Context on the Canada Post v. UPS NAFTA ruling

The Globe’s story, Canada Post NAFTA win sets precedent, for UPS vs the government of Canada with respect to Canada Post, is a bit misleading. It comes across as “see, those whiners about investor-state were wrong all along”:

Chapter 11 was controversial from NAFTA’s inception because critics charged it would allow foreign investors to challenge, and alter, government policies and measures. But as the UPS decision shows, the arbitrators hired to solve NAFTA disputes are narrowing — not expanding — the rights of foreign investors under the 1992 trade deal between the three countries.

Alas, it is not so simple.

The ruling is indeed good news. A UPS success would have set a dangerous precedent for many other public services and Crown corporations. It would have opened a line of attack that could be used to challenge the viability of integrated public monopolies. Secondly, the fact that the case took seven years demonstrates that there must have been some serious politicking in the background, and that investor-state cases are not the instant full-nelson that was thought to be the case.

In the Globe article, trade lawyer Lawrence Herman says:

“It essentially restricts the scope of Chapter 11 and limits the kinds of cases that investors can pursue against [NAFTA] governments in the future,” Mr. Herman said. “I think this will undoubtedly have a further dampening effect on the enthusiasm of investors to challenge states” under NAFTA.

That is, if companies perceive that this is an ineffective tool with long time horizons, then the battle against investor-state is more than half-won. I would caution that, in spite of the Globe headline, international trade panels are NOT bound by precedent, unlike the domestic courts. And other rulings under bilateral investment treaties (of which there are about 2,000 internationally, most of which have some form of investor-state dispute resolution) still suggest we should be concerned about kangaroo courts second-guessing our public policies.

That said, the UPS ruling comes on the heels of another high-profile case that was lost, when BC-based Methanex sued the US government for close to US$1 billion, because the state of California banned Methanex’s product, MTBE, a gasoline additive that is leaching into California groundwater. This case prompted NAFTA ministers to issue a declaration in 2001 to clarify the intent of Chapter 11.

A final case of interest occurred when US-based Metalclad sued the Mexican government and won, because a state government declared a toxic waste dump owned by the company to be an ecological reserve. This was a classic expropriation because the federal government had given the company the permit to go ahead with the dump. But even though Metalclad won, what was significant was that the $700 million they were seeking was reduced to an award to $17 million, a figure more in line with lost economic value.

All of this is reassuring that the NAFTA’s investor-to-state rules may not be used to slice-and-dice regulations at will. But there are many other cases in the queue (summary by Scott Sinclair here), and we have no way of knowing how much the “chill” cast by Chapter 11 has affected the development of new regulations. The relative absence of new environmental regulations since the NAFTA is telling but is more like circumstantial evidence.

There are also some details about the case that suggest it was on flimsy grounds to begin with. The UPS case was based on using Chapter 11, Investment, to claim a violation of Chapter 15, Competition Policy, Monopolies and State Enterprises. Chapter 15 is devoted to defining restrictions on state-designated monopolies (whether public or private) and state enterprises (such as Crown Corporations). What follows is drawn from a 2003 paper I did with Charles Morand on competition policy in international trade agreements:

The NAFTA does not prohibit a Party from creating or maintaining a monopoly or state enterprise, although creating one would likely require compensation under the Investment chapter of the NAFTA if actions by Canada, for example, affected the interests of a US or Mexican company. This situation could arise if public health care in Canada were to be expanded to new areas such as prescription drugs or dental care. US private health insurance companies and pharmaceutical companies with a presence in Canada would likely use Chapter 11 of NAFTA (the investor-state provisions of the Investment chapter) to sue for billions in compensation for lost business.

There are a number of important limitations and obligations with regard to designated monopolies and state enterprises in the Chapter, ostensibly to guard against anti-competitive behaviours. Article 1502 ensures that monopolies act “in accordance with commercial considerations”; provide “non-discriminatory treatment” to investments, goods and service providers of other Parties; and do not use their monopoly position to engage in anticompetitive practices in other markets in a way that affects the investment of another Party (procurement by government agencies is exempted from this provision). Article 1503 ensures that state enterprises provide non-discriminatory treatment in the sale of its goods and services.

These provisions have some significant implications for public enterprises. One example of trade challenge facilitated by the NAFTA is postal services. The US courier company UPS is suing the government of Canada under Chapter 11 for US$160 million in damages, arguing that the Crown corporation is subsidizing its express delivery service through its regular letter infrastructure, thereby obstructing UPS’s investments in Canada. The case is based in part on provisions of Chapter 15, although UPS is reading in more of Chapter 15 than the text of Chapter 11 specifies. UPS has a long list of complaints about Canada Post’s alleged anti-competitive practices, and is deliberately using the anti-monopoly provisions of Chapter 15 to force Canada Post to either segregate its courier activities or to get out of the courier business altogether.

If you are still reading, the point is that this case may not be precedent-setting at all, but may have been thrown out on a technicality, like the DNA evidence getting tainted in the process of collection.