The Global Fifth Amendment? Nafta's Investment Protections and the Misguided Quest for an International 'Regulatory Takings' Doctrine

Abstract

NAFTA's investment chapter provides foreign investors from Mexico, Canada and the United States with a number of protections against the actions of the governments that are parties to NAFTA. One such provision - requiring host governments to compensate foreign investors for acts of "direct or indirect expropriation" or "measures tantamount to expropriation" - is the basis for several major "regulatory takings" claims filed against NAFTA governments. To date, four such claims have been decided on the merits by NAFTA arbitral tribunals, and while it is too early to tell how broadly the tribunals will interpret the expropriation provision, these claims have generated considerable concern among environmentalists that the investor protections will stifle environmental and land-use regulation.

The article addresses two issues central to the increasingly heated debate over NAFTA's expropriation provision. First, it examines the relationship between the NAFTA tribunals' decisions on expropriation claims and U.S. domestic law on regulatory takings. Although many have argued that NAFTA "exports" the U.S. regulatory takings standard into international law, the article demonstrates that, in fact, the tribunals' decisions significantly exceed U.S. Fifth Amendment takings protections in several respects. The tribunal decisions broaden the definition of compensable property interests, extend the compensation requirement to "judicial" takings, and bypass the ripeness and exhaustion requirements of U.S. takings doctrine.

Second, the article asks whether this expansion of compensation for regulatory takings under international investment agreements such as NAFTA is justified under the leading rationales for a compensation requirement: the internalization of the costs of government regulation; the extension of fair treatment to regulated investors; the provision of ex post insurance to regulated investors; and the need to attract foreign investment to developing countries. Our analysis shows that none of these arguments supports the expansion compensation requirements to embrace "regulatory takings" in the international investment context.

While there is no viable case to be made for expanding international compensation requirements, such expansion involves a number of significant costs: It gives foreign investors a competitive advantage over domestic firms, redistributes wealth between domestic taxpayers and foreign firms, and may deter efficient regulation. In light of the tenuous benefits and potentially serious costs of an international "regulatory takings" doctrine, we conclude that the United States and other sponsors of international investment agreements should eschew the expansion of compensation requirements, instead limiting expropriation provisions to the traditional concerns of investor protections: physical invasions and seizures, direct nationalization, and governmental assumption or transfer of control of foreign property.

Keywords: Property, environmental law, land use law, Fifth Amendment, Takings Clause

JEL Classification: F18, H21, K11, K32, K33