Increasing the Host State's Regulatory Flexibility Under FTA Investment Chapters: US Approaches Under NAFTA, the AUSFTA and the TPP

Abstract

Building on the negotiation of U.S. bilateral investment treaties beginning in the early 1980s, U.S. free trade agreements incorporating specific host-state obligations to foreign investors and binding investor-state dispute settlement (ISDS) have been a feature of U.S. trade and investment policy since 1992 (when the NAFTA negotiations were concluded). Presidents Ronald Reagan, George H.W. Bush, Bill Clinton, George W. Bush and Barack Obama have all endorsed ISDS, despite opposition by many Democratic legislators, organized labor and environmental groups.

Yet the content of these investment chapters shows a significant evolution from NAFTA to the Australia — United States FTA (AUSFTA) (with investor protection but without ISDS), the United States — Chile FTA and the Singapore — United States FTA (2003) to the Trans-Pacific Partnership (TPP) (2015). The changes have been driven largely by the concerns of civil society and government officials over the dozens of NAFTA investment claims filed against the NAFTA Parties. They also reflect the perceived need for the United States and other host governments to maintain a higher level of regulatory flexibility and discretion, particularly in such areas as protecting the environment and maintaining public health. The United States’ Trade Promotion Authority (TPA) legislation enacted in 2002 and 2015 also mirrors these post-NAFTA changes. The newest iteration of the mechanism (Chapter 9 of the TPP) thus affords host governments far more regulatory discretion than earlier agreements such as NAFTA, along with increased transparency, making it more difficult for foreign investors to prevail against host governments with claims of denial of “fair and equitable treatment” and “regulatory takings.” The evolution of U.S. sponsored investment protection provisions into a significantly more host government friendly, regulatory friendly, process, is the principal theme of this paper.

Keywords: bilateral investment treaties, free trade agreements, FTAs, investor-state dispute settlement, NAFTA, TPP, trade promotion authority