Mariano Gomezperalta, a member of robert wray PLLC, represented the Government of Mexico and Mexico’s trucking associations in various facets of the NAFTA cross-border trucking dispute. In this article, he comments on the twists and turns of one of the most entangled conflicts under NAFTA.


The Retaliation Measure

It is five o’clock on February 23, 2009. Mexico’s trade lawyers are outside the office of the Secretary of the Economy (Economía). They are waiting their turn to present a proposal to the Secretary for a retaliatory measure against the US in response to the US’s cancellation of the NAFTA pilot program which allowed Mexican trucks to enter the US and deliver exports to their final destination. The retaliation measure will consist of an increase in the duties of 89 products exported by the US to Mexico. The team enters the Secretary’s office. He reads the proposal and goes through the list of affected goods: Christmas trees, strawberries, soy sauce, batteries, pencils, almonds, potatoes, red wine, sunglasses, dog food, toilet paper, and dozens of other tariff items. He looks up and asks: “Is this the best we can do—impose tariffs on dog food and toilet paper?”

After several rounds of discussions, Economía’s team is able to convince the Secretary of the logic behind the retaliation list. He makes only one change: batteries are out and coffee-makers are in. Economía verifies its trade figures to make sure the measure does not breach the proportionality rule under NAFTA. The Secretary submits the Decree for the President’s review and approval. The President signs it and it becomes effective on March 18, 2009. The next day, a massive amount of US exporters and Mexican importing companies file injunctions in Mexican courts to freeze the effects of the retaliatory decree. Lobbyists in Washington and Mexico make every effort to get their products off the list. Meanwhile, hundreds of Mexican producers gather outside Economía’s offices demanding additional products on the list. It is their opportunity to keep other US competing goods out of the Mexican market. Economía tries to hold the line.

On a separate track, CANACAR, Mexico’s powerful trucking association, prepares an investment claim against the US under NAFTA’s investment chapter. They claim millions of dollars in damages and lost profits suffered by Mexican trucking companies that have been unable to enter the US market for almost 10 years. They also demand that Economía take a strong stance and prohibit all operation of US trucks in Mexico. The turmoil continues for several days.


The State-to-State Dispute

The origin of the dispute goes back to 1995 and relates to the US reservation under Annex I of NAFTA pursuant to which the US agreed to terminate the so-called “moratorium” and allow Mexican cargo trucks to have operating authority and enter the US. A few days before the expiration of the reservation, the Department of Transportation (DOT) announced that it would not process applications from Mexican carriers to operate in the US. The DOT stated that Mexican trucks posed a legitimate safety concern on US highways and referenced incidents in which Mexican trucks had been involved, including an accident allegedly attributed to 16-year-old Mexican driver Pedro Higuera who drove uninsured and with faulty brakes and bald tires.

Mexico moved to request the establishment of an international arbitration panel under NAFTA’s state-to-state dispute resolution mechanism. Mexico argued that the US refusal to accept any application for operating authority coming from a Mexican trucking company conflicted with the US’s obligations under NAFTA Chapter 12 (Trade in Services) and its commitments under Annex I. The US maintained that it was legal and appropriate for the US to delay the processing of Mexican applications for operating authority as the US and Mexico needed to work out an adequate safety enforcement framework to ensure that operating authority granted to Mexican trucking companies would not undermine US highway safety. The arbitration panel, led by a British arbitrator, ruled on February 6, 2001, against the US. Although it acknowledged that NAFTA parties may set the level of protection that they consider appropriate in pursuit of legitimate regulatory objectives, it determined that the DOT’s blanket refusal to process applications for operating authority coming from Mexican nationals was inconsistent with the US’s obligations under NAFTA. The executive branch sought to comply with the panel’s findings but various legislative measures made it unattainable. Pursuant to NAFTA Chapter 20, Mexico could have opted to apply trade sanctions 30 days after the panel’s decision, but it decided not to do so ostensibly because the Mexican government believed at the time that a retaliatory measure would affect immigration initiatives and other matters that were on Mexico’s agenda with the US. Mexico therefore opted for a negotiated solution.

The negotiations took several years. Six years after the panel’s ruling, the US and Mexico agreed on a “pilot program” that would give access to up to 100 Mexican trucking companies. The pilot program was in operation for over one year and attracted only twelve companies but it served as an indication that the US would open the border to Mexican trucks once the program conditions were met. In March 2009, however, Congress prohibited DOT from spending funds on the pilot program for the fiscal year 2009. The program was immediately terminated and the border was again closed to Mexican trucks. Shortly thereafter, Economía announced its decision to impose the retaliatory tariffs over 89 products.

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From a legal perspective, the retaliatory measure presented a number of interesting issues. NAFTA Article 2019 sets forth the rules for suspending trade benefits once a final arbitration award has been issued:

Article 2019: Non-Implementation-Suspension of Benefits

        1. If in its final report a panel has determined that a measure is inconsistent with the obligations of this Agreement or causes nullification or impairment in the sense of Annex 2004 and the Party complained against has not reached agreement with any complaining Party on a mutually satisfactory resolution pursuant to Article 2018(1) within 30 days of receiving the final report, such complaining Party may suspend the application to the Party complained against of benefits of equivalent effect until such time as they have reached agreement on a resolution of the dispute.

        2. In considering what benefits to suspend pursuant to paragraph 1:

                                (a) a complaining Party should first seek to suspend benefits in the same sector or sectors as that affected by the measure or other matter that the panel has found to be inconsistent with the obligations of this Agreement or to have caused nullification or impairment in the sense of Annex 2004; and

                                (b) a complaining Party that considers it is not practicable or effective to suspend benefits in the same sector or sectors may suspend benefits in other sectors.

        3. On the written request of any disputing Party delivered to the other Parties and its Section of the Secretariat, the Commission shall establish a panel to determine whether the level of benefits suspended by a Party pursuant to paragraph 1 is manifestly excessive.

As required by Article 2019, Mexico was constrained to keep its measure within a reasonable range. NAFTA required the retaliation measure to be of “equivalent effect.” This standard is relatively straightforward when dealing with regular exports of goods: if an arbitration panel confirms that (i) Country A is entitled to export tomatoes duty-free to Country B and (ii) Country B breached its trade obligation because it blocked exports from Country A, Country A would calculate its annual exports of tomatoes to Country B and adopt a trade measure of equivalent effect against Country B (e.g., impose a 200% tax on the importation of sugar to block sugar exports from Country B). How would Mexico calculate the value of “lost exports” when the measure at issue related to cross-border trucking services carrying 85% of Mexico’s trade with the US? Would it be the annual value of the cargo (i.e., $150 billion), the lost profits of the actual Mexican trucking companies or some other value?

In addition, there was not a single case under NAFTA, WTO or any other forum in which a country had waited such a long time to suspend trade benefits to its counterparty. Typically, trade sanctions are adopted shortly after the affected country obtains a final ruling from an arbitration panel. Mexico had waited eight years. Did this mean Mexico was entitled to recover eight years of “lost exports” ($150 billion times 8 = $1.2 trillion)? The risk of “burning the toast,” as Mexicans say, was very high. There was no record of any trade countermeasure of this magnitude. Although Mexico wanted to induce the US to open up the border to Mexican trucks, it had no intention of starting a trade war or even having a NAFTA Commission set an adverse precedent that Mexico’s countermeasure had been manifestly excessive.

Furthermore, due to Mexico’s “tariff bindings” under WTO, it was not legally possible for Mexico to establish tariffs of 150% or 200% to completely block US exports of a few selected products. These bindings established Mexico’s MFN (Most-Favored Nation) rate and functioned as a ceiling on customs tariff rates. If Mexico were to increase tariffs beyond its tariff bindings, it could be exposed to claims from the US under WTO. To avoid violating WTO provisions, the retaliation tariffs would need to be greater than zero but less than Mexico’s MFN rates. For certain products, this meant Mexico would not be able to impose tariffs beyond 10% or 15%. If Mexico was not able to shut down exports of certain US goods completely, then the target retaliation figure would have to be achieved through small tariff increases over a larger number of products. This posed several problems. First, the effect on trade would be even more substantial as more products would be involved in the retaliation. It was one thing to affect three or four products but a very different thing to affect 80, 90, or 100. Second, Mexico would have to find products that were not used for the production of other goods in Mexico as this would result in a loss of competitive advantage to Mexican exporters of final goods, i.e., a shot in the foot. Third, the products on the list would have to be “inflationary-neutral” to avoid pressures on the price of basic goods consumed in Mexico such as milk, eggs, beans, rice, and corn, among others. Fourth, Mexico had to be careful not to select products that were already part of distorted markets or subject to other trade disputes (e.g., fructose, beef, steel, tuna, chicken, etc.). Finally, the selected products also had to be important for the US as otherwise, the retaliation measure would not have the desired effect of motivating the US to bring its DOT policies in compliance with NAFTA. In a fully integrated North American market with NAFTA operating in Canada, the US, and Mexico for almost 15 years, finding 100 products (out of thousands of tariff items) meeting these conditions presented a real challenge. Toilet paper, dog food, Christmas trees, and the like were not only Mexico’s preferred choices; they were its only choices.


The Investment Arbitration Claim

In the midst of the retaliation process, Mexico’s national trucking association, CANACAR, realized that if Mexico were to use some form of “lost profits” approach when calculating its countermeasure and an arbitration panel had already established that the US measures on cross-border trucking services were inconsistent with NAFTA, then CANACAR might be able connect these points and submit an investor-state claim against the US under NAFTA’s Chapter 11, which, if successful, could result in a substantial monetary award in favor of CANACAR.

CANACAR initiated its investment claim against the US under NAFTA Chapter 11 on April 2, 2009. As with the retaliation measure, this investment claim posed a series of novel issues. CANACAR represented the interests of almost 4,000 individual investors/claimants. This was not the typical investment arbitration case between one investor and the respondent state. It was a multi-party, mass claim type of action that was unprecedented under NAFTA and had rarely occurred under other investment treaties. Was NAFTA designed to support this type of arbitration? Was it logistically possible to administrate a dispute with 4,000 claimants?

CANACAR’s claim also presented interesting jurisdictional issues. As a starting point, would Mexican trucking companies qualify as “investors” within the definition of Article 1139 of NAFTA? Some considered that NAFTA has a territorial basis and that investments by Mexican nationals in Mexican trucks that were not operating in the US could not possibly qualify as international “investors” for purposes of NAFTA. A deeper and more careful analysis could suggest otherwise. Although there were variations among the numerous claimants, Mexican trucking companies owned assets that had been acquired with the expectation that they would be used to obtain economic benefit in the US. These properties included the actual trucks (which had been made NAFTA-compliant over many years with the expectation of providing long-haul, point to point, trucking services to the US) as well as equipment, holding yards and patios, office spaces, etc. and rights to business income. These were “wealth-producing” elements that could make CANACAR’s assets fall within NAFTA’s definition of “investment.”

CANACAR’s claim was also initially tagged as unviable since it was considered that disputes relating to trade in goods and services were outside the jurisdiction of Chapter 11 that was supposed to be solely for investment disputes. There were a few arbitration precedents, however, that indicated the contrary. Despite the legal challenges and logistical issues, CANACAR decided to proceed. The US responded that it would defend the claim vigorously.

To this day, neither the state-to-state dispute nor CANACAR’s investment claim have so far been fully and finally resolved. A former owner of a cross-border trucking company (who is both a US and a Mexican citizen) declared to the press that the trucking case was “testing whether NAFTA’s rules could resolve any type of dispute despite its size, duration or complexity.” The answer to this remains to be seen.