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Investors in Canada and around the world continue to grapple with multiple rounds of tariffs, counter-tariffs and non-tariff barriers to market access imposed by the United States and its trading partners. These measures include tariffs imposed by the Trump Administration under the asserted authority of the International Emergency Economic Powers Act ― recently held to be unlawful by the US Court of Appeals for the Federal Circuit (although the decision is expected to be appealed to the US Supreme Court) ― as well as tariffs targeting the automotive, steel, aluminum and copper sectors under section 232 of the US Trade Expansion Act of 1962. They also encompass retaliatory tariffs or "surtaxes" imposed by Canada on aluminum, steel, and automobile imports from the United States, along with potential restrictions on imports or exports or export taxes. Notably, in the case of a wide range of steel products, Canada has recently imposed tariff rate quotas on imports from its non-US trading partners.
The unprecedented and unpredictable nature of the protectionist measures being deployed in the ongoing global trade war may have investors wondering what recourse, if any, they have to address threats and damages to their foreign operations and investments.
What investment protections are available?
The United States has signed Bilateral Investment Treaties ("BITs") and Free Trade Agreements ("FTAs") that include investment chapters with dozens of countries. These agreements may provide investors with a legal footing to challenge tariffs that pose a risk to their investments. Though the recent round of on-again-off-again tariffs by the Trump Administration and U.S. trading partners have not yet triggered any investor-state dispute settlement ("ISDS") challenges under U.S. BITs and FTAs, investors have used investor-state challenges to challenge the imposition of import tariffs in other contexts. These cases could provide a roadmap to investors affected by recent or threatened tariffs.
Generally speaking, BITs and FTAs with investment chapters enumerate a number of protections for investors that may be relevant to investors seeking to challenge the imposition of import tariffs. These protections may include guarantees of:
- National treatment: the investor is to be accorded treatment that is no less favourable than the treatment afforded to domestic investors in the host state.
- Most favoured nation treatment: the investor is to be accorded treatment no less favourable than the treatment afforded to foreign investors from other states.
- Fair and equitable treatment: the investor is guaranteed treatment such as due process, a stable and predictable legal framework, transparent State conduct, and no arbitrary or discriminatory treatment or denial of justice.
They may also include prohibitions on:
- Performance requirements: an investor cannot be required to comply with certain prohibited conditions, such as requirements for sourcing domestic goods or services, transferring technology domestically, or exporting a proportion of its production, in connection with its investment.
- Unlawful expropriation: the property of the investor cannot be expropriated (directly or indirectly) without a legal process and fair compensation.
Generally speaking, these BITs, as well as ISDS mechanisms in certain FTAs, enable foreign investors to submit claims before arbitral tribunals for damages to the investor or its investment arising out of the host government's violation of its investment protection obligations.
Tariff-related investment claims
Investor protections of this kind were invoked in separate tariff-related cases brought by Cargill and Vento Motorcycles against Mexico. These cases may prove instructive as investors consider their options in the current trade environment:
- Cargill v. Mexico1 — Following the passage of the North American Free Trade Agreement ("NAFTA"), Cargill anticipated that it would be able to sell more high fructose corn syrup in Mexico and increased its capacity to export to it accordingly. However, the Mexican government took a number of steps to protect its domestic sugar industry, including by imposing a tax on soft drinks containing high fructose corn syrup, and refusing to issue import permits for Cargill's products. Cargill successfully challenged these measures under NAFTA's investment chapter as being inconsistent with Mexico's national treatment, fair and equitable treatment, and performance requirement obligations.
- Vento Motorcycles v. Mexico2 — Vento, a U.S. corporation, challenged Mexico's decision to deny preferential tariff treatment under NAFTA to motorcycles it assembled in the U.S. and sold in Mexico through a joint venture. Mexican authorities considered the motorcycles to contain non-U.S. components, such that they were not "NAFTA originating goods." Vento argued that Mexico discriminated against its investment by according more favorable tariff treatment to foreign and domestic companies selling similar products in Mexico (in effect, claims for denial of national treatment and most favoured nation treatment). It also claimed that Mexican officials denied it the minimum standard of treatment guaranteed by NAFTA by arbitrarily denying preferential tariff treatment. The arbitral tribunal rejected these arguments, finding that Vento had failed to identify suitable foreign and domestic comparators on which to base its most favoured nation and national treatment claims, and that the tariff determinations were not inconsistent with Mexican or international law. However, that award was subsequently set aside by the Court of Appeal for Ontario for reasons unrelated to the merits of the case. It remains to be seen whether a second attempt may be made and garner a different result.
Though the investors in the Cargill and Vento Motorcycles cases met with varying success in their claims, the cases illustrate that investor-state dispute settlement claims can be a vehicle for investors to challenge import tariffs and other barriers to trade that are having a deleterious impact on their investments. Any investor contemplating a challenge to import tariffs will need to consider the specifics of their claim, including the nature of the investment and the specific tariffs or non-tariff barriers at issue, including the manner in which they were announced and imposed and their effects on the relevant investment.
In this regard, the legal characterization of the tariff is an important issue. Many BITs and FTAs explicitly preclude investors from pursuing treaty claims in relation to tax measures, or immunize government decisions grounded on certain bases (such as national security) from scrutiny. A government faced with a treaty-based claim challenging tariffs thus might seek to characterize them as taxes, or rationalize them accordingly (as the Trump Administration has done in some instances). That said, the domestic nomenclature used by governments to characterize state measures will not determine whether they can be challenged under a BIT or FTA; tribunals regularly look to the "substance" of a measure in ISDS challenges.3 Moreover, taxes and tax exemptions are notnecessarily immune from ISDS challenges.4
Also critical is a consideration of which treaty/ies an investor might be able to invoke. For example, in light of the limitations on investor-state dispute settlement under NAFTA's successor, the United States-Mexico-Canada Agreement, Canadian investors considering recourse against U.S.-imposed tariffs will need to consider the availability of alternative BITs or FTAs.
Footnotes
1 Cargill Inc. v. United Mexican States, ICSID Case No. ARB(AF)/05/2, Award, Sept. 18, 2009.
2 Vento Motorcycles, Inc. v. United Mexican States, ICSID Case No. ARB(AF)/17/3, Award, Jul. 6, 2020.
3 See, e.g., ACF v. Bulgaria, ICSID Case No. ARB/18/1, Award, 5 January 2024, ¶ 698.
4 See, e.g., Occidental Exploration and Production Company v. Republic of Ecuador, London Court of International Arbitration Administered Case No. UN 3467 (UNCITRAL).
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