NAFTA Chapter 11 dispute resolution and Mexico: a healthy mix of international law, economics and politics.

• Author: Jablonski, Scott R.
• Position: North American Free Trade Agreement

1. INTRODUCTION

   Trade and investment agreements provide the political, economic and legal framework for economic integration in the modern international political economy, and underscore the importance of international law in the integration process. The proliferation of such agreements among nation-states since the mid-twentieth century has been a major factor contributing to the increasing volume of business transactions across borders. (1) The Americas are certainly not an exception to these trends. There are roughly fifty regional, sub-regional and bilateral trade and integration agreements in the Americas, (2) with negotiations underway for other agreements, including a Free Trade Area of the Americas ("FTAA"). (3) In 2000, total trade among FTAA negotiating countries had reached roughly $784 billion, growing at 11% annually. (4)

   Within the context of multilateral governance of trade and investment and increasing transnational business transactions lies the following reality: more transnational transactions mean an increasing need to seek effective, uniform principles of dispute resolution for disputes between private parties and governments arising out of a government's obligations under a trade agreement. (5) This is particularly true in the context of trade-related investment agreements, through which private parties play a direct role in economic integration. (6) The role of law in the modern international political economy is therefore paramount.

   Several obstacles, however, often hinder or severely detract from efforts to achieve uniformity of dispute resolution among foreign legal systems. The greatest obstacle is the phenomenon of differing legal traditions. (7) Alternative Dispute Resolution ("ADR"), namely arbitration, has emerged as the preferred method of dispute resolution among nation-states belonging to trade agreements, as well as among private parties engaged in international transactions. (8) Indeed, in the context of international investment, private parties have long preferred international arbitration for resolving investment disputes with foreign governments. (9)

   Chapter 11 of the North American Free Trade Agreement ("NAFTA") (10) is unique among trade agreements in that it contains an entire chapter dealing with foreign investment and the protection of such investment. (11) Chapter 11 broadly defines who an investor is and what an investment is in North America, and gives private investors in NAFTA Parties (12) direct access to binding international arbitration for claims against NAFTA Parties arising out of investment disputes. NAFTA thus seeks to bridge the gap between private individuals and governments in the resolution of cross border commercial disputes. And, it does so by creating an opportunity for a private investor to resolve an investment dispute without litigating in foreign courts or pressuring the investor's home government to resolve the dispute through diplomatic bargaining. (13) The arbitration alternative is also a pragmatic approach to the pressing need for effective international investment dispute resolution without engaging in the monumentally difficult task of harmonizing three different legal systems. (14) Chapter 11 dispute resolution is indeed representative of the evolving link between international law, economics and politics in the modern global political economy.

   Despite its pragmatism and progressive nature, however, Chapter 11 dispute resolution has not escaped criticism. In recent years it has come under attack by various groups and commentators in NAFTA Parties whose arguments are generally based upon two main assertions: Chapter 11 dispute resolution is a threat to national sovereignty and an abrogation of democracy. (15) These critics base their assertions on what they believe are fundamental flaws in the Chapter 11 dispute resolution framework. The most often-cited arguments are that Chapter 11 promotes frivolous litigation and permits disproportionate compensation, lacks an adequate award review process, uses "secret" tribunals to reduce transparency, prevents legitimate governmental regulation, and derogates from notions of equality and sustainable development. (16) In recent years, the literature on Chapter 11 has increased as the general debate on its dispute resolution framework has intensified.

   The debate has centered primarily on whether Chapter 11 is detrimental to all NAFTA Parties. A focus on Mexico, however, is particularly intriguing given Mexico's history toward foreign investment and its economic status relative to Canada and the United States. (17) Interestingly, Chapter 11, for all intents and purposes, runs counter to the traditional Mexican approach to international law and foreign investment. That traditional approach emanates from conceptions of international law and economic integration that are quite opposite from the philosophy behind NAFTA. (18) Indeed, the traditional Mexican approach to investment dispute resolution has customarily characterized a major line of demarcation between developed and developing countries in an age of globalization.

   The inclusion of Chapter 11 in NAFTA, therefore, represents a major reversal in policy for Mexico, and thus begs the question: is Chapter 11 direct access dispute resolution beneficial to Mexico? After all, of the NAFTA Parties it is Mexico which has made the most dramatic changes in accepting Chapter 11 and which is economically disadvantaged compared to its North American counterparts. (19) Any detrimental aspects of Chapter 11 arguably would affect Mexico the most. The purpose of this article, therefore, is to provide an informed discussion of the criticisms of Chapter 11 dispute resolution and to evaluate the implications of Chapter 11 for Mexico, focusing on the NAFTA text and the Chapter 11 arbitrations against Mexico so far. First, however, this paper presents important historical and policy foundations behind NAFTA in order to pave the way for a discussion of Chapter 11 and Mexico.

   Part II first provides a brief background on the history of economic integration in the Americas. This part highlights the interrelationship of historical political and economic policy interests pursued by the United States and Latin America. Part II also includes an overview of the traditional Mexican approach to foreign investment and international law. Indeed, history tells why things are the way they are now, and thus serves as an important backdrop for discussing the purposes of NAFTA Chapter 11 and its implications for Mexico. Part II ends with a detailed discussion of the background of NAFTA and its dispute resolution framework, commenting briefly on the differing legal traditions of NAFTA Parties and ADR in general. This discussion completes the task of providing the necessary background information for proceeding to a more narrow discussion of Chapter 11 and Mexico.

   Part III discusses in detail Chapter 11. It first highlights the major substantive provisions of Chapter 11, and then details its dispute resolution framework. This is followed by summaries of the first four final arbitral awards involving Mexico. (20) This discussion sheds light on how the process has been handled in real-life situations in Mexico and serves as a critical reference point for purposes of this article.

   Part IV moves to an informed discussion of the implications of Chapter 11 for Mexico. It does so by taking into account the major criticisms of Chapter 11, and then by responding to them using the Chapter 11 text and the first four final arbitral awards against Mexico as the bases for testing those criticisms. The criticisms discussed herein are by no means exhaustive. Rather, this article summarizes the most often-cited concerns with Chapter 11. This discussion attempts to accomplish several things. It provides further clarity as to how and why NAFTA Parties structured Chapter 11 as they did. It demonstrates why the broader concerns with Chapter 11 are unfounded--why Chapter 11 is not a threat to Mexico's sovereignty or democratic governance.

   Further, and perhaps most importantly, Part IV also sheds light on how Chapter 11 is a unique example of how international law is a necessary and positive force for Mexico in the governance of economic integration in North America. As an extension of well-established principles of international law to business activities between private individuals and governments, and as a novelty in the ongoing trend of economic integration in the Americas, Chapter 11 direct access dispute resolution is exemplary of what is necessary for Mexico's successful participation in the international political economy.

2. A NOTE ON THE HISTORY OF ECONOMIC INTEGRATION IN THE AMERICAS

   Globalization is the buzz word for describing the modern international political economy. Although specifically defining the phenomena of globalization and when it precisely began tends to generate debate, it certainly implies "a stretching of social, political and economic activities across frontiers." (21) In this sense, economic integration--predominantly accomplished through trade and investment agreements--is a key ingredient, a critical tool, of globalization. (22) The proliferation of trade agreements in the Americas over the last half century demonstrates an unprecedented push by nation-states of varying wealth and size to integrate their economies. (23) This is perhaps nowhere more apparent than in NAFTA, where two countries with highly advanced economies, the United States and Canada, entered into a free trade agreement with Mexico, a developing country. (24) The history behind NAFTA goes back much further than the early 1990s, however. Historical, political, and economic policy interests of both the United States and Latin America as a whole set the background for understanding NAFTA and the intended purposes and implications of its provisions.

   1. U.S. Policy and the Economics of Latin America

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