By Charles H. Camp and Kiran Nasir Gore
President Trump is now three-fourths through his initial term as U.S. President. Between the U.S. House of Representatives’ December 2019 decision to charge him with two articles of impeachment, which results in a referral to the Senate for further investigation and deliberation, and a looming possible bid for reelection in November 2020, many are now drawing conclusions on the true impact of the Trump Effect. This article analyzes the current landscape from the lens of international dispute resolution, focusing on three areas where the Trump Effect is particularly palpable: U.S. sanctions policy, the World Trade Organization, and the birth of the North American Free Trade Agreement’s successor, the U.S.-Mexico-Canada Agreement. Developments in each area have significant impact on the future of international business dispute resolution, earning President Trump an “A” for advancing his myopic America First protectionist policies and an “F” for freedom in international business transactions and flexibility in related dispute resolution.
For American politics, 2019 concluded on an action-packed note. On December 18th, after weeks of inquiry and testimony, the U.S. House of Representatives charged President Donald Trump with two articles of impeachment: abuse of power and obstruction of Congress. This decision required members of the House to apply a legal test derived from the U.S. Constitution’s Article II. Specifically, did President Trump commit “high crimes and misdemeanors”? This term is not defined in the Constitution and it is considered a term of art, akin to other constitutional phrases such as “levying war” and “due process.” As explained by Professor Nikolas Bowie of Harvard Law School, the meaning of this phrase has been shaped by legal scholars over the past 150 years. While it does not refer to “literal crimes or misdemeanors” it is widely understood to refer to serious abuse of power and violations of the presidential oath of office.1
The House’s impeachment decision alone is not determinative. As of this writing, Speaker of the House Nancy Pelosi must refer the two articles of impeachment to the Senate, so that its members may conduct an impeachment trial. Notwithstanding the inquiry’s outcome, its very existence is momentous. The impeachment mechanism has previously only been deployed twice in American history against a U.S. President. First, after the U.S. Civil War, against President Andrew Johnson for undermining Congress in the Reconstruction effort. Then more recently, in 1998, against President Bill Clinton for perjury and obstruction of justice concerning his alleged relations with a White House intern.
While this level of scrutiny for a U.S. president is rare, it is par for the course for President Trump. Since the beginning of his presidency, commentators have discussed the “Trump Effect.” This refers to the gravity of the intended and unintended effects of this particular change in control of the U.S. executive branch on the international community. It is also the subject of Professor Harold Hongju Koh’s recent book, The Trump Administration and International Law. In his book, Professor Koh explains that the Trump Administration’s policies and ideologies, which consistently challenge post-World War II multilateral institutions, risk the stability of the transnational legal system.2 This certainly resonates with international investors and global businesses. International business transactions and disputes are not immune from shifts in the global geopolitical landscape and are often found at the intersection of international trade, commerce, and development.
President Trump also has completed three-fourths of his four-year presidential term. With a possible Senate impeachment trial and a potential November 2020 bid for reelection on the horizon, the time is ripe to assess the Trump Administration’s actual impact on future international business disputes. This article thus examines the Trump Effect on three categories of international business disputes, including how they arise and how they may be resolved.
U.S. Sanctions, Extraterritoriality, and Secondary Sanctions
U.S. citizens, businesses working globally and their foreign subsidiaries are familiar with Office of Foreign Assets Control (OFAC) requirements. These sanctions are widely perceived as a tool of U.S. foreign policy and they fluctuate as those priorities change.
For example, in 2015, then-President Obama, alongside other P5+1 partners (China, France, Russia, the United Kingdom, and Germany), entered into the Joint Comprehensive Plan of Action (JCPOA). This came after years of tension over Iran’s alleged efforts to develop a nuclear weapon. Under the JCPOA, Iran agreed to limit its sensitive nuclear activities and allowed international inspectors into its borders. In return, the P5+1 partners agreed to lift crippling economic sanctions. The JCPOA reflected the Obama Administration’s broader policy to cooperate with allies, such as the E.U., to align economic sanctions on common targets. It was a practical endeavor: greater coherence also maximized impact.
The Trump Administration, in contrast, has adopted a unilateral approach toward sanctions. In May 2018, the Trump Administration unexpectedly announced U.S. withdrawal from the JCPOA, while the other P5+1 partners remained committed to the 2015 agreement.3 January saw further developments as Iran’s reduced compliance with the JCPOA, in light of U.S. withdrawal, led the E.U. parties to consider referring the matter to the JCPOA’s Joint Commission under the Agreement’s Dispute Settlement Mechanism. Some dismiss the Trump Administration’s decision to withdraw from the JCPOA as insignificant because, even during U.S. participation, the American embargo on Iran remained. However, the true impact of this decision is clear when assessed more broadly. The Trump Administration’s unilateral approach creates divergence in both the timing and substance of global sanctions measures. Moreover, following increased U.S. sanctions, the E.U. retaliated by expanding the scope of its blocking regulation to prohibit E.U. companies from complying with U.S. secondary sanctions targeting Iran.4 Secondary sanctions specifically target foreign individuals and entities which engage in enumerated activities that may have no U.S. jurisdictional nexus. The goal is to prevent non-U.S. citizens and businesses abroad from doing business with a target of primary U.S. sanctions.5
Businesses that must comply with both U.S. and E.U. law now face the challenge of navigating inconsistent economic sanctions and the risks accompanying imperfect compliance. Violation of secondary sanctions by a non-U.S. entity can cause it to be subject to various sanctions by the U.S. government and the Trump Administration has signaled it will fully enforce the sanctions now in effect.6 The compliance game is now more complicated through the increased Iranian sanctions announced on January 10th. Further challenges concerning available claims and defenses may emerge as these businesses encounter disputes related to their international activities. For example, in the maritime industry, a vessel must actively ensure compliance with sanction policies as it selects ports. In the worst-case scenario, where a subrogation claim leads to litigation or arbitration, an insurer may claim that the insurance policy was invalidated through the vessel’s failure to comply with mandatory sanctions.
Systemic Stressors at the World Trade Organization
For twenty-four years, more than 160 Member States have entrusted the World Trade Organization (WTO) to regulate trade agreements and provide a framework and forum, the Dispute Settlement Body, to enforce those agreements. Private individuals and businesses do not have direct access to the WTO. They cannot complain about the practices of Member States before the WTO’s Dispute Settlement Body or rely upon rights granted by the WTO in litigation or arbitration because these claims are carved out by treaty or statute. Yet without a doubt, investors and businesses rely upon the WTO’s stability and predictability to support their international activities. These precise features have been challenged and undermined by President Trump’s “America First” economic policy.
Since January 2018, the Trump Administration has incrementally increased U.S. import restrictions under Section 232 of the 1962 Trade Expansion Act. Section 232 allows the executive branch authority to impose or increase tariffs on imports deemed threatening to “national security.” “National security” is not defined in the Act. The trade wars instigated by these unilateral policies are well-documented in global headlines and have caused increased tariffs on everything from washing machines to aluminum and steel. Several WTO Member States challenged these trade measures with claims before the Dispute Settlement Body.7 The Trump Administration, represented at the WTO by U.S. Trade Representative Robert Lighthizer, has argued that these disputes are “non-justiciable” as the measures relate to national security under Article XXI of the General Agreement on Tariffs and Trade 1994 (GATT 1994).8 In April 2019, the Russia – Measures Concerning Traffic in Transit Panel Report became the first WTO decision interpreting Article XXI of GATT 1994. It rejected the Trump Administration’s non-justiciability argument.9 This decision limits Member States’ range of defenses before the WTO. As a result, Member States may face increased scrutiny of their actions, which may impact Member States’ commitments to the Dispute Settlement Body specifically, and the WTO generally.
More recently, the Trump Administration has made headlines for causing the suspension of the WTO’s Appellate Body, the second-level review mechanism of the Dispute Settlement Body. The Appellate Body consists of seven seats and three members must be empaneled to hear every appeal. Since 2017, as terms have expired and vacancies have emerged, the Trump Administration has blocked the appointment of any new Appellate Body members.10 These vacancies exacerbated delays, but the Appellate Body was still able to function. However, as of December 10th, the only remaining judge of the Appellate Body is Chinese national Ms. Hong Zhao and it is impossible for Ms. Zhao to decide appeals alone. Many Member States remain committed to the WTO and have issued a “joint call” to launch the selection process for the appointment of further Appellate Body members. Meanwhile, other Member States have taken it upon themselves to develop solutions. Canada and the European Union, for example, in July agreed to an Interim Appeal Arbitration Arrangement to resolve WTO disputes at the appellate level.11 The arrangement is a parallel and ad hoc system for dispute resolution, permitted under Article 25 of the WTO’s Understanding on Rules and Procedures Governing the Settlement of Dispute, but it has not previously been tested and is only a temporary solution to a systemic challenge caused by the Trump Administration.
International investors and global businesses engaged in trade activities have limited voice before this multilateral institution, but they are not immune from highly politicized fluctuations or the impact of trade wars. The Trump Administration’s “America First” economic policy has introduced an added layer of instability for businesses around the world. Prudent investors and businesses can account for some of this unpredictability as they allocate risk in future business deals. For example, unexpected tariffs may cause certain deals to no longer be financially prudent, or even viable. Thoughtful and strategic contract negotiators could expressly allocate the financial burden of possible future tariffs or even introduce an opt-out mechanism through a force majeure clause to insulate from these risks. Indeed, such risks might even justify seeking political risk insurance for businesses particularly susceptible to the Trump Effect.
The Rise of NAFTA 2.0
In October 2018, President Trump collaborated with his Canadian and Mexican counterparts to unveil the U.S.-Mexico-Canada Agreement (USMCA).12 The USMCA aims to replace the North American Free Trade Agreement (NAFTA), which enabled a free-trade zone between the United States, Canada, and Mexico since 1994. From a trade and economic perspective, the resounding view is that not much has changed.13 The investment arbitration mechanism of NAFTA also remains intact. As usually employed, this mechanism allows individuals and businesses who qualify as foreign “investors” holding qualified “investments” to pursue investment arbitration directly against the host State should guaranteed rights be violated.14 However, the USMCA’s Chapter 14, which embodies this dispute resolution mechanism, departs from NAFTA and reflects a new approach that should be closely monitored by foreigners holding investments in any of the three USMCA Member States.
The prior NAFTA regime took a “balanced” approach to rights and obligations among the three Member States. In the USMCA, Canada has withdrawn from Chapter 14 entirely. This means that Canada remains a party to the USMCA, but investment arbitration claims can no longer be asserted by Canadian investors, nor asserted against Canada. Canada’s consent for legacy claims will expire three years after NAFTA’s termination (a currently undetermined date).15 The investment arbitration mechanism survives for the benefit of American and Mexican investors with changes to the types of disputes investors may pursue, and the procedural means to do so. Moreover, as explained below, certain elements are now dependent on national identity.
Investors from other Member States (i.e., prospective claimants) are now required to litigate claims “before a competent court or administrative tribunal of the respondent.”16 This is essentially a requirement for investors to first litigate in local courts to resolve disputes without initiating an investment arbitration proceeding. Investors must litigate until a “final decision from a court of last resort,” or, alternatively, 30 months have elapsed since local court proceedings were initiated.17 There is an exception to this local litigation requirement “to the extent recourse to domestic remedies was obviously futile or manifestly ineffective.”18 This scheme is accompanied by a four-year concurrent statute of limitations for asserting any claim through investment arbitration.19
The USMCA provides an “asymmetrical” fork-in-the-road provision.20 If, while pursuing local litigation, American investors allege a breach of the USMCA itself (as opposed to a breach of Mexican law), this will bar any right to pursue investment arbitration under the USMCA.21 The USMCA does not contain a parallel provision for Mexican investors, thereby altering the scope of an investor’s rights based solely on nationality.
If investors have exhausted the local litigation requirement (or 30 months have elapsed) and no adequate relief has been obtained, they become qualified to pursue investment arbitration against the host State. In the arbitration proceeding, only certain claims would be available: (1) direct (but not indirect or “creeping”) expropriation,22 (2) violations of national treatment,23 or (3) violations of the USMCA’s Most Favored Nation (MFN) provision.24 There is a carve-out for MFN claims concerning “the establishment or acquisition of an investment.”25 This is a departure from the approach of similar provisions in other investment agreements.
Further rights are available for claims concerning government contracts in several highly regulated sectors (including energy, telecommunications, transportation, and infrastructure).26 These provisions allow investors to pursue claims for violations of the minimum standard of treatment under customary international law, indirect expropriation, and the establishment or acquisition of an investment.27
While each of these changes are distinct and reflect discrete rights and opportunities, all of them suggest that investors must be strategic, both in making their investments and pursuing remedies in case of adverse action by a host State. In all events, once a dispute arises and investors begin the process of vindicating their rights through local litigation, they must be prepared with a parallel strategy (and well-informed counsel) to pursue investment arbitration.
Leaders of all three Member States signed the USMCA at a ceremony in fall 2018 and domestic ratification by each would make the treaty binding. Mexico ratified the USMCA in June 2019.28 Unexpectedly, on December 10th (the same day that the WTO Appellate Body ceased to function), all three Member States executed a “Protocol of Amendment” (Amendment). The 26-page Amendment includes modifications to key elements of the USMCA, most importantly dispute settlement, labor and environmental provisions, intellectual property rights, and steel and aluminum requirements in the rules of origin for automobiles.29 The Amendment does not make any changes to Chapter 14’s investment protections. However, it introduces novel concepts for international dispute resolution, including evidentiary guidelines for any tribunal empaneled to hear a State-to-State dispute under the USMCA’s Chapter 31. This is not directly relevant for international business disputes, but it is interesting nonetheless as international investors and global businesses may be impacted by State-to-State disputes arising from the Trump Administration’s protectionist policies.
In the U.S., the House ratified the USMCA during the week leading up to Christmas and now it must also be ratified by the Senate. President Trump’s articles of impeachment (as of this writing, yet to be dispatched to the Senate by House Speaker Pelosi) also are on the Senate’s agenda for January, signaling that it will be a busy month in Washington, DC. Following completion of ratification by the U.S. and Canada, investors and businesses with activities in USMCA Member States will be better able to assess the impact on their investments and rights.
Conclusion
In his book on the subject, Professor Koh characterizes the Trump Effect on global politics, international law, and related multilateral institutions as impacting the “future world order.”30 Professor Koh wrote these words at the dawn of this U.S. presidential term. As we come closer to its conclusion, these words could not have been more prolific. The international investment and global business community has proven that it takes resilience to thrive in this era. Continuously evolving business strategies, including the need to react to changing global sanctions policies, emerging trade wars, and the rise of a new regional free trade agreement, have been essential for successful business endeavors. The same kind of resilience and creativity will be essential to successful dispute resolution as the aftermath of this presidential term unfolds. By our score, President Trump has earned an “A” for advancing his myopic America First protectionist policies and an “F” for freedom in international business transactions and flexibility in related dispute resolution.
About the Authors
Charles H. Camp is an international lawyer with over thirty years of experience representing foreign and domestic clients in international litigation, arbitration, negotiation, and international debt recovery. In 2001, Mr. Camp opened the Law Offices of Charles H. Camp, P.C. in Washington, D.C. to focus on effective, personalized representation in complex, international matters. Mr. Camp teaches international negotiations at the George Washington University Law School.
Kiran Nasir Gore is Counsel at the Law Offices of Charles H. Camp, P.C. Her expertise is in international dispute resolution, including advocacy before U.S. courts, commercial and investment arbitration tribunals, and investigative authorities. She also draws on her professional experiences as an educator at the George Washington University Law School and New York University’s Global Study Center in Washington, D.C.
References
1. Nikolas Bowie, “High Crimes Without Law: Responding to Laurence Tribune & Joshua Matz, To End a Presidency (2018),” 132 Harvard Law Review Forum 59, 60 (2018).
2. Harold Hongju Koh, The Trump Administration and International Law 5-19 (OUP, 2019).
3. Joint Comprehensive Plan of Action (JCPOA) (July 14, 2015); Mark Landler, Trump Abandons Iran Nuclear Deal He Long Scorned, N.Y. TIMES (May 8, 2018).
4. Council Regulation (EC) No. 2271/96 (Nov. 22, 1996), protecting against the effects of the extraterritorial application of legislation adopted by a third country, and actions resulting therefrom.
5. Jeffrey A. Meyer, Second Thoughts on Secondary Sanctions, 30 University of Pennsylvania Journal of International Law 905, 906 (2009).
6. See generally U.S. Treasury Iran Sanctions Resource Center, available at: https://www.treasury.gov/resource-center/sanctions/programs/pages/iran.aspx.
7. Challenges have been brought by China, India, the European Union, Canada, Mexico, Norway, Russia, Switzerland, and Turkey. Several other countries have joined these disputes as Third Parties.
8. Third-Party Oral Statement of the United States, Russia – Measures Concerning Traffic in Transit, WT/DS512, at 4 (Jan. 25, 2018); Third-Party Executive Summary of the United States, Russia – Measures Concerning Traffic in Transit, WT/DS512, at 2 (Feb. 27, 2018).
9. See Panel Report, Russia – Measures Concerning Traffic in Transit, ¶ 7.103, WTO Doc. WT/DS512/R (adopted Apr. 5, 2019).
10. “Members reiterate joint call to launch selection process for Appellate Body members,” World Trade Organization (Nov. 22, 2019), available at: https://www.wto.org/english/news_e/news19_e/dsb_22nov19_e.htm
11. Joint Statement by Canada and the European Union (EU) on an Interim Appeal Arbitration Arrangement (July 25, 2019).
12. See generally Robert Landicho and Andrea Cohen, What’s in a Name Change? For Investment Claims Under the New USMCA Instead of NAFTA, (Nearly) Everything, Kluwer Arbitration Blog (Oct. 5, 2018).
13. See e.g., Daniel J. Ikenson, “USMCA: A Marginal NAFTA Upgrade at a High Cost,” Cato Inst. (April 10, 2019); Gwynn Guilford, “The net impact of Trump’s new NAFTA is probably nothing”, Quartz (Apr. 22, 2019).
14. For a more in-depth discussion, see generally Kiran Nasir Gore, From NAFTA to USMCA: Providing Context for a New Era of Regional Investor-State Dispute Settlement, 8 Young Arbitration Review 4 (July 2019).
15. A “legacy investment” is defined as “an investment of an investor of another Party in the territory of the Party established or acquired between January 1, 1994, and the date of termination of NAFTA 1994, and in existence on the date of entry of force of this agreement.” USMCA, Annex 14-C (Legacy Investment Claims and Pending Claims), Art. 6(a).
16. Id., Annex 14-D (Mexico-U.S. Investment Disputes), Art. 14.D.5 (Conditions and Limitations on Consent).
17. Id.
18. Id., note 24.
19. Id., Art. 14.D.5 (Conditions and Limitations on Consent).
20. For an in-depth discussion, see Alexander Bedrosyan, The Asymmetrical Fork-in-the-Road Clause in the USMCA: Helpful and Unique, Kluwer Arbitration Blog (Oct. 29, 2018).
21. USMCA, Annex 14-D (Mexico-U.S. Investment Disputes), App’x 3.
22. “Direct expropriation” occurs when “an investment is nationalized or otherwise directly expropriated through formal transfer of title or outright seizure.” Id., Annex 14-B (Expropriation), Art. 2.
23. “National treatment” means “treatment no less favorable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory” Id., Art. 14.4.1 (National Treatment).
24. An MFN claim arises when a State’s treatment of an investor is “less favorable than the treatment it accords, in like circumstances, to investors of any other Party or of any non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory” Id., Art. 14.5.1 (Most-Favored-Nation Treatment).
25. Id., Annex 14-D (Mexico-U.S. Investment Disputes), Art. 14.D.3 (Submission of a Claim to Arbitration), Art. 14.D.3 (Submission of a Claim to Arbitration), note 22.
26. Id., Annex 14-E (Mexico-U.S. Investment Disputes Related to Covered Government Contracts), Art. 6.
27. Id.
28. Mary Beth Sheridan, Mexico becomes first country to ratify new North American trade deal THE WASHINGTON POST (June 19, 2019).
29. “Protocol of Amendment to the USMCA” (Dec. 10, 2019), available at: https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/Protocol-of-Amendments-to-the-United-States-Mexico-Canada-Agreement.pdf
30. Harold Hongju Koh, The Trump Administration and International Law 2 (OUP, 2019).
