As Mariano Gomezperalta explains, failed efforts to protect Mexican film makers illustrate how international treaties can benefit both local and international investors. Mr. Gomezperalta represented Mexico’s National Chamber of Film and Video (Canacine) in this matter.

I. The Mexican Movie Quota

Four of the ten worst movies in 2011 remained in Mexican theaters almost as long as some of the best movies of the year. Theaters showing the former were almost entirely empty while those showing the latter were completely full. Why would any reasonable businessperson allocate movie space for films with very low demand and maintain empty theaters at a significant cost for prolonged periods of time?

Mexican movie theaters owned by foreign or local investors have been subject to local content provisions that require them to allocate a percentage of the theater’s screen time to movies produced in Mexico (regardless of their quality or audience). The local content requirement was first established in Mexico in 1992 at a rate of 30%. Given that this movie quota was clearly a violation of NAFTA’s national treatment and performance requirement clauses, Mexico negotiated an exception with the US and Canada that became part of the treaty (NAFTA Annex I – CMAP 94 1103). Mexico could have maintained the Movie Quota indefinitely under NAFTA, but it chose to gradually phase it out and finally eliminated it in 1998.

The Mexican Congress reintroduced a 10% movie quota in 1999, but such a quota was now illegal since the “ratchet” principle prohibits NAFTA parties to reverse unilateral liberalization. The NAFTA violation, however, went unnoticed. There were no challenges in local courts or investment tribunals and the industry generally seems to have been under the impression that Mexico was underutilizing the original 30% movie quota.

In the summer of 2011, a group of Mexican congressmen, supported by local producers, directors and actors, decided to “bridge the gap” and proposed to increase the quota from 10% to 30%. The proposal also called for a minimum of 2 weeks of show time for Mexican-made movies. During the congressional hearings, supporters of the legislation argued that the Mexican state had a cultural responsibility to guarantee the audience with meaningful access to Mexican movies. Otherwise people would be left to watch Hollywood productions and would be prevented from an opportunity to view different types of films. For over five hours, the hearings were loaded with calls to defend the Mexican movie industry and the traditions and values that they represent. “The audience does not prefer Hollywood over Mexican movies. The audience simply does not have an alternative,” actress Irene Azuela complained. “Harry Potter was released with 3,000 copies and occupied 46% of the theaters—how can this be?” demanded producer Leon Sermet.

For local movie producers, the movie quota represented the only way to stop the invasion of Hollywood movies and provide Mexican films with a space that the market alone would never provide. Local film makers viewed the movie quota as a necessary advantage in favor of the Mexican movie industry.

The theater association, however, argued that Mexican movie theaters resist showing Mexican movies because very few people want to see them. They claimed that Mexican movies are generally made without consideration for the audience or their tastes and are often of very poor quality. With a few exceptions, theaters showing Mexican movies are generally empty. Mexican theaters were also able to show that the proposed movie quota was contrary to Mexico’s obligations under its international trade and investment agreements and that breaching such obligations would expose Mexico to substantial law suits in international and local tribunals. (Recent NAFTA cases addressing performance requirements, for example, resulted in some of the largest awards in the region (i.e., ADM and Cargill, which collectively hold more than 100 million dollars in awards against Mexico)).

The movie theaters’ position seems to have been effective, as the new movie quota lost support after the hearings and it has become less attractive to Congress. It also now faces opposition from the Mexican Executive, which presumably does not wish to be involved in any new investor-state disputes regarding performance requirements. Some government agencies, such as Mexico’s Competition Commission, even issued official opinion letters against the movie quota and recommended Congress not to approve it given its adverse effects to the market and its conflicts with national competition laws.

II. International Regulations Regarding Local Content

The international regulations banning local content and performance requirements such as the Mexican movie quota are quite broad and addressed in multilateral (e.g., 1994 GATT and other WTO Agreements), regional and bilateral treaties.

At a multilateral level, the GATT (via Article III:4 – National Treatment) prohibits discriminatory treatment with respect to all laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of imported products. This provision usually catches any local content measure affecting international trade. In addition, local content measures are often prohibited by Article XI – Quantitative Restrictions, which prohibits non-tariff barriers, since they frequently contain “quantitative” elements such as conditioning investments upon exporting a certain percentage of goods or requiring the use of a certain amount of locally produced goods, etc.

The GATT’s Agreement on Trade Related Investment Measures (“TRIMs”), which applies to investment measures related to trade in goods, also prohibits WTO Members from applying measures that are inconsistent with GATT Article III – National Treatment and Article XI – Quantitative Restrictions and lists local content requirements in its “Illustrative List” of WTO-inconsistent measures.

At a regional level, international agreements such as NAFTA contain a significant list of prohibited performance requirements. Sections 1106(1) and 1106(3) of NAFTA, for example, provide that:

1. No Party may impose or enforce any of the following requirements, or enforce any commitment or undertaking, in connection with the establishment, acquisition, expansion, management, conduct or operation of an investment of an investor of a Party or of a non-Party in its territory:

(a) to export a given level or percentage of goods or services;

(b) to achieve a given level or percentage of domestic content;

(c) to purchase, use or accord a preference to goods produced or services provided in its territory, or to purchase goods or services from persons in its territory;


3. No Party may condition the receipt or continued receipt of an advantage, in connection with an investment in its territory of an investor of a Party or of a non-Party, on compliance with any of the following requirements:

(a) to achieve a given level or percentage of domestic content;

(b) to purchase, use or accord a preference to goods produced in its territory, or to purchase goods from producers in its territory;

(c) to relate in any way the volume or value of imports to the volume or value of exports or to the amount of foreign exchange inflows associated with such investment; or

(d) to restrict sales of goods or services in its territory that such investment produces or provides by relating such sales in any way to the volume or value of its exports or foreign exchange earnings.

Most of the performance requirements listed under Section 1106 are self-explanatory: NAFTA parties are prohibited from requiring investors to employ a certain amount of local materials in their production, exporting a given percentage of their output, hiring local employees, etc.

The relationship, however, between performance requirements and investments (i.e., the meaning of the phrase “in connection with an investment” of Section 1106(3)) was the subject of discussion in three recent NAFTA arbitration cases: ADM, CPI and Cargill. The arbitral tribunals in these cases reviewed whether a special tax on soft drinks produced with sweeteners other than sugar cane (i.e., high fructose corn syrup, “HFCS”) could constitute a prohibited performance requirement in connection with HFCS investments under NAFTA. The special tax was imposed on soft drink manufacturers, not on the claimants, the HFCS companies, which were suppliers of HFCS to the bottlers. The ADM and Cargill tribunals appear to have concluded that a performance requirement exists regardless of whether the investment is affected directly or indirectly by the measure. In other words, “in connection with an investment” was interpreted broadly and was not equated to “directly affected by.” It seems that what mattered was whether the performance requirement was designed to affect the investment.

Although a somewhat opposite conclusion was reached by the CPI tribunal, the ADM and Cargill findings are interesting, as governments seeking to circumvent the wording of Article 1106 through creative local content regulations might find it more difficult now that at least two tribunals have focused on the design and effect of the measure rather than the direct or indirect nature of the effect.

III. The Everyday Investor

The Mexican movie quota is just one of numerous instances worldwide where local groups strive to convince legislatures or governments to adopt protectionist measures in favor of local industries. Local content proposals have historically appeared in many sectors—pharmaceutical, auto industry, government procurement, agricultural goods, to name a few—and even though many of them do not materialize or ever come into effect, they are a constant headache to investors.

Despite the extensive regulations and the frequency of such proposed measures, the number of arbitration cases (whether investor-state or WTO) actually dealing with local content/performance requirements is very small. Why? One likely explanation is that performance requirements are usually financially relevant but not sufficiently severe to shut down a business. Investor-state cases do not provide a short-term or even worthwhile solution to investors facing performance requirements because proceedings are long and expensive and typically instituted as a last resort (or, in Metalclad jargon, prior to the enterprise packing up the metal). WTO proceedings are also often unviable since the chances of a government sponsoring a claim are very remote and the remedies in WTO proceedings, in any event, are of a prospective nature (i.e., no monetary damages are awarded).

The Mexican movie quota case shows, however, that the chances of the everyday investor preventing or reversing a local content regulation are greatly enhanced if it can point to the specific international provisions that are being breached and demonstrate to government officials and other interested parties the costs to the state of violating treaty provisions. Given the natural connection between free trade/investment policies and market efficiency, it is often also viable to use competition laws as another element to repel performance requirements. If articulated in the correct manner, lobbying efforts, together with the pressure of international arbitration, are frequently an effective combination against local content regulations.  ■