The Renovation of Investment-Related Environmental Clauses in USMCA and China's Stance

• Author: Liang Yong & Hou Chu-chen
• Position: Ph.D., Associate Professor of Fudan University Law School, Fulbright Visiting Scholar (2018-2019) hosted by Columbia Law School/LM Candidate of Fudan University Law School
• Pages: 1-20

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The Renovation of Investment-Related Environmental Clauses in

USMCA and China’s Stance

Liang Yong & Hou Chu-chen

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Abstract: The US-Mexico-Canada Agreement (“USMCA”) concluded in 2018 has made

a great renovation of investment-related environmental clauses (“IRE clauses”) to strengthen

the environmental regulatory power of host states. Such renovation triggers important concerns

from the three countries, represents the latest developments of IRE clauses, and also leads to

great attention from other countries, including China. This article tries to examine the

renovation of IRE clauses in USMCA, investigate the recent developments of China in IRE

clauses, and analyze China’s stands on the renovation. Whether China will transplant the IRE

clauses in USMCA in the ongoing IIAs, and whether China will incorporate some Chinese

features or characteristics into the IRE clauses are important not only for China, but also for

the future of rebooting new generation investment rules. Finally, the article makes a conclusion

on China’s stance on the renovation of IRE clauses in USMCA.

The article is composed of four parts. The first part categorizes IRE clauses in USMCA

into six types, makes brief introductions of each one and attempts to interpret the inherent

coherence and relationship of the six types. The second part conducts an empirical analysis of

Chinese IIAs over 40 years and pinpoints the problems to be renovated. The third part points

out China’s stance on IRE clauses in future IIAs and provide specific recommendations to

achieve better-balanced IIAs between investment promotion and environmental protection.

The fourth part is the conclusion which attempts to explore China’s stance on the IRE clauses.

Key Words: IRE Clause; USMCA; China’s Stance

1. Introduction

The North American Free Trade Agreement (“NAFTA”) signed in 1992 is one of the

earliest agreements that incorporates environment provisions in trade and investment

agreements

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and was considered a watershed event, representing the first time policymakers

explicitly sought to address the complex linkages between environmental protection and

liberalized trade.

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It must be mentioned that NAFTA incorporated a strongly binding investor-

state dispute settlement (“ISDS”) mechanism which authorizes foreign investors to bring

investment disputes against host states to international arbitral tribunals to guarantee

expectations of foreign investors. In 1993, in response to the doubts raised by domestic

environmentalists, U.S., Canada and Mexico signed the North American Agreement on

Environmental Cooperation (“NAAEC”) as a supplementary agreement to NAFTA.

Since its entry into force on January 1st, 1994, the doubt about whether NAFTA and

NAAEC were capable of protecting the environment has never faded away over the 20 years

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First Author: Liang Yong, Ph.D., Associate Professor of Fudan University Law School, Fulbright Visiting

Scholar (2018-2019) hosted by Columbia Law School. Second Author: Hou Chu-chen, LLM Candidate of Fudan

University Law School. The article is the intermediary research report of the project of Research on Internat ional

Investment Dispute Settlement Mechanism Innovations under the “One Belt and One Road” Initiative granted by

the China Legal Society (No. CLS (2018) C36).

2

See JORGE E. VINUALES, Foreign Investment and the Environment in International Law, Cambridge

University Press, p.283 (2012).

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See Linda J. Alle n, The Environment and NAFTA Policy Debate Redux: Separating Rhetoric from Reali ty, 42

WM. & MARY ENVTL. L. POL’Y REV. 965, 965 (2018).

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of its course. The U.S. and the Canadian governments have been sued by the other party’s

investors in dozens of ISDS cases, and a big portion of those cases arose from environmental

regulatory measures taken by host state governments. For instance, the U.S. has been sued in

16 ISDS cases, and all of them invoked NAFTA as the legal basis. Although, the U.S. has never

failed in any ISDS case, with 10 cases favoring the U.S government, 4 cases settled,

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and 2

cases discontinued, the U.S. government began noticing the potential risks and paid more

attention to the environmental regulatory powers of host states. That’s why the U.S.

pragmatically changed its stance and added Article 12 (Investment and Environment) to the

U.S. Model Bilateral Investment Treaty of 2004 (“2004 U.S. Model BIT”) to rebalance the

interests of host states and foreign investors in environmental matters. According to Article 12,

any dispute arising from environmental matters shall be resolved by a joint committee between

U.S. and the contracting state rather than be ruled by arbitral tribunals under ISDS. After that,

2012 U.S. Model BIT strengthened the obligations of host states in complying with

environmental laws, and changed the “best effort clause” to “mandatory requirement”.

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However, the U.S. wanted to go further. Soon after the Trump Administration took the

position in 2017, the U.S. commenced NAFTA renegotiations in July 2017. In the Summary of

Objectives for the NAFTA Renegotiations, the concern for environmental matters was one of

the six critical objectives for NAFTA renegotiations.

On November 30th, 2018, the three countries signed the Agreement Among the United

States of America, the United Mexican States and Canada (“USMCA”)

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to replace NAFTA,

and lots of modifications and additions have been made on IRE clauses. The U.S. House of

Representatives passed the USMA on December 19th, 2019, bringing it that much closer to

come into effect. What about are IRE clauses in USMCA? What kinds of potential changes

will be led to by those IRE clausesWill the IRE clauses cause a general trend in the

international community to reconsider their positions on investment and environment? Where

does China stand under such situations?

This article examines and summarizes the renovation that USMCA made on IRE clauses,

and then analyzes China’s stance on the renovation. The first part conducts a typological

analysis of IRE clauses in USMCA, examining and summarizing the functions and

characteristics of these clauses. The second part adopts an empirical approach to analyze IRE

clauses in Chinese IIAs and pinpoints the problems of these clauses. The third part analyzes

China’s reformative objective for the newest generation of IIAs, and then gives a conclusion

about China’s stands on the renovation of IRE clauses in USMCA.

2. Typological Analysis of IRE Clauses in USMCA

This part categorizes important IRE clauses in USMCA into six types: preamble clauses,

non-derogation clauses, general exception clauses, specific exception clauses, dispute

settlement procedure clauses and private subject participation clauses. The functions and

characteristics of each type are examined individually, and some NAFTA cases are discussed

for a better understanding of relevant clauses. After that, we will explore the inherent

connections among the six types of IRE clauses.

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See United States of America, Investment Policy Hub, htt ps://investmentpolicy.unctad.org/investment-dispute-

settlement/country/223/united-states-of-america/respondent (accessed on December 13, 2019).

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Article 12 of 2012 U.S. Model BIT deleted the term of “strive to” in subparagraph 2 in 2004 U.S. Model BIT,

which requires each Party shall ensure that it does not waive or otherwise derogate from or offer to waive or

otherwise derogate from its environmental laws.

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See A New Canada - United States - Mexico Agreement, Government of Canada ( Date Modified on April 3, 2

020), htt ps://www.international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/cusma-a

ceum/index.aspx?lang=eng (accessed on April 13, 2020).