State-to-state Dispute Settlement under the USMCA: Better than NAFTA?

Abstract

The WTO Appellate Body ceased to function in December 2019 with significant negative repercussions for the multilateral dispute settlement process. In light of the demise of the Appellate Body, regional dispute settlement processes may assume a more prominent role. In North America, regional dispute settlement is about to change. On November 30, 2018, the United States, Mexico and Canada signed the United States-Mexico-Canada Agreement (USMCA) to replace the North American Free Trade Agreement (NAFTA) and its state-to-state dispute settlement procedure. The new agreement contains some significant reforms to the treaty that has governed North American trade since January 1, 1994 but the rules for state-to-state dispute settlement in NAFTA Chapter 20 were brought forward largely unchanged, apart from the introduction of transparency requirements. In a protocol adopted on December 10, 2019, however, a few meaningful improvements were made. The key change was to adopt a fix to the broken panel appointment process. Under NAFTA Chapter 20, a state party facing a claim by another party that it has not complied with its obligations can frustrate the appointment of a panel to adjudicate that claim. The panel process has become so dysfunctional that Canada, the United States, and Mexico have abandoned it in practice. It has not been used since the third case was initiated in 1998. This paper describes the state-to-state dispute settlement system under the USMCA, highlighting both its similarities to and differences from NAFTA Chapter 20 and identifying the persisting problems. When they come into effect, likely in 2020, the changes that have been made in the USMCA, especially the improvements to the panel appointment process, will improve the effectiveness of state-to-state dispute settlement rules compared to NAFTA. At the same time, the USMCA diminishes the role of authoritative, independent adjudication as way of encouraging states to comply with their obligations. Overall, the changes to state-to-state dispute settlement in the USMCA are unlikely to enhance significantly its utility to the United States, Mexico and Canada.

Keywords: United States-Mexico-Canada Agreement, USMCA, North American Free Trade Agreement, NAFTA