A recent investor-state arbitration decision under the investment chapter of the North American Free Trade Agreement (NAFTA Chapter 11), Vento v. Mexico, demonstrates that foreign investors protected by an international investment agreement may submit arbitration claims that international trade regulatory and tariff measures breach the state's international obligations.
A recent investor-state arbitration decision under the investment chapter of the North American Free Trade Agreement (NAFTA Chapter 11), Vento v. Mexico, demonstrates that foreign investors protected by an international investment agreement may submit arbitration claims that international trade regulatory and tariff measures breach the state's international obligations.
To bring an investment arbitration claim, foreign investors first need to establish that they are investors protected under an international investment agreement, and that they have a qualifying investment.
The investor may contend that trade measures violate protections against the "fair and equitable"/minimum standard of treatment, the protections against discrimination, and others.
Government trade regulatory policies that harm importers, including tariffs, may breach a state's international obligations if they violate standards of protection under an international investment agreement.
NAFTA has been terminated and replaced by the U.S.-Mexico-Canada Agreement (USMCA) as of 1 July 2020. However, key provisions of NAFTA Chapter 11 remain effective for three years after the entry into force of the USMCA and so still provide a basis for international claims.
Foreign investors harmed by trade policies may institute investment arbitration to prosecute claims for monetary damages.
Introduction
Disputes involving trade measures are traditionally litigated before local courts, local administrative bodies, or before the World Trade Organization. Nonetheless, investment arbitration offers foreign investors an additional avenue to obtain relief in the form of damages when a state imposes trade-related measures that breach its international obligations. The recent Vento Motorcycles, Inc. (Vento) v. Mexico award sheds light on the possibility to seek damages for harmful trade measures in investment arbitration.
We analyze some key aspects of the Vento award and discuss how government measures involving issues of international trade could give rise to jurisdiction before investment arbitration under NAFTA Chapter 11 and similar international investment agreements. Investors that have been harmed by trade measures should carefully consider their rights under international investment agreements and specifically to assess their ability to seek monetary damages for past harm caused by government tariffs and other trade measures. Key provisions of NAFTA Chapter 11 remain effective until 1 July 2023, notwithstanding the 1 July 2020 entry into force of the USMCA.
II. A glimpse of Vento v. Mexico
Vento established jurisdiction under NAFTA Chapter 11, because it is a U.S. corporation investing in a joint venture located in Mexico. Vento argued that tariffs imposed on imports into Mexico of U.S.-made motorcycles assembled from Chinese-originating parts harmed its investment in Mexico, in violation of NAFTA Chapter 11. Specifically, Vento claimed that Mexico denied NAFTA duty-free tariff preferences to its imports when Mexico found that the motorcycles assembled in the United States were originated in China, and therefore applied a higher tariff rate consistent with treatment of the goods as having been imported from China.
Vento's claims ultimately failed on the merits because Vento could not show irregularities in the Mexican tax authority's treatment of its investment or make an apples-to-apples comparison to compare its investment to firms owned by Mexican or third country investors. We analyze these elements of the case in turn.
Vento complied with the nationality requirement and had an investment for purposes of NAFTA Chapter 11
The tribunal found that Vento was a U.S. corporation (meeting the nationality requirement), and that its joint venture for the sale and marketing of motorcycle in Mexico met the definition of an investment under NAFTA Chapter 11. The tribunal found that this joint venture involved joint efforts, cooperation, and commitment of resources, skills, and know-how by both Vento and Motor Bike to develop an economic activity in Mexico. The joint venture did more than simply buy motorcycles from the United States and sell them in Mexico. Vento contributed capital, facilities to assemble the motorcycles, finished the motorcycles; its skills and know-how in the motorcycle assembly business and the exportation of goods; and client development and accounting services. 1
These facts were important because the tribunal also determined that the joint venture was an investment as defined in NAFTA Chapter 11. This finding means that a foreign manufacturer/exporter that has a local subsidiary or joint venture is able to claim protection under NAFTA Chapter 11 when its local entity is being harmed by import tariffs. And, by extension, that foreign investor may seek damages for harms to its local investment(s) caused by import tariffs. Notwithstanding, as discussed below, an investor must still demonstrate a substantive violation of NAFTA Chapter 11 in order to receive compensation as a result of the harms caused by the imposition of the import tariffs.
Vento failed to prove breaches of the minimum standard of treatment
Vento unsuccessfully alleged that Mexico breached the minimum standard of treatment (MST). That is, NAFTA Chapter 11 requires that investors accorded !!!! "treatment in accordance with international law, including fair and equitable treatment and full protection and security." The tribunal found that such a breach requires proof of state conduct that harmed the claimant and that is "arbitrary, grossly unfair, unjust or idiosyncratic, is discriminatory and exposes the claimant to sectional or racial prejudice, or involves lack of due process. . . or a complete lack of transparency . . . in an administrative process . . ." 2
Vento alleged that Mexican tax officials conducting the origin verification of Vento's exports to Mexico were not following standard rules of procedure. Instead, Vento claimed that Mexico had established a secret set of "marching orders," which required the tax officials to reach a discriminatory conclusion, i.e., to stop the joint venture from being able to import U.S.-made, Vento-branded motorcycles into Mexico on a duty-free basis. Vento complained of a lack of due process, arbitrary and discriminatory treatment in the Mexican tax authority's (SAT's) administrative proceedings that led to two SAT determinations denying NAFTA preferential tariff treatment to motorcycles assembled by Vento in the United States and imported into Mexico. 3
Notwithstanding these allegations by Vento, the tribunal did not find anything irregular about Mexico's application of Mexican customs law. Mexican courts agreed that the Mexican government's determinations were consistent with Mexico's obligations under NAFTA. The tribunal did not defer to those court decisions, but generally agreed that those decisions were well reasoned. The tribunal thus rejected the claim that Mexico acted arbitrarily in breach of MST.
Vento failed to identify appropriate comparators to its investment
Vento's claims that Mexico discriminated against its investment in Mexico under the national treatment and Most-Favored Nation standard was ultimately unsuccessful. The tribunal found that Vento failed to identify comparator companies in Mexico that were in like circumstances to Vento's Mexican affiliate, and so there was not an apples-to-apples comparison to establish Vento received less favorable treatment. The tribunal stated that "none of the comparators identified by Vento in the marketing, distribution, sales and servicing of small displacement motorcycles in Mexico operated in Mexico through joint venture agreements." Vento's proposed comparators were Mexican corporations authorized to import motorcycle parts under an import duty exemption program. In particular, the tribunal found that the three comparator companies identified by Vento that were subject to lower import duties were not subject to the same foreign trade framework as Vento, and so they were distinguishable on that basis. This finding allowed the tribunal to reject all claims that Mexico discriminated against Vento and its investment. 4
Vento's business was the following: Vento assembled motorcycles in the United States exclusively from parts and components imported by another company into the United States from China. Subsequently, Vento exported the finished motorcycles to Mexico. Mexico's tax authority determined that Vento's motorcycles did not comply with the NAFTA rules of origin and did not qualify as NAFTA originating goods, instead applying a tariff as if Vento's motorcycles were imports directly from China. 5
The tribunal found that Vento's and the comparators' businesses were not in "like circumstances" as required by NAFTA Chapter 11's national treatment and Most-Favored Nation standards of protection, for the following reasons:
First, the comparators were all based in Mexico and carried out all their assembly, distribution, marketing, sale, and servicing operations there. They imported motorcycle parts from China and India under the import duty exemption program, for further assembly into motorcycles, which were then sold directly in Mexico. 6
Second, at its peak, Vento produced around 38,000 motorcycles in two assembly lines with around 20 employees. On the sales and distribution side, Vento's local joint-venture company had around 60 distributors in Mexico and employed around 100 persons responsible for market sales, distribution, spare parts, and post-sale services. In contrast, the Mexican comparators were all corporations constituted in Mexico that had broader industrial or business activities and significant investments in Mexico. 7 One comparator company had substantial investments, which included four assembly lines with a capacity to produce 650,000 motorcycles and had created over 2,300 direct jobs and over 6,000 indirect jobs, whereas Vento's local joint venture facilities never became operational. Thus, Vento was not in similar circumstances to the Mexican comparator.
Third, Vento assembled its motorcycles in the United States exclusively from Chinese parts and components and then exported finished goods to Mexico, whereas the Mexican comparators assembled their motorcycles in Mexico and sold them directly in the Mexican market. 8 Because of these differences, the tribunal found that Vento failed to show that the different Mexico investments operated in the same manner.
Next steps
Vento v. Mexico provides a path for global businesses to commence arbitration for damages involving tariffs or other trade measures that harm their investments abroad. The Vento case is particularly important as trade tensions have increased in recent years around the world, leading to several cross-cutting tariffs and other trade measures that have caused substantial harm to companies operating in the global marketplace. In order to successfully prosecute investment agreement claims, an investor should first ensure that it has a protected investment abroad, because commercial sales and import/export agreements may not be sufficient to achieve protection under a treaty. The investor should also prepare a detailed factual record to establish discrimination or other irregularities in a government's treatment of its affiliated local importer. If both elements are present, a foreign investor may then be able to pursue claims for damages caused by harmful trade measures, including tariffs.