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Nondiscrimination Obligations

NAFTA Chapter 11 contains the nondiscrimination obligations of national treatment (Article 1102) and most-favored-nation treatment (Article 1103), as well as an obligation to provide the better treatment of the two (Article 1104). These provisions prohibit discrimination between investors and investments in “like circumstances.” Article 1102 prohibits less favorable treatment of foreign investors than domestic investors, while Article 1103 prohibits discrimination between foreign investors from other parties and any non-party. As we noted above, differences in the impact that investors or investments have on climate change could be relevant to determine whether they are in “like circumstances,” to the extent that WTO jurisprudence can be applied to interpret these obligations as focusing on the competitive relationship between investors and investments in a manner that takes into account the impact ofprocessing and production methods. However, the different context and terminology in Articles 1102 and 1103 leave open the question of which criteria should be used to make this determination. Moreover, those criteria are likely to vary according to the nature ofthe investor or the investment. For example, it is unlikely that goods manufacturers and service providers could be subject to the same criteria to determine likeness. Indeed, in the context of the WTO, goods and services are subject to different likeness criteria in the GATT and the GATS nondiscrimination provisions, respectively.[1]

Recent WTO jurisprudence on the meaning of “less favorable treatment” in the TBT Agreement also could be relevant to the interpretation of nondiscrimination obligations in IIAs. The Appellate Body held that “less favorable treatment” requires a determination of whether the contested measure modifies the conditions of competition to the detriment of imported products. However, the existence of such a detrimental effect is not sufficient to demonstrate less favorable treatment if the detrimental impact on imports stems exclusively from a legitimate regulatory distinction rather than reflecting discrimination against the group of imported products.[2] In the context of IIAs, this test could be applied with respect to the differential treatment ofdomestic and foreign investors or investments. Indeed, this test dovetails nicely with the concept of the right of governments to regulate, which has been discussed in the context of IIAs.

In S.D. Myers v. Canada, the Tribunal interpreted Article 1102 in light of the context of the NAFTA as a whole, the NAAEC and the principles that are affirmed by the NAAEC (including those of the Rio Declaration), including its concern for the environment and the need to avoid trade distortions that are not justified by environmental concerns. The Tribunal also took into account the part of the OECD Declaration on International and Multinational Enterprises of June 21, 1976 regarding national treatment, as well as OECD commentary on the “like situation” test from 1993. Finally, the Tribunal considered Supreme Court of Canada jurisprudence regarding discrimination against individuals. The Tribunal concluded that the assessment of “like circumstances” must take into account whether the foreign and national investors are in the same economic or business sector and circumstances that would justify governmental regulations that treat them differently in order to protect the public interest. The Tribunal compared S.D. Myers with Canadian competitors who also provided PCB waste remediation services.[3] Thus, in this case, the determination was in fact based on the comparators providing the same services and being competitors. This approach is consistent with the WTO focus on the competitive relationship between products in the determination of whether they are “like.”

Regarding the issue of whether there was less favorable treatment, the S.D. Myers Tribunal based its decision on whether the practical effect of the measure is to create a disproportionate benefit for nationals over non-nationals and whether the measure, on its face, appears to favor nationals over non-nationals. In this regard, the Tribunal stated that protectionist intent would only be relevant if the measure produced an adverse effect on the foreign complainant. It held that it was a legitimate goal to want to maintain the ability to process PCBs within Canada, and consistent with the policy objectives of the Basel Convention. However, there were alternative measures that Canada could have taken to achieve this objective that would have been consistent with the NAFTA.[4] Thus, the Tribunal appears to have first interpreted Article 1102 to including de facto as well as de jure discrimination, and then introduced a test that resembles the least-trade-restrictive test of GATT Article XX.

In Methanex v. United States, a Canadian company sued the US government for damages under NAFTA Chapter 11 for a California ban on methanol. Methanex argued that the obligation to provide national treatment to foreign investors in “like circumstances” should be interpreted in the light of the GATT/WTO “like products” test, which focuses on the competitive relationship between products. It argued that if two or more investors or their investments compete for the same business, they are in “like circumstances” for the purposes of Article 1102. Methanex also argued that the “like circumstances” test was met because ethanol and methanol are “like products” according to the GATT/WTO test.[5] However, the Tribunal found that the California methanol ban had the same effect on the American investors and investments in methanol as it had on the Canadian investor, Methanex. Given the existence of domestic methanol producers, they were the appropriate point of comparison, not ethanol producers. Methanex did not receive less favorable treatment than the identical domestic comparators, producing methanol. As a result, the Tribunal did not need to determine how to interpret the term “like circumstances.”[6] The interesting point of this aspect of the case is the question of the appropriate comparator in a given case.

Regarding the applicability of the “like products” test to the “like circumstances” test in Article 1102, the Methanex Tribunal noted that “like goods” is never used with respect to the investment regime of NAFTA Chapter 11 and “like circumstances” is not used in relation to goods. The text shows that trade provisions were not to be transported to investment provisions. Accordingly, Article 1102 should be read on its own terms and not as if the words “any like, directly competitive or substitutable goods” appeared in it.[7] However, this sheds no light on how to interpret the term “like circumstances.”

The term “like circumstances” requires tribunals to take into account the nature of investments on a case-by-case basis in the comparison of likeness. Relevant evidence could include the type of enterprise, whether it produces goods or sells services, its location, its technology and its environmental impact. Thus, “circumstances” cannot be limited to the physical characteristics of a product produced by an investment. The term “circumstances” is much broader than the term “prod- ucts.”[8]

NAFTA Article 1202 on services also uses the term “like circumstances.” In the US-Mexico Trucking Services case, the Panel accepted that differential treatment for legitimate regulatory objectives related to safety was a valid consideration. It further stated that “such differential treatment should be no greater than necessary for legitimate regulatory reasons such as safety, and that such treatment be equivalent to the treatment accorded to domestic service providers.”[9] The Panel interpreted Article 1202 in light of Article 2101 of NAFTA, which allows for exceptions for environmental and human health reasons.[10] Since Chapter 11 has no comparable exception for the nondiscrimination provisions, one could argue that legitimate regulatory objectives (like the legitimate regulatory distinctions test in the TBT Agreement) should be relevant circumstances, to enable a State to establish distinctions between investors on the basis of the actual impacts and effects of their investments.[11] This view is consistent with the statement of the Feldman Tribunal that “the concept of discrimination has been defined to imply unreasonable distinctions between foreign and domestic investors in like circumstances.”[12] With respect to climate change regulation, would distinguishing between investments based on their carbon footprint be reasonable where the investors are otherwise in like circumstances? In other words, are differences in greenhouse gas emissions sufficient to negate a finding of like circumstances and thus reach a conclusion that the nondiscrimination obligations are not violated? Alternatively, would differential treatment based on differences in GHG emissions meet the legitimate regulatory distinctions test and thus not constitute less favorable treatment? Legitimate climate change regulation could be found to be consistent with the nondiscrimination obligations of IIAs on either ground.

Public interference with the right of foreign investors to benefit from support schemes for renewable energy or with their right to GHG emission credits can constitute an unjustified difference in treatment. In the Nykomb v. Latvia case, the Tribunal held that Latvia had violated the national treatment standard in the Energy Charter Treaty by refusing to honor a promise of support for low-carbon electricity production on the basis of which Nykomb made its investment. The administrator of the support scheme continued to support low-carbon installations operated by domestic investors, while refusing this payment to Nykomb, which was operating in comparable conditions. The Tribunal held that the host State had failed to justify on the basis of public policy why it refused to pay the promised support to the foreign investor, while continuing to support national investors.[13] This case is consistent with the view that differential treatment should have a basis in a legitimate regulatory distinction.

  • [1] Mirreille Cossy, “Determining ‘likeness’ under the GATS: Squaring the circle?” (2006) WTOWorking Paper ERSD-2006—08 (accessed March 15, 2013); Nadja Dorothea Ruiz Euler, “El Trato Nacional y la Nacion MasFavorecida en el Acuerdo General sobre el Comercio de Servicios de la OMC” (2012) 2 Revista deDerecho Economico Internacional 5 (accessed March 15, 2013).
  • [2] Appellate Body Report, United States—Measures Concerning the Importation, Marketing and SaleofTuna and Tuna Products (US—TunaII (Mexico)), WT/DS381/AB/R, adopted June 13, 2012, para.215.
  • [3] S.D. Myers v. Canada, Partial Award, paras 247—51.
  • [4] S.D. Myers v. Canada, Partial Award, paras. 254—5.
  • [5] Methanex v. United States, Final Award, Part IV(B) paras. 5—7.
  • [6] Methanex v. United States, Final Award, Part IV(B) paras. 18—22.
  • [7] Methanex v. United States, Final Award, Part IV(B) paras. 33-8.
  • [8] Methanex Corporation v. United States, Amicus Curiae Submission para. 36-9.
  • [9] In the Matter of Cross-Border Trucking Services, Final Report of the Panel, February 6, 2001(Secretariat File No. USA-MEX-98-2008-01), para. 258, (accessed April 9, 2013).
  • [10] Final report of the Panel, In The Matter of Cross-Border Trucking Services (2001) USA-Mex-98-2008-01, paras. 257-258.
  • [11] Methanex Corporation v. United States, Amicus Curiae Submission paras. 40-4.
  • [12] Marvin Roy Feldman v. United Mexican States, ICSID Case No. ARB(AF)/99/1, Award(December 16, 2002) para. 170.
  • [13] Nykomb Synergetics Technology Holding AB v. Republic of Latvia, SCC Case No. 118/2001,Award (December 16, 2003).
 
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