any additional protections have been afforded as a result of this provision, In that regard, Article 5.1 stipulates that the term “neither unduly discriminatory nor unduly preferential” is to be interpreted specifically in reference to trade related precedents which may differ from that interpretation employed under domestic utility laws.
- The longstanding U.S. commitment from the Canada-U.S. FTA ensuring that Bonneville Power Administration, a U.S. federal agency, afford BC Hydro “treatment that is no less favourable” than that afforded to utilities located outside of the Pacific Northwest (Article 5.2). This provision is a holdover from the original Canada-U.S. Free Trade Agreement and the NAFTA. Power trades freely within the market by BC Hydro and Bonneville Power Authority located in Washington in order to maintain stable prices and supply for all participants.
6. CUSMA has a Mexico specific chapter on recognition of Mexico’s “Direct, Inalienable and Imprescriptible Ownership of Hydrocarbons”
Chapter 8 of CUSMA recognizes the sovereign right of Mexico to regulate and modify its domestic legal framework, including the Constitution. It also reaffirms Mexico’s “direct, inalienable, and imprescriptible ownership of hydrocarbons” in Mexico’s subsoil. The incoming government of the left leaning Mexican President, who has been a vocal opponent of Mexico’s energy reform that started in December 2013, requested this chapter. It remains to be seen how the New Mexican President’s administration might try to use this provision to augment its policy on energy, and further regulate investments and hydrocarbon production of foreign investors. On its face, the provision appears declaratory; it does not affect any of the specific provisions found elsewhere in the CUSMA. It may be that President Obrador sees this provision more as a statement to his domestic audience than as a provision giving Mexico new rights under CUSMA.
That said, the new administration’s pursuit of Mexico’s energy self-sufficiency may result in an increased priority to public investments while private and foreign investments are to play a “secondary role.”39
For instance, in December 2018, at the request of Mexico’s new administration, Mexico’s National Hydrocarbons Commission (CNH), which conducts the tenders and supervises contracts, cancelled two largest upstream auction rounds (auctions rounds 3.2 and 3.3),40 and Petroleos Mexicanos (PEMEX) postponed the farmout of seven onshore clusters from by seven months. A joint venture named Tonalli Energia formed by a Canadian firm, International Frontier Resources Corporation (IFR), in partnership with Mexican petrochemical company Grupo IDESA, had registered and was granted access to the data room for the second tender of Round 3.2 of Mexico’s oil and gas energy reform. As described by IFR, Round 3.2 encompasses “37 onshore conventional blocks”. As of mid-May 2018, eight companies had initiated the prequalification process and 12 companies had expressed interest in participating in Round 3.2.41
It is important to note that CUSMA also includes a new chapter on state-owned enterprise,42 which expands the definition of SOEs and largely mirrors language in the CPTPP. The modernized chapter obligates both SOEs and designated monopolies to operate “in accordance with commercial considerations”, and buy and sell goods and services in a non-discriminatory manner.43 From the perspective of Canadian or U.S. energy companies, these commitments are positive additions to the agreement that will help to ensure a level playing field and more predictability when dealing with any SOEs in Mexico, such as PEMEX and CFE.
7. “Non-Commercial Assistance” is allowed for the Trans Mountain Pipeline
Generally, the CUSMA forbids the Member states from providing non-commercial assistance to Crown corporations, meaning governments cannot assist corporations to restructure debt, rescue a corporation from bankruptcy, or offer services on terms more favourable than those commercially available.44 Under CUSMA’s Annex IV, however, the Canadian government has listed Trans Mountain Corporation (TMC) as an exception to the non-commercial assistance, “in circumstances that jeopardize the continued viability of [TMC], and for the sole purpose…to return (the enterprise) to viability and fulfill its mandate.”45 This clause indicates that the Canadian government is allowed to provide assistance to the Trans Mountain Pipeline until TMC is either privatized or ten years elapses from the date CUSMA enters into force, whichever is earlier. It is noteworthy that the Canadian government’s ability to provide assistance has a time limit of ten years from the date on which CUSMA comes into effect, as that may be a factor in the Canadian Government’s future decision to privatize TMC.
(7) What Has Not Changed?
1. Most of NAFTA’s provisions remain intact. Fundamentally, CUSMA maintains most of the NAFTA more or less as is: duty free treatment for almost all goods, strong disciplines on services, and investment and somewhat strengthened rules on intellectual property.
2. CUSMA retains the binational panel dispute settlement mechanism
CUSMA preserves the bi-national panel “dispute settlement mechanism”, which is found in NAFTA Chapter 19, and confers on all private parties the right to challenge anti-dumping and countervailing duty determinations before an independent binational expert panel.46 NAFTA Chapter 19 became a red line issue for Canada during the negotiations, contested by U.S. negotiators who wanted to eliminate the system. Retention of the mechanism is a clear political win for Canada. Historically, Canadian businesses have used Chapter 19 dispute settlement panels to challenge U.S. trade remedy decisions, notably on softwood lumber.47
It is worth noting that there is a lengthy and growing list of trade remedy cases taken by Canada against foreign suppliers of goods, and that these are of considerable importance to the energy industry.
3. U.S. Section 232 steel and aluminum tariffs remain
CUSMA does not resolve the dispute over the tariffs applied pursuant to section 232 of the U.S. Trade Expansion Act of 196248 on steel and aluminum imports from Canada and Mexico, or the retaliatory countermeasures that Canada and Mexico each put in place. Section 232 authorizes the U.S. President to restrict imports of goods that he concludes are “a threat to national security.” Under this authority, the president has applied duties of 25 per cent and 10 per cent to a range of imports of steel and aluminum products from all countries, including Canada.
Eliminating these duties and Canadian countermeasures applied in retaliation is a top trade objective of Canada in the coming months. In the meantime, they constitute a major problem not only for Canadian steel and aluminum producers but also for the users of these products such as engineering, procurement and construction (EPC) companies and energy producers, pipeline and midstream companies. Fortunately, many American interests also attach importance to removing these American tariffs and the Canadian and Mexican countermeasures. Chuck Grassley, the veteran Republican Chair of the Senate Finance Committee, has identified addressing the President’s use of Section 232 as a priority for his committee.
II .CONCLUSION
With many moving pieces and political hurdles, final content and implementation of CUSMA will remain uncertain for many months to come. If implemented, CUSMA will provide predictability and a solid framework for North American energy regulation. However, it also includes significant changes, identified in this Article that stakeholders must endeavour to understand fully to ensure a successful transition to the new post-NAFTA trade and investment regime for the energy industry. Firms should weigh the impact of these changes as they consider how to structure their businesses and investments. Changes include:
- amendments to rights of investors, including the phase-out of recourse to investor-state dispute settlement between Canada and the United States, and significantly weakened protection for American investors in Mexico;
- revised means of gaining access to government procurement contracts involving the three North American countries;
- elimination of customs duties on imports into the U.S. of Canadian heavy oil containing diluent; and,
- elimination of the proportionality clause on energy trade between Canada and the U.S.
In addition, stakeholders should monitor other trade developments beyond the immediate scope of the CUSMA. These include the American duties under Section 232 on steel and aluminum imports and the retaliatory countermeasures taken by Canada and Mexico in response. In the prevailing trade environment, energy businesses should consider utilizing the range of remedies available to mitigate the impact of these trade actions, including remission orders, duty drawback and duty relief.
The CPTPP provisions that apply only as between Mexico and Canada ironically offer a more business friendly and stable framework for investors than do the provisions of the CUSMA. Any analysis of the dynamics of the North American energy economy should account for use and impact of CPTPP provisions. Uncertainty surrounding trade rules and actions will persist at least until U.S. Congress determines the fate of the CUSMA, but there are steps that firms can take to mitigate their exposure to various risks.
* John M. Weekes is a senior business advisor at Bennett Jones LLP and was Canada’s chief negotiator for the original NAFTA negotiations an ambassador to the WTO. With his extensive experience, John provides clients with an insider’s perspective on how governments approach such matters, including the negotiation, implementation and management of trade agreements and trade relations.
** Darrel H. Pearson is a senior partner and head of Bennett Jones’ International Trade and Investment Group. Darrel practices all aspects of international trade and customs law, including trade remedies, customs, international trade treaty matters, export regulation, sanctions and controls, goods and services taxes, government procurement dispute settlement, and other regulatory matters concerning Canadian trade regulation. He has appeared before and has served on panels struck under NAFTA Chapter 19 (trade remedy) dispute resolution.
*** Lawrence E. Smith Q.C. is the founding head of the regulatory department and the former Vice Chairman of Bennett Jones. Lawrence was counsel to the National Energy Board, and served as a policy advisor to a Minister of the Government of Canada. He has presented expert testimony in commercial and NAFTA arbitral proceedings; before the California Energy Commission; and appeared as a witness before the Canadian House of Commons and Senate. His practice has focused on pipeline, power and LNG projects, energy import/export approvals and related rate regulation.
**** Margaret M. Kim is an associate in the International Trade and Investment Group of Bennett Jones. Margaret has previously worked as a consultant in the Legal Vice-Presidency Unit of the World Bank.
The authors would like to thank Micaela Zila, an associate in Bennett Jones’ Calgary office, for her assistance in preparing this Article.
Bennett Jones LLP has been intimately involved in virtually every major energy development in Canada in the past 20 years and has served as a strategic partner to both private and public sector participants in Canada’s energy industry for nearly a century. The strength and depth of our energy and trade experts have been widely acknowledged. With more leading energy lawyers than any other Canadian law firm (Lexpert®), and some of the country’s pioneers in international trade and investment law, Bennett Jones is uniquely positioned to help clients in the energy sector deal with complex legal and regulatory matters across borders.
- Global Affairs Canada, “A new Canada-United States-Mexico Agreement”, online: <https://international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/cusma-aceum/index.aspx?lang=eng>.
- Global News, “Trump says he will tell Congress soon to terminate NAFTA”, (1 December 2018), Global News, citing Reuters, online: <https://globalnews.ca/news/4720022/donald-trump-nafta-termination-congress>.
- Patti Domm, “Energy is crown jewel of NAFTA nations and will bind them, even in a trade war”, CNBC, (2 March 2018), online: <https://www.cnbc.com/2018/03/02/energy-is-crown-jewel-of-nafta-nations-and-will-tie-them-together-regardless-of-trade-deals-.html>.
- The Dialogue, “How Does the New USMCA Deal Affect the Energy Sector?” (4 October 2018), Energy Advisor, online: <https://www.thedialogue.org/analysis/how-does-the-new-usmca-deal-affect-the-energy-sector>.
- Office of the United States Trade Representative, “Summary of Objectives for the NAFTA Renegotiation”, (17 July 2017), USTR, online: <https://ustr.gov/sites/default/files/files/Press/Releases/NAFTAObjectives.pdf>. This Article adopts the Canadian version of the agreement, CUSMA.
- President Trump insisted that any spending bill contain the US$5-billion for building the “wall” between the United States and Mexico. At the time of writing, the shutdown has been going on for 27 day, now the longest shutdown in U.S. history. See The Globe and Mail, “Is the U.S. government shutdown still on? A guide to the standoff between Trump and Congress”, (8 January 2019), online: <https://www.theglobeandmail.com/world/us-politics/article-us-government-shutdown-trump-congress-wall-explainer>.
- The New York Times, “Mexico’s New Leader, Once a Nafta Foe, Welcomes New Deal”, (1 October 2018), N.Y. Times, online: <https://www.nytimes.com/2018/10/01/world/americas/nafta-mexico.html>.
- See North American Free Trade Agreement Implementation Act, SC 1993, c 44.
- Ibid, s 10; See also World Trade Organization Agreement Implementation Act, SC 1994, c 47, s 8.
- Ibid, s 605: Other Export Measures reads:
“…a Party may adopt or maintain a restriction otherwise justifiedunder Articles XI:2(a) or XX(g), (i) or (j) of the GATT with respect to the export of an energy or basic petrochemical good to the territory of another Party, only if:
a) the restriction does not reduce the proportion of the total export shipments of the specific energy or basic petrochemical good made available to that other Party relative to the total supply of that good of the Party maintaining the restriction as compared to the proportion prevailing in the most recent 36 month period for which data are available prior to the imposition of the measure, or in such other representative period on which the Parties may agree;
b) the Party does not impose a higher price for exports of an energy or basic petrochemical good to that other Party than the price charged for such good when consumed domestically, by means of any measure such as licenses, fees, taxation and minimum price requirements. The foregoing provision does not apply to a higher price that may result from a measure taken pursuant to subparagraph (a) that only restricts the volume of exports; and
c) the restriction does not require the disruption of normal channels of supply to that other Party or normal proportions among specific or basic petrochemical goods supplied to that other Party, such as, for example, between crude oil and refined products and among different categories of crude oil and of refined products. [Emphasis added]. - GATT, 1994: General Agreement on Tariffs and Trade 1994 (Apr. 15 1994), s XI General Elimination of Quantitative Restrictions.
- Global Affairs Canada, “NAFTA – Chapter 11 – Investment – Cases filed against the Government of Canada; Ongoing arbitration to which Canada is a party”, online: <https://www.international.gc.ca/trade-agreements-accords-commerciaux/topics-domaines/disp-diff/gov.aspx?lang=eng>.
- Canada-United States-Mexico-Agreement, Ch 14, Annex 14-C, s 3 [CUSMA] (“A Party’s consent under paragraph 1 shall expire three years after the termination of NAFTA 1994”.).
- 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”. This means that an investment must have been “established or acquired” when the NAFTA is in force, and remain “in existence” on the date the CUSMA enters into force. See CUSMA, supra note 13, “Legacy Investment Claims and Pending Claims”, s 6(a), available at: <https://international.gc.ca/trade-commerce/assets/pdfs/agreements-accords/cusma-aceum/cusma-14.pdf>.
- CUSMA, Ch 14, Annex 14-C, s 6(b)(i) (“…activities with respect to oil and natural gas that a national authority of an Annex Party controls, such as exploration, extraction, refining, transportation, distribution, or sale”).
- Ibid, s 6(b)(ii).
- Ibid, s 6(b)(iv).
- Ibid, s 6(b)(v) (the Annex restricts the ownership or management of roads, railways, bridges, or canals that are not for the exclusive or predominant use and benefit of the government of an Annex Party”).
- Ibid, s 6(b)(iii).
- See CUSMA, supra note 13, s 14.D.5: Conditions and Limitations on Consent
[…]
(b) the claimant or the enterprise obtained a final decision from a court of last resort of the respondent or 30 months have elapsed from the date the proceeding in subparagraph (a) was initiated…
Footnote 25 states that this provision does not apply “to the extent recourse to domestic remedies was obviously futile”. It remains to be seen how U.S. investors invoke this “obvious futility exception” when seeking an ISDS solution against the government of Mexico without first seeking domestically available legal recourse in Mexico. - See Government of Canada, “What is the CPTPP?” (Date modified: 8 January 2019) online: <https://international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/cptpp-ptpgp/index.aspx?lang=eng>.
- The effectiveness of the state-to-state dispute settlement remains unresolved because each country can block appointment of panelists as an obstructive tactics.
- See CUSMA, supra note 13, Annex 4-B, “Product-Specific Rules of Origin”, Note 4: For the purposes of determining whether or not a good of heading 27.09 is an originating good, the origin of diluent of heading 27.09 or 27.10 that is used to facilitate the transportation between Parties of crude petroleum oils and crude oils obtained from bituminous minerals of heading 27.09 is disregarded, provided that the diluent constitutes no more than 40 per cent by volume of the good”.
- Government of Canada, “CUSMA Energy provisions summary”, online: <https://international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/cusma-aceum/energy-energie.aspx?lang=eng>.
- CUSMA, s 13.2.
- CUSMA, Ch 13: Government Procurement, s 13.2.3, online: <https://international.gc.ca/trade-commerce/assets/pdfs/agreements-accords/cusma-aceum/cusma-13.pdf>.
- Jean Heilman Grier, “USMCA – Modernized NAFTA: Procurement” (5 October 2018), online: <https://trade.djaghe.com/?p=5174>.
- Annex 2, Sub-central Government Entities, United States’ Commitment to the World Trade Organization’s Government Procurement Agreement, online: <https://www.wto.org/english/tratop_e/gproc_e/gp_app_agree_e.htm>.
- The Canadian Trade Commissioner Service, “Trade Agreements – World Trade Organization Government Procurement Agreements,” online: <https://www.tradecommissioner.gc.ca/sell2usgov-vendreaugouvusa/procurement-marches/trade_agreem-acc_cciaux.aspx?lang=eng>.
- “Memorandum: The Proposed USMCA and U.S. Trade Relations with Mexico”, Cong. Res. Serv. (30 October 2018), online: <https://cuellar.house.gov/uploadedfiles/usmca_comparison_and_mexico_released.pdf>.
- CUSMA, Ch 13, Annex 13-A, “Schedule of Mexico”, s 4(a).
- Ibid, s 4(d).
- Online: <https://www.canada.ca/en/treasury-board-secretariat/services/policy-notice/contracting-policy-notice-2018-01.html>.
- Government of Canada, “Annex: Energy Regulatory Measures and Regulatory Transparency to the Canada-U.S.-Mexico Agreement”, (Letter on 30 November 2018), online: <https://international.gc.ca/trade-commerce/assets/pdfs/agreements-accords/cusma-aceum/letter-energy.pdf>.
- Damian Paletta, Erica Werner & David J. Lynch, “Trump announces separate U.S.-Mexico trade agreement, says Canada may join later”, (27 August 2018), Washington Post, online: <https://www.washingtonpost.com/business/2018/08/27/us-mexico-reach-partial-agreement-resolve-trade-conflict-step-towards-nafta-deal>.
- Letter from Robert E. Lighthizer, USTR Representative to the Honourable Chrystia Freeland, Minister of Foreign Affairs of Canada (dated November 30, 2018).
- In Canada, companies regulated by the National Energy Board Act, RSC, 1985, c N-7, Canada Oil and Gas Operations Act, RSC, 1985, c O-7, or Canada Petroleum Resources Act RSC, 1985, c 36 (2d Supp), are required to see National Energy Board authorization or approval for various activities. See National Energy Board, “Applications & filings”, online: <https://www.neb-one.gc.ca/pplctnflng/index-eng.html>.
- Supra note 4, Canada-U.S. Side Letter on Energy.
- Isabelle Rousseau, “Mexico’s Energy Reforms at Risk?” Edito Energie, December 2018, Institut Français des relations Internationales, (3 December 2018), online: <https://www.ifri.org/en/publications/editoriaux-de-lifri/edito-energie/mexicos-energy-reforms-risk>.
- Mexico’s energy reform was enacted on December 20, 2013.
- International Frontier Resources Corporation, “Mexico: Projects”, online: <http://www.internationalfrontier.com/s/Mexico.asp>.
- See CUSMA, supra note 13, Ch 22, “State-Owned Enterprises and Designated Monopolies”, online: <https://international.gc.ca/trade-commerce/assets/pdfs/agreements-accords/cusma-aceum/cusma-22.pdf>.
- Ibid, s 22.4: Non-Discriminatory Treatment and Commercial Consideration.
- Ibid, s 22.1: Definition of “non-commercial assistance”.
- Ibid, Annex IV – Canada.
- Ibid, Ch 10: Trade Remedies, Annex 10-B.1 Establishment of binational panels, online: <https://international.gc.ca/trade-commerce/assets/pdfs/agreements-accords/cusma-aceum/cusma-10.pdf>.
- Global Affairs Canada, “Softwood Lumber”, online: <https://www.international.gc.ca/controls-controles/softwood-bois_oeuvre/index.aspx?lang=eng>.
- Trade Expansion Act of 1962, Pub L No 87–794, s 232, 76 Stat 872 (codified at 19 USC Ch 7).