The Rise of NAFTA 2.0: A Case Study in Effective ISDS Reform

Abstract

From 1994 to 2020, the North American Free Trade Agreement (NAFTA) enabled a free trade zone in the region. Its early days were undoubtedly successful. NAFTA was credited with stimulating trade, economic growth, and cooperation among Canada, Mexico, and the US. Yet, NAFTA was not without controversy. Its Chapter 11 offered an Investor-State Dispute Settlement (ISDS) mechanism that American and Canadian trade negotiators anticipated would protect their investors from risks posed by Mexico’s legal system. They did not expect ISDS claims against their own governments, which they perceived as a threat to their sovereignty. NAFTA’s successor, the US–Mexico–Canada Agreement (USMCA) entered into force on 1 July 2020 and adopts a new approach to ISDS within its Chapter 14. As the existing ISDS system faces increasing criticism and scrutiny, much of the debate centres on whether the ISDS system remains fit for its purpose. This chapter examines the social, political, and experiential circumstances which led to the rise of USMCA. It concludes that USMCA is a practical example of effective ISDS reform. In sum, the story of USMCA demonstrates that evolution, and not death, is the answer to the modern ISDS debate.