I. INTRODUCTION

As noted in our original article, the United States-Mexico-Canada Agreement (USMCA or CUSMA) was signed by the leaders of the three NAFTA countries on November 30, 2018. At that time it was unclear how long the ratification process would take. The expectation was that the biggest ratification challenge would be in the United States Congress where the Democrats had just won a majority in the House of Representatives in the 2018 Congressional elections. The Mexicans moved first when the Mexican Senate ratified the Agreement in June 2019. The Canadian Government introduced an implementing bill into the House of Commons in early summer but decided to await developments in the U.S. Congress before proceeding further.

In Washington DC, the House Democrats, led by Speaker Pelosi, made clear that they were not prepared to accept the Agreement in its current form. Discussions began between the Trump Administration and the Democrats. These talks took place between a team led by the United States Trade Representative Robert Lighthizer and a team of senior House Democrats selected by Speaker Pelosi. Initially expectations for success were low, but with goodwill on both sides it gradually emerged that the Democrats were trying to work to a “yes.” Lighthizer had signaled that the Administration was prepared to accommodate, in some way, the demands for change set out by the Democrats. Essentially the Democrats wanted stronger dispute settlement provisions particularly with respect to the Labour and Environment chapters of the Agreement. In addition, they wanted to reduce the time period during which biologic drugs would be afforded the protection of the intellectual property provisions of the Agreement. As these internal American negotiations continued, Lighthizer maintained regular contact with his Canadian and Mexican counterparts, keeping them in the picture and to gauge whether Canada and Mexico would be prepared to go along with the changes that he was working on with the Democrats. For Canada this was a relatively easy decision because the changes sought by the Democrats were very similar to proposals that Canada had made during the renegotiation of the NAFTA.

Finally, on December 10, 2019 the three countries agreed to the final package of amendments to the CUSMA, which took the form of a 27-page Protocol of Amendment (Protocol) to the original CUSMA signed a year earlier.^[2]

Once again the Mexicans were first to move with the Mexican Senate ratifying the revised deal on December 12, 2019. In the U.S. Congress first the House and then the Senate voted to approve the deal and to pass the associated implementing legislation by overwhelming majorities not seen in over 40 years for a major piece of trade legislation. The President signed the package into law on January 29, 2020, completing the process of American ratification.

Then on March 13, 2020, Bill C-4, An Act to Implement the CUSMA^[3] was passed by both the House of Commons and the Senate and given Royal Assent. The law will enter into force in Canada on a date to be determined by Order in Council. It is not clear at the time of writing exactly when the CUSMA will enter into force. The Americans are pressing for June 1 but that may require amending the Agreement itself to alter its provisions on entry into force. These provisions would currently provide for entry into force on June 1 only if the letters notifying the other Parties that each Party had completed the internal procedures required for the entry into force were sent before the end of March. That seems unlikely in which case the most likely date for the Agreement to come into force would be July 1, 2020.

In this Article, we examine revisions to the CUSMA of probable interest to energy stakeholders, and summarize the key changes to Canada’s domestic legislation that will take effect when the CUSMA Act enters into force.

II. NAFTA 2.1 – THE AMENDED CUSMA

In our original article, we discussed the following energy-related changes that will result from the CUSMA. They 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;
• elimination of the proportionality clause on energy trade between Canada and the U.S.; and
• a bilateral side letter on energy between Canada and the U.S. on energy.

The Protocol signed on December 10 made changes to certain aspects of the Agreement, namely: in the areas of state-to-state dispute settlement, labour and environment, automotive rules of origin, and intellectual property.^[4] The changes in the first three areas (i.e., dispute settlement, labour and environment) may have direct implications to the energy sector, and are summarized below. The effect of the changes in the latter two areas (i.e., automotive rules of origin and intellectual property) will be of lesser interest for the energy stakeholders.

1. State-to-State Dispute Settlement

The most noteworthy change in the Protocol from a Canadian perspective is the significant strengthening of the CUSMA’s State-to-State dispute settlement mechanism. The State-to-State dispute settlement is an improvement on Chapter 20 of the original NAFTA.

The dispute settlement provisions of the original NAFTA (Chapter 20) and the equivalent CUSMA provisions in Chapter 31 allowed a Party to block the formation of a panel in a State-to-State dispute settlement case by either not engaging in the meeting of the Free Trade Commission of Ministers (required to approve a panel), or by refusing to agree to the proposed roster of panelists from which the panelists were required to be selected. The updated dispute settlement system closes these gaps by causing panels to be automatically established upon request, bypassing the Commission of Ministers. If the government Parties cannot reach consensus agreement on the roster of panelists within one month, the roster will be formed automatically from the individuals proposed by each government.

No dispute settlement panel has been successfully formed under NAFTA Chapter 20 since 2000, when the United States blocked the establishment of a panel in the U.S.-Mexico sugar dispute.^[5] The revised dispute settlement provisions are consistent with more modern FTAs, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which ensure that parties cannot unreasonably delay or block the formation of a panel.

This improvement is all the more important in the shadows cast by the current shutdown of the World Trade Organization (WTO) Appellate Body that has made WTO dispute resolution a less reliable process for dispute settlement by the WTO’s 164 member countries, including Canada, the United States and Mexico.

Going forward, the strengthened state-to-state dispute settlement procedures will provide greater assurance to Canadian energy stakeholders that the provisions of the CUSMA, including those on investment, will be upheld and enforceable, at least by the governments that are parties to the Agreement. This is significant because the CUSMA will phase out private recourse for investors to sue governments once the Agreement comes into force and terminates the investor-state provisions of the NAFTA as between Canada and the United States.

2. Labour

In response to pressure from Congressional Democrats, the United States secured a “Facility-Specific, Rapid Response Labor Mechanism” with Mexico, which is a first-of-its-kind bilateral mechanism for expedited dispute settlement of specific labour obligations concerning freedom of association and collective bargaining.^[6] Under the new process, a Party may request an investigation into allegations of labour violations at an exporter’s facility by an independent panel of three labour experts. If the panel concludes that violations exist, the complaining Party may impose penalties on exports from that facility. An identical bilateral mechanism was also created between Canada and Mexico. While this was not a priority request for Canada, once the U.S. had acquired such a provision it was politically imperative for Canada to have one too. There is no such mechanism between Canada and the United States.

In the CUSMA negotiations, labour issues were a major Congressional concern in the United States. The Parties removed language in the Labour chapter’s “Violence Against Workers” provision that conditioned a violation on a “sustained and recurring course of action or inaction”. Also, the amendments reverse the burden of proof for challenging labour violations: as previously worded, a Party had to demonstrate that the other Party’s act or omission constituted a violation of labour rights “in a manner affecting trade or investment between the Parties”. In the amended version, the burden on the complaining Party to prove this point is replaced by a presumption that a labour violation affects trade and investment “unless the responding Party demonstrates otherwise”. These two changes should increase the flexibility to pursue dispute settlement by the Parties in connection with labour chapter violations.

Overall, the CUSMA Labour chapter enhances the equivalent in the original NAFTA in that the Labour chapter requires the Parties to adopt and maintain, in law and practice, labour rights (as recognized by the International Labour Organization) to effectively enforce their labour laws,^[7] and not to waive or derogate from their labour laws.^[8] The CUSMA includes a new prohibition of the importation of goods produced by “forced or compulsory labour”, including forced or compulsory child labour.^[9]

Canadian stakeholders who have operations in Mexico, or those considering investment prospects in Mexico, should be aware of these new labour standards and enforcement provisions under the CUSMA, in order to understand their obligations and recourse available in case of labour-related disputes.

3. Environment

The burden of proof for establishing a failure to comply with environmental obligations has been reversed. The changes should increase the enforceability of the Parties’ obligations in the Environment chapter.

The revised Environment chapter (Chapter 24) recognizes and reinforces the existing commitments of the Parties under various multilateral environmental agreements (MEAs). The amendments restore a provision under Article 104 of the original NAFTA that prioritizes MEA commitments when implementing MEA and trade agreement obligations. The list of covered MEAs for Canada are:

• The Convention on International Trade in Endangered Species of Wild Fauna and Flora;
• The Montreal Protocol on Substances that Deplete the Ozone Layer;
• The Protocol of 1978 Relating to the International Convention to the Prevention of Pollution from Ships;
• The Convention on Wetlands of International Importance Especially as Waterfowl Habitat; and
• The Convention for the Establishment of an Inter-American Tropical Tuna Commission.^[10]

In the event of a conflict between the CUSMA and an MEA, the obligations under the CUSMA will not preclude a Party from taking measures to comply with its obligations under the MEA, as long as the measure is not a disguised restriction on trade.

III. RATIFICATION PROCESS

As noted above, the CUSMA as amended had to be ratified by each Party for the Agreement to come into force, thereby replacing the original NAFTA. And of course each Party had to take steps to ensure its domestic legislation was amended to be in conformity with the provisions of the new Agreement.

1. Mexico

Mexico was the first to ratify the new Agreement. On June 19, 2019, the Senate of Mexico ratified NAFTA 2.0, with an overwhelming majority support (114 in favour, 4 against).^[11] On December 12, 2019, Mexico’s Senate voted to accept the modifications resulting from the Protocol of Amendment by a vote of 107-1.^[12] The modifications included increased enforcement of labour and environmental rules, as described above. Notably, Mexico reformed its domestic labour legislations to guarantee secret-ballot votes on union representation and contracts, a measure designed to address, amongst others, concerns of corruption in Mexican unions.^[13]

2. The United States

On January 29, 2020, President Trump signed the USMCA implementing legislation into law.^[14] The bill had received overwhelming bipartisan support in both the Democratic-controlled House of Representatives and the Senate.^[15] The very strong bipartisan support for the USMCA provides some assurance that the agreement will be durable over time.^[16] Interestingly, statements by Bernie Sanders that he would renegotiate the deal got a cold shoulder from House Democrats.^[17]

3. Canada

In Canada, the Canada-United States-Mexico Implementation Act^[18] (the CUSMA Act) will amend several domestic legislations to bring Canada into conformity with its treaty obligations under the CUSMA. Among them, the following amendments are particularly relevant to Canadian energy stakeholders:

a) The Removal of the Proportionality Requirement

i. Changes to the Canadian Energy Regulator Act (CERA)

The CERA will be revised to reflect the removal of the proportionality requirement that was previously found in Article 605 of the original NAFTA.^[19] Under its terms, no NAFTA Party’s government measure may reduce the proportion of the supply of an energy product to the other Party based on recent export levels. Their obligation never operated to guarantee the supply of a specific quantity of product; rather, it was designed to prevent governments from intervening in the market with the effect of reducing supply in a way that disproportionately 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 dissipated with the enormous growth in its own energy production.

b) Labour-Related Changes

The Canadian Customs Tariff will be revised to reflect new provisions to prohibit the importation of goods produced by forced labour.

i. Changes to Customs Tariff

Currently under sections 132(1) and 136(1) of the Canadian Customs Tariff,^[20] the importation of goods of tariff item No. 9897.00.00, 9898.00.00 or 9899.00.00 is prohibited.^[21] The CUSMA Act will amend these provisions of the Customs Tariff by adding to the prohibition list importation of “goods mined, manufactured or produced wholly or in part by forced labour”.^[22] This imposes legal obligations on importers of goods to ensure that the goods entering into Canada are not connected with violations of labour rights as recognized by the CUSMA. Accordingly, importers and owners of goods being imported into Canada, including those in the extractive sector, should be vigilant of the process through which goods are mined, manufactured or produced prior to being imported into Canada, as importing these prohibited goods may attract civil penalties and criminal consequences.

c) Changes to the Commercial Arbitration Act

As we explained in the original article,^[23] the Investor-State Dispute Settlement (ISDS) provisions between Canada and the United States will be phased out under the CUSMA. The ISDS mechanism is a private recourse available to an investor to bring a claim against another government Party host to the investment. According to CUSMA Chapter 14 on Investment, for three years after the termination of NAFTA,^[24] existing “legacy investment claims and pending claims”^[25] will be covered under what were formerly provisions of NAFTA Chapter 11. Thereafter, ISDS will no longer be available as a recourse for investments of Canadian investors in the United States, or those of U.S. investors in Canada.

To reflect this change, the CUSMA Act will revise the an eligible “claim” under the Commercial Arbitration Act^[26] by replacing the original NAFTA claim under Chapter 11 with legacy investment claims and pending claims, as defined in Annex 14-C of the CUSMA. Canada’s Commercial Arbitration Act implements the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration (Model Law) through the Commercial Arbitration Code.

IV. CONCLUSION

In all likelihood, the CUSMA will come into force on June 1 or July 1, 2020. The three countries are working urgently to ensure their domestic procedures needed for implementation are complete. The U.S. Administration has shown no signs to date of countenancing delay. In any event, with the Agreement finalized and the necessary legislation passed in all three countries, now is the time for businesses involved in trade or investment in the energy sector in North America to take stock of how the new Canada-United States-Mexico Agreement will affect their interests.

1. This is an addendum to John M. Weekes et al, “NAFTA 2.0: Drilling Down – The Impact of CUSMA/USMCA on Canadian Energy Stakeholder” (2019) 7:1 Energy Regulation Q 45, online (pdf): <www.energyregulationquarterly.ca/wp-content/uploads/2019/03/ERQ_Volume-7_Issue_1_2019.pdf>.
   *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 Leader 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, and before tribunals and reviewing/appellate courts including the Supreme Court of Canada.Lawrence E. Smith QC 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.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.
2. This update examines how that Protocol impacts the provisions in the original deal signed on November 30, 2018.
3. Bill C-4, An Act to implement the Agreement between Canada, the United States of America and the United Mexican States, 1^st Sess, 43^rd Parl, 2020, (assented to 13 March 2020); See also “A new Canada-United States-Mexico Agreement” (last modified 24 Avril 2020), online: Global Affairs Canada <international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/cusma-aceum/index.aspx?lang=eng>.
4. “Summary of revised outcomes” (last modified 28 January 2020), online: Government of Canada <www.international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/cusma-aceum/summary_outcomes-resume_resultats.aspx?lang=eng> [Revised outcomes].
5. Simon Lester, Inu Manak & Andrej Arpas, “Access to Trade Justice: Fixing NAFTA’s Flawed State-to-State Dispute Settlement Process” (2019) 18:1 World Trade Rev 63.
6. Revised outcomes, supra note 4.
7. Canada-United States-Mexico Agreement, 30 November 2018, arts 23.3, 23.5 [CUSMA 2018] (Labour Rights and Enforcement of Labour Laws).
8. Ibid, art 23.4 (Non-Derogation).
9. Ibid, art 23.6 (Forced or Compulsory Labour).
10. Ibid, Chapter 24 (Environment).
11. Miguel Angle Lopez & Dave Graham “Mexico first to ratify USMCA trade deal, Trump presses U.S. Congress to do same”, Reuters (19 June 2019), online: <www.reuters.com/article/us-usa-trade-mexico-usmca/mexico-first-to-ratify-usmca-trade-deal-trump-presses-us-congress-to-do-same-idUSKCN1TK2U3>.
12. Associated Press “Mexican Senate Ratifies Changes to USMCA Trade Pact”, US News (12 December 2019), online: <www.usnews.com/news/business/articles/2019-12-12/mexican-senate-ratifies-changes-to-usmca-trade-pact>.
13. US, Congressional Research Service, USMCA: Labour Provisions (IF11308) (10 January 2020), online (pdf): <fas.org/sgp/crs/row/IF11308.pdf>.
14. US, Bill HR 5430, United States-Mexico-Canada Agreement Implementation Act, 116^th Cong, 2020 (enacted), online: <www.congress.gov/bill/116th-congress/house-bill/5430/text>.
15. The USMCA received bipartisan support, both at the House and the Senate; the House of Representatives approved legislation to implement the USMCA by a 385 to 41 vote, with 193 Democrats and 192 Republicans supporting the legislation; on January 16, 2020, the Senate voted for the USMCA implementing legislation by a 89 (Democratic 38, Republican 51) to 10. See Emily Cochrane “Senate Passes Revised NAFTA, Sending Pact to Trump’s Desk”, New York Times (16 January 2020), online: <www.nytimes.com/2020/01/16/us/politics/usmca-vote.html>; See also John M. Weekes “Canada and USMCA: An Unexpected Success Story”, BRINK (23 January 2020), online: <www.brinknews.com/unexpected-success-story-canada-and-usmca>.
16. Heather Long, “The  USMCA is finally done. Here’s what is in it”, Washington Post (10 December 2019), online: <www.washingtonpost.com/business/2019/12/10/usmca-is-finally-done-deal-after-democrats-sign-off-heres-what-is-it>.
17. “Key democrats push back on Sanders’ USMCA renegotiation”, Inside U.S. Trade, World Trade Online (14 February 2020), online: <insidetrade.com/daily-news/key-democrats-push-back-sanders%E2%80%99-usmca-renegotiation-ambition>.
18. SC 2020, c 1 [CUSMA 2020].
19. Canadian Energy Regulator Act, SC 2019, c 28, s 10 [CERA]; See also CUSMA 2020, supra note 18, ss 207–12.
20. SC 1997, c 36.
21. Ibid, ss 132(1), 136(1) (Prohibited Goods).
22. CUSMA 2020, supra note 18, ss 201, 204(7) (amending Description of Goods of tariff item no. 9897.00.00).
23. See Weeks, supra note 1 at 47 (Part C.2. What Has Changed? Phase out of the Investor-State Dispute Settlement Provisions between Canada and the United States).
24. CUSMA 2018, supra note 7, Chapter 14, Annex 14-C, s 3 (“A Party’s consent under paragraph 1 shall expire three years after the termination of NAFTA 1994”).
25. 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 2018, supra note 7, Chapter 14, Annex 14-C, s 6(a) (“Legacy Investment Claims and Pending Claims”).
26. RSC 1985, c 17 (2^nd Supp).