The Context of the Negotiation

Donald Trump's campaign soundbites of “build the wall,” “make them pay,” “send them back,” and other offensive harangues against Mexicans were followed by demands to terminate a twenty-five-year-old trade deal if renegotiations were not to his liking. Given its dependency on access to U.S. markets, Mexico had to capitulate to the demands, and in so doing became the first nation to succumb to Trump's “Art of the Deal.” The resulting agreement, timed around electoral concerns and politics on both sides of the border, may well illustrate the elements of a new era in international economic governance.

There should be no surprise that Mexico was the first to agree to sign a trade deal with the Trump administration. More than 80 percent of Mexican exports go to the United States. If the United States had suddenly terminated the North American Free Trade Agreement (NAFTA), it would have crippled Mexico's economy by deterring productive investment and tanking Mexico's long-term growth. This would have been particularly damaging at a time when the unilateral U.S. tariffs adopted in the name of national security on aluminum and steel had already affected Mexico.

The new USMCA—which is practically, albeit not technically two bilateral deals signed by the United States—is expected to take effect January 1, 2020. Legislative bodies in the three countries will have to approve the deal, a process that may take some months and could be upended by the Democrat's takeover of the House of Representatives in the United States.Footnote ⁴

USMCA and the “New Normal”

One way to understand the USMCA is as a small element in a changing global environment. While it is the product of a negotiation, key features of the agreement squarely reflect U.S. interests (some of which align with Mexican and Canadian interests) because the (still) biggest economy in the world enjoys considerable leverage over Canada and especially Mexico. In the differences with its direct predecessors—namely NAFTA, but also the Trans-Pacific Partnership (TPP) (which until January 2017 also involved the three countries)—the USMCA reveals some of the pillars of a new Geoeconomic World Order. This order is:

In essence, the post-WWII liberal era that drifted into the neoliberal world is rapidly evaporating and new institutions that will manage the future of economic interdependence are emerging. Many states are adapting in part by pushing decision-making towards the realm of national discretion and away from international oversight. This results in the curtailment of key features of the liberal order, primarily international legal adjudication. Especially in the United States, concerns over the security risks posed by interdependence and China's economic ambitions are enhancing state control of the economy (chiefly, the general desirability of free trade and foreign investment in key sectors), and perhaps a more isolationist version of self-sufficiency and resilience.Footnote ⁶

The USMCA reflects this shift. Combined, its features reduce the role of law—or, at the very least, the role of international adjudication—and increase the role of power—or, at the very least, the use of raw economic power. The ultimate goal may be to expand flexibility, policy space, or discretion to implement trade measures to protect the industrial and manufacturing base on national security grounds, to expand screening of foreign investments in critical infrastructure, and to impose new export constraints with respect to key, cutting-edge technologies—all with little risk of meaningful accountability or legal challenges on international law grounds.

For instance, in the realm of trade, one of the major shortcomings of NAFTA was its incomplete state-to-state dispute settlement process, under which a dispute settlement panel could only be established with the consent of the parties. Chapter 31 of the USMCA, which addresses dispute settlement, looks similar. It requires that by the date of entry into force of the agreement “a roster shall be appointed by consensus and remain in effect for a minimum of three years or until the Parties constitute a new roster.”Footnote ⁷ Nothing ensures that the parties will follow through with such commitment and do more than they did under NAFTA—making the obligations of the treaty hard to enforce. In fact, the situation is worse than it was when NAFTA entered into force, given that by the time USMCA enters into force the World Trade Organization's (WTO's) dispute settlement mechanism will likely no longer be functioning and thus will not provide Canada and Mexico with a consequential alternative process. Further, the treaty mandates a review process, plus eventual automatic expiration if the review does not confirm the parties’ desire to extend the agreement. This may increase the role of power when disagreement ensues, especially if dispute settlement is unavailable.Footnote ⁸

Turning to foreign investment, the treaty significantly scaled back the role of investor-state dispute settlement (ISDS), an imperfect mechanism, but one whose use until recently had been a well-established policy of the U.S. government.Footnote ⁹ In principle, there is no more general recourse to ISDS between the United States and Canada (with some exceptions for Legacy Investment Claims and Pending Claims). The agreement maintains a limited version of ISDS between Mexico and the United States.Footnote ¹⁰ Notably, in many instances, claims alleging the failure to provide a minimum standard of treatment or an indirect expropriation are not allowed. Establishment and acquisition claims are generally barred, and exhaustion of local remedies is almost always required. As a result, it is unlikely that a government's decision to unfairly block foreign investment will ever be reviewed by USMCA arbitrators. In fact, the United States’ Better Utilization of Investments Leading to Development (BUILD) Act approved in October 2018 has increased investment surveillance and national executive discretion in this realm. Therefore, such a decision is unlikely to be significantly reviewed under U.S. domestic law either.Footnote ¹¹

At the same time, the USMCA maintains a trend towards regulatory harmonization, the regulation of e-commerce, and free transfer of data reflected in the TPP Agreement. These areas are also interesting examples of balancing “soft” and “hard” law. This balancing is done by promoting the particular policy preferences within international law, but insulating decisions from international adjudicatory review. For example, the USMCA prevents parties from restricting “the cross-border transfer of information,” with limited exceptions.Footnote ¹² Additionally, it prevents parties from requiring firms “to use or locate computing facilities in that Party's territory as a condition for conducting business.”Footnote ¹³ These provisions advance the interests of larger technology companies in sustaining an unregulated internet by preventing protectionist data localization requirements that inhibit the flow of data across borders. However, like the chapter on regulatory harmonization, which emphasizes science-based risk assessment, it has very limited judicial bite.Footnote ¹⁴ In fact, the treaty provides that no party to the agreement shall have recourse for dispute settlement for a matter arising under the regulatory harmonization provisions, except to address a sustained and recurring course of action or inaction.Footnote ¹⁵

Even the most “progressive” elements of the USMCA show similar geoeconomic impulses and a general distaste for legal adjudication. For instance, the much-needed anticorruption provisions are nonjusticiable, evidence that the United States will continue to rely on corruption allegations at a political level—when the Foreign Corrupt Practices Act (and its disparate effects) is inapplicable—to embarrass foreign authorities.Footnote ¹⁶ To be sure, the higher environmental standards or explicit protection of indigenous and labor rights prominently covering violence against workers, migrant workers, and sex-based discrimination should be celebrated, although these obligations will be difficult to enforce.Footnote ¹⁷ Even the much-touted automobile provisions demanding that a percentage of a vehicle be built by workers earning at least US$16 an hour may be of little help. Both countries negotiated a side letter allowing exports at a lower tariff rate to allow U.S. cars continued access to the U.S. market—including vehicles built with low wages—to avoid any dispute.Footnote ¹⁸

With unprecedented unilateral actions against China in the background (a 25 percent tariff on US$50 billion and an additional 10 percent tariff on US$200 billion of Chinese goods) and the threat of more to come, the USMCA seeks to help reconfigure supply chains.Footnote ¹⁹ In addition to reestablishing lower tariffs and regulatory harmonization in the region, U.S. policymakers are using the treaty to sketch a new approach in which production location should be subjected to higher levels of state oversight, making these measures harder to challenge before international mechanisms. In an island of optimism amidst profound uncertainty, Mexico and Canada stand to win something under this new framework, as the treaty may force the relocation of manufacturing to North America. But if there were any doubt as to the new approach behind the USMCA, two clauses aimed at China discourage partners from establishing free trade agreements with a “non-market economy” or granting similar enforceable investment benefits to that economy's investors.Footnote ²⁰ This could also prove to be a costly constraint on economic policy for Mexico and Canada.

The New Role for Law and for Power

The survival in the USMCA of the binational review of domestic trade remedies determinations was touted as a key victory for Canada.Footnote ²¹ It is not that the review of these determinations—which involve technical aspects of when nations can impose additional duties to respond to unfair trade practices such as exporting products below cost (dumping) or exporting products that receive governmental subventions (subsidies)—is fundamental for peace, cooperation, or prosperity. But the constraint of unfettered power is key to this endeavor.

USMCA Chapter 10 maintains a role for legal adjudication in these areas as the pendulum moves away from what U.S. officials see as a “government of judges”—a complaint expressed about international dispute settlement in many fora. In addition to crippling the WTO through the blockage of judicial appointments and defiance of its dispute settlement framework, the United States has withdrawn from other international commitments (e.g., the Paris Convention and the Joint Comprehensive Plan of Action with Iran) or scaled back its participation in or support to international adjudicatory systems (e.g., ISDS, the International Criminal Court, and the International Court of Justice). To some extent, the survival of a dispute settlement process that can review decisions in a sensitive area is welcome, especially as it may be the last credible mechanism that maintains broad jurisdictional scope over certain U.S. policy decisions.

Notwithstanding the existence of the adjudicatory provisions of Chapter 10, there seems to be a notable trend in international economic law in the opposite direction. National security and economics are converging in key areas such as trade, foreign direct investment, cyber security, and other aspects of the digital realm. It signals a new era marked by an increase in the invocation of broadly defined national security prerogatives and the weakening of international accountability under the rule of law.Footnote ²² This redefinition may be accompanied by the use of bilateral or minilateral agreements to deploy power and to expand discretion more effectively than under multilateral organizations (and its rules). In fact, the former WTO Chief has warned members to be prepared for a future without the United States as a member of this multilateral, quasiuniversal organization.Footnote ²³

One way to avoid a “government of judges” that interpret loose treaty rules in ways states dislike is for negotiators to draft clear rules and to clarify rules where they prove too imprecise. The other is to preclude judges from interpreting such rules. Based on the USMCA, the United States seems to be leaning in favor of the latter option—to insulate decisions from international adjudication. With the exception of the trade remedies review process, the retrenchment of adjudicatory law-making in the USMCA may well mark a more cynical era in international economic governance, one in which power and politics have a more important role in economic affairs. In effect, as the WTO fades into irrelevance great powers will likely use the invocation of discretion, including the type reserved to national security issues, to adopt protectionist measures and shield many areas from international review. Moreover, by getting rid of restrictions on the executive branch and Congress entirely, the United States may be aiming at deploying its power without meaningful accountability.

Despite the retrenchments detailed above, the survival of the binational review process in the USMCA may suggest a path forward for those nations that see value in international legal adjudication. After being unpleasantly surprised by the initial Mexico-United States bilateral deal, Canada stood its ground on this international dispute settlement system and made it a potential deal-breaker.Footnote ²⁴ Whatever happens in the treaty approval processes before the three states’ legislative bodies, the USMCA signals a new consensus in Washington—one that not only sees China's practices of restricting market access and pushing foreign companies to hand over valuable technology as unacceptable, but also views its economic emergence as a threat to an American-led world. This can result in what Anthea Roberts calls a more autonomous (though still competitive) “spheres of influence” approach, in which trade policy is deployed to further strategic goals and to force other nations to pick a side. As reflected in the USMCA, the big loser in this new Geoeconomic World Order will be international legal adjudication and the international rule of law more generally.