• After months of uncertainty, the United States, Mexico and Canada recently reached a new trilateral trade agreement, the United States-Mexico-Canada Agreement (USMCA), to replace the North American Free Trade Agreement (NAFTA).
  • This new agreement is a win for Mexico, who as net importer of Foreign Direct Investment (FDI) managed to include an Investor-State Dispute Settlement (ISDS) mechanism despite strong resistance from the U.S. administration.
  • Under the USMCA, the new protections offered to most U.S. investors in Mexico are much more limited than the ones provided by NAFTA Chapter 11.

After long months of uncertainty with respect to the survival of the North American Free Trade Agreement (NAFTA) in general – and its investment chapter in particular – and more recently regarding Canada's continued participation in any updated agreement, Mexico, the United States and Canada finally on Sept. 30, 2018, reached a new trilateral agreement named the United States-Mexico-Canada Agreement (USMCA). However, it leaves Canada out of the new Investor-State Dispute Settlement (ISDS) mechanisms1 agreed to on a bilateral basis between Mexico and the United States.

This new agreement is a win for Mexico, who as net importer of Foreign Direct Investment (FDI) managed to include an ISDS mechanism despite strong resistance from the U.S. administration. As a net importer of FDI, it was crucial for Mexico to maintain at least some reduced protection for U.S. companies investing in Mexico.2

The new investment chapter agreed to between the U.S. and Mexico modernizes NAFTA's Chapter 11 and brings it somewhat in line with other recent trade agreements signed by Mexico, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), although it contains particular provisions that differ from those in other agreements.

Key Points of Interest for U.S. Investors

The key features of the new investment chapter of the USMCA of most interest to U.S. investors in Mexico are the following:3

  • Legacy claims under NAFTA may still be initiated after the USMCA enters into force (expected in 2020) for a period of up to three years, and ongoing cases will not be affected by the termination of NAFTA and the start of the USMCA.
  • ISDS under the USMCA is much more restricted than under NAFTA. The substantive protections available to U.S. investors and their investments in Mexico will be significantly limited and moreover, for many investors, subjected to a 30-month litigation period in Mexican courts before being able to bring an arbitration claim against the government. This latter provision might not be enforced in all cases, as it remains to be seen whether an ISDS tribunal will require compliance with this obligation in all cases, particularly when recourse to legal courts might be futile. In this context, it is worth mentioning that there is no incorporation of the ISDS standards in Mexican law. The expected results from local litigation may therefore be different from those expected under an ISDS mechanism. The same could be true for the recovery of damages from expropriation of certain assets that under Mexican law will most likely be lower.4
  • U.S. investors in certain industry sectors (oil and gas, power generation, telecommunications, transportation and infrastructure) that have signed government contracts with Mexico will enjoy broader access to substantive and procedural protections (such as the minimum standard of treatment, protection against indirect expropriation and an exemption from the local litigation requirement). This being said, these substantive protections provided to investments related to covered investment contracts have also been further restricted providing, for example, the taking into account of public welfare objectives.
  • One of the most relevant changes found in the new text concerns the most favored-nation treatment. The USMCA clearly limits the interpretation of this obligation by excluding the possibility of invoking in disputes under the USMCA any protections contained in other international trade or investment agreements signed by Mexico (and the U.S.). Another relevant change is that U.S. and Mexico will only accept claims derived from losses or damages incurred by investors in their capacity as investors (this would exclude claims brought to recover losses or damages resulting from exports).
  • Cases under the investment chapter of the USMCA will be public and may allow for submissions by third parties after consultation by the tribunal with the disputing parties.
  • Interestingly, the new text allows the parties to comment on a final award before it is issued.


The investment chapter of the USMCA is certainly good news for U.S. investors in Mexico as the more likely alternative seemed to be a complete loss of investment protection with the possible negative effects on investment flows this could have caused for Mexico. However, the new protections offered to most U.S. investors under the USMCA (those related with a covered government contract to a lesser extent) are much more limited than the ones provided by NAFTA Chapter 11.

Both U.S. and Canadian investors in Mexico are well advised to be aware of the three-year period following the entry into force of the USMCA during which time they will still be able to file claims under NAFTA Chapter 11. In parallel and afterward, Canadian investors could recur to the CPTPP ISDS to file disputes against Mexico once it enters into force.