The USMCA or “NAFTA 2.0” came into force on 1 July 2020

The US-Mexico-Canada Trade Agreement (USMCA), the replacement to the North American Free Trade Agreement (NAFTA), entered into force on 1 July 2020.

Background

On 24 April, 2020 the United States Trade Representative issued a press release confirming that all three NAFTA member states had notified the other parties, in writing, that they had completed the internal procedures required for the entry into force of USMCA. According to Paragraph 2 of the Protocol replacing NAFTA with the USMCA, the USMCA therefore entered into force on the first day of the third month following the last notification, i.e. on 1 July, 2020. Under the sunset clause, NAFTA will remain in effect for three years from this date for legacy investments and pending claims.

Among the differences between the USMCA and NAFTA are the revised Investor State dispute settlement provisions at Chapter 14 of the USMCA. Investor-state arbitration has been removed for Canadian investors and the Canadian state, although there remains potential for investment disputes between Canada and Mexico to be referred to ISDS under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (to which the US is not a party). As between Mexico and the US ISDS remains, but the scope of potential claims are narrowed. Under the USMCA, investor-state claims may be brought for alleged breaches of post-establishment national treatment or most favoured nation treatment, as well as alleged direct expropriations. Claims for fair and equitable treatment and for indirect expropriation are not included. In other changes, the treaty contains a 30-month local remedies requirement, as well as a 4-year limitation period for bringing claims (with a shorter limitation period for certain government contracts). Chapter 14 also includes transparency requirements and “double-hatting” limitations, with arbitrators in one arbitration being forbidden from acting as counsel, expert or witness in any other USMCA proceedings while the arbitration is ongoing (Annex 14-D, Article 6(5)(c)).

For more information or to discuss the implications of the USMCA for you or your business, please contact Christian Leathley, Partner, Amal Bouchenaki, Partner, or your usual Herbert Smith Freehills contact.

Christian Leathley
Christian Leathley
Partner
+1 917 542 7812
Amal Bouchenaki
Amal Bouchenaki
Partner
+1 917 542 7830

UK SUPREME COURT LIFTS STAY OF ENFORCEMENT OF ICSID AWARD AGAINST ROMANIA

In Micula and others (Respondents/Cross-Appellants) v Romania (Appellant/Cross-Respondent) [2020] UKSC 5 the UK Supreme Court (the “SC”) found that the duty of sincere cooperation under EU law does not preclude enforcement of an ICSID Convention (the “Convention”) award against Romania (the “Award”). In what is the enforcement stage of the long-running and well-known saga of Micula v Romania, the SC has lifted an almost three-year enforcement stay, which was ordered by the High Court (the “HC”) and later confirmed by the Court of Appeal (the “CA”). The SC’s decision is interesting because it deals with the interplay of (sometimes) conflicting obligations of national, international and EU law in the context of investment arbitration, and confirms that the UK’s obligations under the Convention to recognise and enforce ICSID awards are not prevented by the duty of sincere cooperation under EU law.

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EUROPEAN PARLIAMENT APPROVES EU-VIETNAM TRADE AND INVESTMENT AGREEMENTS

On 12 February 2020, the European Parliament (“EP“) gave its consent to the EU-Vietnam Free Trade Agreement (“EU-Vietnam FTA“) and the Investment Protection Agreement (“EU-Vietnam IPA“). The consent from the EP paves the way for approval of the two agreements by the EU Council of Ministers next month.

In brief, the EU-Vietnam FTA focuses on reducing restrictions on trade in goods and services between the EU and Vietnam. The EU-Vietnam IPA, in turn, establishes specific protections for investors and creates, inter alia, a dispute resolution system that allows private parties to bring actions against measures that impact their investments.

Vietnam is a significant trading partner of the EU, with a population of 95 million. It is expected that the EU-Vietnam FTA will enter into force by the middle of 2020. However, the EU-Vietnam IPA will also need to be ratified by Member States and so its full entry into force will depend on their approval. This process is likely to take a number of years.

Further information on the EU-Vietnam FTA and the EU-Vietnam IPA is below.  The full texts of both agreements can be accessed here.

1.) EU-Vietnam FTA in more detail

Central to the EU-Vietnam FTA is the elimination of customs duties on nearly all products traded between the EU and Vietnam. On day one, 65% of EU products will enter Vietnam duty-free and 71% of Vietnam products will enter the EU duty-free. The EU will remove most of the remaining duties it imposes on Vietnamese products within seven years and Vietnam will do the same within ten years.  As illustrated by the table below, in many cases, duties will be reduced significantly.

Product category Vietnam’s current tariff
Machinery and appliances Up to 35%
Chemicals Up to 25%
Textiles 12%
Chocolates 30%
Dairy products Up to 20%

The EU-Vietnam FTA also addresses trade in services – but the liberalisation is generally much more limited than for goods. In particular, like in the WTO, there is no opportunity for “free” trade in services without restrictions. This said, from the EU perspective, a key benefit of the agreement is that Vietnam has agreed to reduce restrictions on services trade for EU companies to a greater extent than it has done for any other trade partner. EU services benefitting from increased access include the following: computer services, financial services, telecommunications, social services, distribution services, courier services, logistic services, air and maritime transport, and environmental services. In accordance with other trade agreements, the EU has not significantly widened its services offering (in particular, because the EU market is relatively open). However, via the FTA, it commits to retain its current level of openness (therefore providing Vietnam a benefit as compared to WTO rules).

Other aspects of the FTA include the following:

  • Non-tariff barriers – Trade in goods is hindered not only by at the border measures, including customs duties, but also by differences in regulation. The FTA contains provisions to reduce behind the border barriers to trade in respect of technical regulations, sanitary and phytosanitary measures and others. For example, as a result of the agreement, Vietnam will accept on its market EU parts and equipment certified in the EU as complying with the UN Regulations.
  • Public procurement – The FTA provides EU companies with access to procurement markets in Vietnam, which is not available to them today. Rules to make procurement more transparent and enforceable by traders are also included.
  • Intellectual Property Rights – The FTA includes comprehensive provisions covering copyright, trademarks, industrial designs, patents and plant varieties. Among other things, the EU pharmaceutical sector will benefit from improved protection of intellectual property rights. Extension of patent protection, up to a limit of two years, will be possible where the effective patent life has been reduced due to unreasonable delays in the process of marketing approval.
  • Geographical IndicationsThe EU-Vietnam FTA extends protection to 169 European foods and drinks. Thus, for example, the rules require that the use of geographical indications such as Champagne, Prosciutto di Parma, Rioja wine and Irish whiskey be reserved for imports from the EU regions from which they originate.
  • Environmental protection and labour conditions – In line with other FTAs recently concluded by the EU, the EU-Vietnam FTA includes a chapter on trade and sustainable development – incorporating obligations related to environmental protection, labour policy and climate change. The agreement provides for the establishment of specialised committees on trade and sustainable development to facilitate and monitor the effective implementation thereof – and envisions a number of channels for the involvement of civil society. The terms of environmental and labour protections will not be enforceable through the generally applicable dispute settlement mechanisms established by the agreements. In lieu, the chapters establish the possibility for external review of issues by independent panels of experts (but who will not have the power to issue binding decisions).
  • State-owned enterprises: In line with recent trade agreements concluded by the EU, the FTA contains a chapter with rules on state-owned enterprises which, inter alia, require such enterprises to act in a non-discriminatory manner in accordance with commercial considerations. In the case of Vietnam, the provisions are especially significant since state-owned enterprises have traditionally been a central feature of the Vietnamese economy.
  • Dispute settlement – The FTA is largely underpinned by state-to-state dispute settlement, involving consultations, optional mediation and ultimately the possibility for binding adjudication by an arbitration panel. The mechanism is modelled on the WTO, but there is no possibility for an appeal. Further, unlike in the WTO, private parties will be able to make interested party submissions in proceedings.

2.) The EU-Vietnam IPA in more detail

The EU-Vietnam IPA establishes substantive protections for investors (e.g. on fair and equitable treatment, on non-discrimination, and on expropriation). It also enables investors of one of the state parties to bring proceedings against the government of the other state party in the event of an alleged infringement of these substantive standards (“investor-state dispute settlement“).

The IPA provides for investor-state dispute settlement claims to be resolved through an “Investment Tribunal System” composed of permanent first instance and appeal tribunals. These permanent tribunals (of nine and six members respectively) will be formed of nationals of Vietnam, EU Member States and third party states who fulfil certain expertise requirements and are subject to a code of conduct regarding their independence and impartiality. The members will be appointed publicly for a fixed term and will be paid a retainer and additional fees when hearing disputes under the treaty. The EU has recently agreed similar, although not identical, investor-state dispute settlement provisions with other countries – namely Canada, Singapore and Mexico. The EU’s approach is intended to address concerns around investor-state dispute settlement, including its transparency and the consistency of the case-law. As with these other treaties, the EU-Vietnam IPA confirms both parties’ commitment to the creation of multilateral dispute settlement mechanisms (such as those currently being discussed by UNCITRAL’s Working Group III) and acknowledges that the provisions of the IPA may be amended subsequently if such multilateral proposals progress.

The IPA contains many of the innovative measures introduced by the EU in other recent treaties, including commitments to transparency, the ability of the state parties’ Joint Committee to propose binding interpretations of the IPA to a tribunal hearing any dispute under it, and the ability of a tribunal to determine that a claim has no legal merit or is unfounded as a matter of law. We also see further development of the EU’s position on certain issues; for example, on Third Party funding and security for costs.

Notably, upon entry into force, the IPA will replace 21 bilateral investment treaties (“BITs“) currently applicable between EU Member States and Vietnam. The EU-Vietnam IPA contains reformed investment protection rules that are not present in existing BITs, including guarantees of best available treatment.

As noted, in order to fully enter into force, the EU-Vietnam IPA must be ratified not only by the EU but also by the Member States individually (and also Vietnam). There is a clause in the IPA that allows for provisional application of matters within EU exclusive competence. In practice, if provisionally applied, this would mean that key substantive investment protections would be applicable. However, there would be no mechanism of investor-state dispute settlement.  Nevertheless, the EU-Vietnam IPA does contain provisions on state-to-state dispute settlement which could apply on a provisional basis (assuming that Vietnam would agree to provisional application).

3.) Broader significance of the EU-Vietnam FTA and EU-Vietnam IPA

Beyond the direct impacts on trade and investment, the EU-Vietnam FTA and EU-Vietnam IPA are viewed as important because they further the EU’s broader objective to secure a trade relationship with countries which are a part of ASEAN, i.e. the Association of Southeast Asian Nations (which comprise Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei, Laos, Myanmar, Cambodia and Vietnam).  In 2007, the EU and ASEAN opened negotiations for a trade agreement but these ultimately broke down.  In lieu, the EU has focused on seeking trade agreements with individual ASEAN countries, in the hopes of eventually achieving an EU-ASEAN trade framework.  In 2018, the EU concluded an FTA and IPA with Singapore, its largest trading partner in the region.[1] The next significant step is likely the conclusion of trade agreement with Indonesia, while negotiations with Thailand, Malaysia and the Philippines are currently on hold.

4.) Impact of Brexit

The United Kingdom (“UK“) ceased to be an EU Member State at 23h00 London time on 31 January 2020. Until at least 31 December 2020, the UK must continue to apply EU law. This means that the UK will apply the EU-Vietnam FTA to the extent that it enters into force during the transition period (similarly, it would apply the EU-Vietnam IPA if it provisionally enters into force during the same period). The EU has similarly written to partner countries to the effect that they continue to apply international agreements to the UK during the transition period. In many instances, there may be no strict legal obligation for them to do so, but it is expected that many countries will in practice. By contrast, the UK will have no vote when the EU Council of Ministers decides whether to conclude the EU-Vietnam FTA and EU-Vietnam IPA (the latter for aspects within the EU competence). The implications for the UK-Vietnam Bilateral Investment Treaty are as yet unclear. Investors in Vietnam potentially affected by these changes may wish to seek specific legal advice.

For more information, please contact Andrew Cannon, Partner, Lode Van Den Hende, Partner, Eric White, Consultant, Jennifer Paterson, Senior Associate, or your usual Herbert Smith Freehills contact.

Andrew Cannon
Andrew Cannon
Partner
+44 20 7466 2852

Lode Van Den Hende
Lode Van Den Hende
Partner
+32 2 518 1831

Eric White
Eric White
Consultant
+32 2 518 1826

Jennifer Paterson
Jennifer Paterson
Senior Associate
+32 2 518 1834


[1]        The EU-Singapore FTA entered into force on 21 November 2019. The IPA will enter into force after it has been ratified by all EU Member States according to their own national procedures.

 

UK Department for International Trade outlines proposed approach to FTAs with priority countries and launches public consultation on new tariff policy

Following the UK’s departure as a Member State from the EU on 31 January 2020, the UK is now considering pursuing Free Trade Agreements (“FTAs”) with the EU and the rest of the world.

On 6 February, the Department for International Trade (“DIT”) outlined the UK Government’s proposed approach to the negotiation of FTAs with countries which it has identified as being priority partners. These at present include the USA, Japan, Australia and New Zealand. It is thought that these bilateral negotiations may pave the way for the UK eventually to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

The UK Government anticipates outlining the negotiating directives for the US-UK FTA in due course, but has indicated that some of the priority areas for the UK-USA FTA include goods market access, trade remedies, sanitary and phytosanitary standards, sustainability, trade in services, mutual recognition of professional qualifications, investment, SMEs, digital trade, intellectual property and government procurement.

In parallel, as part of the UK’s new trade policy, the DIT has also launched a public consultation aimed at assisting the development of a new UK Most Favoured Nation (“MFN”) tariff which is due to enter into force on 1 January 2021 and will replace the EU’s Common External Tariff which currently applies to imports into the UK. Under the MFN, it is anticipated that tariffs will apply to all goods imported into the UK, unless an exception applies.

For more information, please contact Andrew Cannon, Partner, Lode Van de Hende, Partner, Eric White, Consultant  or your usual Herbert Smith Freehills contact.

Andrew Cannon
Andrew Cannon
Partner
+44 20 7466 2852

Lode Van Den Hende
Lode Van Den Hende
Partner
+32 2 518 1831

Eric White
Eric White
Consultant
+32 2 518 1826

Update on the future of ISDS: latest Working Group III UNCITRAL discussions

The United Nations Commission on International Trade Law’s (“UNCITRAL“) Working Group III (Investor-State Dispute Settlement Reform) (“WGIII“)​ has published its report (the “Report“) on the work conducted between 14 and 18 October 2019 during its 38th session. The Report provides details about the discussions around three issues in particular: (i) the establishment of an advisory centre; (ii) a code of conduct for decision-makers; and (iii) third-party funding.

Background

UNCITRAL has been considering the possible reform of investor-state dispute settlement (“ISDS“) through the work of WGIII, which has been given a broad mandate to identify concerns regarding ISDS procedure, and develop relevant solutions to be recommended to the main UNCITRAL body. While WGIII enjoys broad discretion in discharging its mandate, any solutions devised will take into account the ongoing work of relevant international organisations, and each State may decide the extent to which it chooses to adopt the proposed solutions. For further information about WGIII’s previous work on ISDS reform, please see our previous PIL Notes blog posts here, here and here.

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European Commission issues procedural proposals for the Investment Court System envisaged under CETA

In October 2019, the European Commission (the “Commission“) presented four proposals (the “Proposals“) to the Council of the European Union (the “Council“) with specific rules to establish the Investment Court System (“ICS“) envisaged under the EU-Canada Comprehensive Economic and Trade Agreement (“CETA“). If the Council and the EU Member States approve the Proposals, the EU will seek to agree them with Canada. The Proposals would enter into force upon the ratification of the CETA by all EU Member States.

Background

On 30 October 2016, the EU and Canada signed the CETA, which is to be implemented and applied through the CETA Joint Committee. While some of the provisions in the CETA have started applying in advance of the CETA’s ratification, some substantive investor protections and the ICS do not apply yet. Please see our previous PIL Notes posts for further information about the negotiations and background of the CETA, as well as the compatibility of the CETA’s ICS provisions with EU law (read more here and here).

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CJEU CONFIRMS THAT CETA DISPUTE RESOLUTION PROVISION IS COMPATIBLE WITH EU LAW

On 30 April 2019, the Court of Justice of the European Union (“CJEU“) confirmed that the mechanism for the settlement of disputes between investors and states set out in the Comprehensive Economic and Trade Agreement between the EU and Canada (“CETA“) was compatible with EU law. This confirms the Attorney General’s opinion discussed here.

The CJEU’s opinion will lend support to the EU’s effort to develop the tribunals established under trade agreements like CETA into a permanent and multilateral Investment Court System (“ICS“) in future.

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International Court of Justice allows Iran claim to proceed to the merits phase but upholds jurisdictional objection on sovereign immunity

On 13 February 2019, the International Court of Justice dismissed one of the United States’ jurisdictional objections to a claim by Iran, upheld another and deferred a final jurisdictional objection to the merits phase in the case concerning Certain Iranian Assets (Iran v United States). The substantive claim, brought by Iran against the United States, relates to legislative and executive acts by the latter permitting enforcement against Iranian assets.

Iran filed its application instituting proceedings on 14 June 2016 under the 1955 Treaty of Amity, Economic Relations, and Consular Rights between the United States of America and Iran (a “Party” or the “Parties“) (the “Treaty“), from which the United States has since indicated it will withdraw. This is one of two cases currently pending before the Court between Iran and the United States.

The Judgment on Preliminary Objections (the “Judgment“) is available on the Court’s website, and can be accessed here. Our previous post concerning Iran’s application instituting proceedings in the same case is available here.

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Advocate General finds that CETA’s “Investment Court System” is compatible with EU law

One of the Advocates General to the Court of Justice of the European Union (“CJEU“), Advocate General Bot, has issued an opinion confirming that the mechanism for the settlement of disputes between investors and states provided for in the Comprehensive Economic and Trade Agreement  between the EU and Canada (the “CETA“) is compatible with European Union (“EU“) law.

If the opinion is adhered to by the CJEU, it confirms the viability of the EU’s mooted Investment Court System (“ICS“) in terms of its co-existence with the EU legal order, and permits the EU to continue to pursue adoption of the ICS on a wider scale across all of the EU’s trade agreements. Continue reading